Monday, January 7, 2013

Why the Customer Development Model instead of the Product Development Model (4 Steps to the Epiphany revisited)

I read the book The Four Steps to the Epiphany about two and half years ago and was convinced that I would revisit the book in the coming years (see my earlier post where I summarized my initial thoughts on it).  Based on some current thinking I'm doing about new market entry, it seemed like the right time to do that.  As I'm re-reading the book, I'm taking some more detailed notes and thought I'd post them here for reference.  Apologies for them being a bit terse.

So, to start, why the customer development model instead of the traditional product development model?

  • Primary risks in entering any market:
    • do you understand the customers’ needs?
    • do you understand the basis for competition in this market?
    • will those customers purchase and adopt?
  • Traditional approaches are terribly inefficient and often lead to disaster
    • traditional product development model
      • concept/seed
        • vision
        • what’s the product? (features, feasibility)
        • who are the customers? (market research, customer interviews)
        • how will it reach the customer? (pricing assumptions, R&D cost assumptions, sales and distribution approach, positioning relative to competitors)
      • product development
        • start building product
        • refine target market (market size, target customer list)
        • go-to-market prep (sales demo, collateral, hire PR, establish thought leadership, establish brand name, hire VP of Sales)
      • alpha/beta test
        • make sure product works (test with outside users, resolve bugs)
        • marketing communications plan (sales support material, start PR, start contacting long-lead-time press)
        • build sales org (sign-up beta customers, build distribution channels, staff and scale sales org)
        • start measuring progress by number of orders
      • launch
        • scale sales org (set sales goal, track quotas, etc.)
        • press event
        • lead gen activities (trade shows, seminars, email, ads, etc.)
        • board measures success on sales execution
        • CEO starts fund-raising because this all costs money
    • examples
      • WebVan - built warehouses, purchases fleet of delivery trucks, built easy-to-use website
  • Traditional approach only really relevant for certain products and markets
    • specifically, new product into an established, well-defined market where the basis for competition is understood and its customers are known
  • What’s wrong with this traditional approach?
    • hint: “product development model” … where’s marketing, sales, customer acquisition, financing, etc.
    • 1. Where are the customers?
      • startups don’t fail because they lack a product
      • they fail because they lack customers and a proven financial model
    • 2. The focus on first customer ship date
      • first customer ship date does not mean the company understands its customers or how to market or sell to them
      • sales, marketing, biz dev all set their watches to ship date and work backwards → “fire, ready, aim”
    • 3. Emphasis on execution rather than learning and discovery
      • emphasis on getting things done fast
      • marketing and sales assume prior experience is relevant, so they execute the same strategies that worked in the past
      • basic questions that aren’t answered with a focus on execution:
        • what are the problems that our product solves?
        • do customers perceive these problems as important?
        • who in a company has a problem that our product could solve?
        • how do we reach consumers?
        • how big is this problem?
        • who do we make the first sales call on?
        • who else has to approve the purchase?
        • how many customers do we need to be profitable?
        • what’s the average order size?
      • you may think you know the answers to these questions, but you have to validate them before executing → humility leads to learning and discovery
    • 4. The lack of meaningful milestones for sales, marketing, and business development
      • sales → revenue and hiring are markers, signing “lighthouse” customers
      • marketing → creating buzz, creating collateral
      • these aren’t true objectives
      • real milestones should be related to understanding customers and their problems, discovering a repeatable roadmap of how they buy, and building financial model that results in profitability
    • 5. The use of product development methodology to measure sales
      • sales works backwards from ship date
      • they are not actually ready to sell, because they haven’t learned how to
      • typical that VP of Sales quits or is fired after 9 months post-ship
    • 6. The use of product development methodology to measure marketing
      • marketing works backwards from ship date
      • generate collateral (based on assumptions around appropriate positioning), start PR, conduct events, generate buzz, generate thought leadership (also based on assumptions)
      • “marketing death march” -- you don’t know if any of this is right until first customer ship … but you have to be ready for ship so you had to make tons of assumptions to be ready (and you have no opportunity to try something different)
    • 7. Premature scaling
      • three docs that traditionally guide hiring and staffing: business plan, Product Development model (staff up by the time the product is done), revenue forecast.
      • these are all execution documents -- none of them tell you to stop and learn from what’s actually happening
      • result is that you scale your organization before you’re actually ready
    • 8. Death spiral: the cost of getting product launch wrong
      • premature scaling causes the death spiral
      • burn rate accelerates → pressure for revenue grows exponentially → marketing spends even more trying to generate pipeline for sales (including “credibility capital” on positioning to analysts, etc.); spending also contributes to need for more revenue → sales misses their numbers because they don’t know how to go-to-market → fire VP of Sales and hire a new one → sales misses their number again → fire VP of Marketing (because you already fired the VP of Sales) → continue to miss numbers → fire the CEO → company implodes (runs out of money, has a down-round, or fire-sale to competitor)
    • 9. Not all start-ups are alike
      • not all start-ups are bringing a new product into an existing market
      • most are bringing a new product into a new market or bringing a new product into an existing market and trying to resegment that market as a low-cost entrant (or niche entrant)
      • the customer needs, basis for competition, and likelihood of adoption are dramatically different
      • things like the Bass diffusion model and other sales forecasting techniques don’t work in other entry types
    • 10. Unrealistic expectations
      • a) the product development model can be used for activities that have nothing to do with product development → finding customers, a market, and a viable business model.
      • b) customer development will move on the same schedule as product development
      • c) all new products will achieve acceptance and deployment at the same rate (at first customer ship)
      • d) to get initial funding, you provided totally unrealistic forecasts to investors that you are now expected to meet
  • Traditional alternatives (or complements to) the product development model
    • technology lifecycle adoption curve + the chasm
      • used to guide sales and marketing as you “scale” post-launch
    • why it’s not relevant early stage
      • because everything you’re doing is way, way before the curve starts
      • crossing any chasm is a luxury and shows that you are already succeeding
      • makes you think that technology enthusiasts are part of the adoption curve, but they are not → they are very important, but none of them will be paying customers … ever
      • the fact that it’s a nice, smooth curve invites the notion that it’s really a “sales execution” problem; even when considering the different segments and how you have to adjust sales and marketing for each, they are really dependent on how you’re entering the market (the start-up market type) and result in step functions rather than smooth progressions
      • books about the curve all emphasize “execution and adoption” (you should be so lucky to have that problem) rather than “learning and discovery”
      • instead of dreaming up ways to cross different chasms, you should instead focus on learning and discovery

Tuesday, August 24, 2010

Nine Prescriptions for Building the Duke Entrepreneurial Community

I think Duke can have one of the strongest entrepreneurial communities in the world. Are we there yet? Well, not yet. But there's a tremendous amount of momentum that I saw build in just the past two years while I was getting my MBA at Duke. While leading Duke's 10th annual business plan competition, the Duke Start-Up Challenge (DSC), last year, I witnessed a near doubling of participation on campus in just a single year. The interest on the ground was clearly there and building rapidly. But now that I'm an alum, I'm looking back and wondering ... how do we rev-up the Duke entrepreneurial community even more?

I read a great article by Daniel Isenberg, a professor of management at Babson, called "How to Start an Entrepreneurial Revolution" in the June edition of the Harvard Business Review. Isenberg outlines nine prescriptions for governments that want to create entrepreneurship ecosystems in their countries. Although he was focused on governments and countries, I thought the prescriptions he outlined were just as applicable to smaller organizations, in this case Duke.

So, I took a stab at outlining nine prescriptions to build the Duke entrepreneurial community, leveraging Isenberg's and including a relevant quote from the article for each. I'd love to hear what you think! Without further ado, here they are:

1. Stop emulating MIT and Stanford
The nearly universal ambition of becoming another Silicon Valley sets governments up for frustration and failure.
MIT and Stanford have in many ways set the gold standard for generating successful entrepreneurs, but they also evolved under a unique set of circumstances that could not be fully emulated by Duke. Ingredients like the open California culture or the close physical proximity that Stanford has with Silicon Valley or MIT has with Route 128 just aren't all there with Duke. In particular, despite what people say about RTP being a magnet for talent, most Duke grads leave Durham. That was the biggest complaint I heard from investors in RTP, particularly when compared to other local schools like UNC and NC State. Folks come in to get their Masters and PhD's and then they move on to other places.

This isn't bad necessarily, just a very critical difference that should potentially be optimized for rather than fixed. How do you optimize? Well, go where the Duke grads go and build relationships in those communities. You'll end up with a community that is much more virtual and distributed (mini-communities in each city), but one that is much more natural for its members. I think DukeGEN is absolutely brilliant in this regard. The LinkedIn groups and local happy-hours in each city work really well.

2. Shape the community around local conditions -- healthcare & life sciences in RTP, IT in SF, ...
The most difficult, yet crucial, thing for a government is to tailor the suit to fit its own local entrepreneurial dimensions, style, and climate.
I've already touched on this in regard to comparing Duke to other schools, but similar principles apply when looking within the Duke community. Duke alumni in San Francisco are very different from those in NYC. In RTP, you'll find a depth of talent in healthcare and life sciences, but not as much in IT. So cater to the local interests. This is kind of obvious, but actually requires a lot of support from each of the niche interest groups or local communities.

This is something we started to do with the DSC last year. We added two new tracks - Energy & Environment and Women Entrepreneurs - to respond to the demand coming from students on campus and we recruited student representatives (DSC Ambassadors) that had credibility (and networks) within those interest areas to help us effectively reach those smaller communities. The challenge with this is finding an appropriate balance between achieving critical mass and being overly fragmented.

3. Engage students and alumni from the start -- student and alumni-led organizations
Government cannot build ecosystems alone. Only the private sector has the motivation and perspective to develop self-sustaining, profit-driven markets. For this reason, government must involve the private sector early and let it keep or acquire a significant stake in the ecosystem's success.
Continuing the analogy, make the following replacements in the above quote -- "government" = "Duke administration" and "private sector" = "students and alumni". Having been a student leader myself, I'm obviously a little biased here, but I think the only sustainable way to build a community is for the community to self-organize with the support of the administration -- rather than the other way around. That means that initiatives on campus should primarily be student-led and those around the world should be alumni-led. This builds ownership, ensures that there is a real pull from the community (rather than things being pushed upon them), ensures that the community reflects the current interests and needs of its members, and most importantly ensures that there is leadership developing in those smaller communities to help align things with the broader community.

One of the draws of the DSC for me was that it was student founded (in 1999) and student-led for the 9 years leading up to when I took it on. DukeGEN, similarly, was formed from discussions between alumni and faculty. I think it's a great model and one that can continue to be leveraged. It requires leaders to step-up, though, to get the ball rolling, so I would argue that no initiative should be taken on unless you can get someone from the community itself (e.g. local city, niche group on campus, etc.) to take ownership of it.

4. Favor the high potentials -- quality over quantity
The reallocation of resources to support high-potential entrepreneurs may seem elitist and inequitable. But especially if resources are limited, programs should try to focus first on ambitious, growth-oriented entrepreneurs who address large potential markets.
The basic idea here is to focus on quality first rather than quantity. We struggled with this at the DSC. Should we spotlight more teams in the main events to "spread the love" or should we keep those events small with only the best of the best? I think the answer here, particularly at the beginning, is to keep things small and high quality. Fewer DukeGEN events with more people are better than more events with just a handful. Fewer entrepreneurs pitching at the angel pitch events with vetted, high quality ideas is better than more entrepreneurs pitching with potentially watered down ideas.

This is important in a couple regards - 1) you're highlighting the winners (more on this in the next prescription), and 2) you're setting a high bar and making things difficult (more on this in prescription 7). I would argue both of these help build self-esteem, which is critical in building identity and cohesion in the community.

5. Get a big win on the board --
It has become clear in recent years that even one success can have a surprisingly stimulating effect on an entrepreneurship ecosystem - by igniting the imagination of the public and inspiring imitators.
I heard recently that almost every company that pitched at the YCombinator Demo Day last week mentioned two things - 1) game mechanics, and 2) As Isenberg mentions, success both fuels the imagination and inspires imitation (in a good way). These types of stories reduce the belief in artificial barriers to starting a new company, belay fears of failure, and show the rewards that can result from taking on risk.

It's important to celebrate (or even overcelebrate) these types of successes. We certainly tried to do that in last year's DSC competition. Aaron Patzer was our keynote speaker for the Grand Finale event in April and afterwards I heard from many people that said they were "inspired" by his story. He was also one of the judges at the Bay Area angel pitch event. It takes longer for stories to get stale than you think, so I think saturating your communication channels is a good start. At the same time, they do eventually lose their novelty. What to do then? Fortunately even small and medium successes have an impact on people. So keep overcelebrating every success!

6. Tackle cultural changes head-on -- failure is OK!
Entrepreneurs learned that it was possible to fail and regroup to try again. "If you wanted to be respected and taken seriously, you needed to be a founder with a stake in a company trying to do something".
It's extremely difficult to change deeply ingrained cultures. Duke is over 150 years old and is one of the most selective institutions in the US to get admitted to. From meeting students from all over campus, I was impressed at how bright the students at Duke are. It takes a straight-A, super over-achieving person to even get admitted. The downside to this is that many of these students are not comfortable with professional failure. Why? Because to get in they rarely failed. Exacerbating the issue, at a cost of over $50k per year, students (or more accurately their parents) are investing over $200k to finish a degree. You think parents are eager to see their kids gamble their educational investment on a crazy start-up idea (more on this in prescription 8)? It's more of a breeding ground for doctors, lawyers, investment bankers, engineers, and consultants than it is entrepreneurs. So what do you do about this? I think 1) you have to deal with the stigma of failure head-on (instead of avoiding it) and 2) you have to leverage media.

Celebrating your successes is important (as previously discussed), but you have a real starting problem if students have a stigma around failure (i.e. it's difficult to get them started when the task seems so daunting). A simple solution to this is to make failure OK. Instead of asking, "are you up for the challenge?", we should be asking "have you had your first failure yet?". In addition to all the inspirational and skill-building content we share through Duke media channels (e.g. DEES talks on "Entrepreneurship 101", "How I started a Life Sciences Company at Duke", etc.), we should also be highlighting the failure process and more importantly how you deal with that emotionally as an entrepreneur. I'd love to see a talk entitled "Have you had your first failure yet?", or "How to deal with your first entrepreneurial failure (because it will happen often and that's ok)". I think given the unique cultural starting point at Duke, this type of content would be really valuable.

And there are lots of media channels that could be perfect for this type of discussion. There are many forums to support live discussion on this topic, including P4E, the One Day Start-Up, DSC info-sessions, DEES networking hours, the Entrepreneurship Symposium, and others. I can even imagine a social media competition called "Share your failure story with your classmates" that could put a funny spin on the topic. DukeGEN profiles or Duke Chronicle articles could also include this spin as well. Particularly if these stories have a happy ending (e.g. I failed miserably three times but then built this great business later), I think this could be a useful approach to changing the culture at Duke.

7. Stress the roots -- make it difficult
Just as grape growers withhold water from their vines to extend their root systems and make their grapes produce more concentrated flavor, governments should "stress the roots" of new ventures by meting out money carefully, to ensure that entrepreneurs develop toughness and resourcefulness.
Starting a company's not easy. Why should school be any different? The bar should be set high for Duke entrepreneurs to get money or resources from the university. This prescription is related back to prescription 6 of favoring the high potentials. If you give money or resources too freely, you may stigmatize the recipients of it as being less capable. It lowers both the self-esteem of the entrepreneurs and the reputation of the Duke entrepreneurial community.

The most obvious places to apply this prescription are to competitions - the DSC and angel pitch events (e.g. New York). I think that's already happening. I could also see this being applied to DUhatch as well. Isenberg talks in the article about how incubator programs have for the most part been unsuccessful in generating meaningful start-up success stories. Even the well conceived and well managed ones can take up to 20 years to show results. So keeping the input to these initiatives high quality is critical to ensure they have the desired impact.

8. Don't overengineer clusters; help them grow organically
"Government ... should reinforce and build on existing and emerging clusters rather than attempt to create entirely new ones.... In fact, most clusters form independently of government action - and sometimes in spite of it. They form where a foundation of locational advantages exists. To justify cluster development efforts, some seeds of a cluster should have already passed a market test...." - Michael Porter ("Clusters and the New Economics of Competition" - HBR)
This is related to prescription 3 of engaging students and alumni and supporting and reinforcing their efforts rather than pushing them artificially. I think the types of communities that spring up in San Francisco, New York, Boston, and other places are natural. Applying this to the Duke campus, you see lots of entrepreneurial activity come out of the business school (Fuqua), engineering school (Pratt), and arts and sciences (Trinity). There's a natural pull from those parts of Duke. But Duke's a big place, right? Why can't we create more clusters?

We made a concerted effort this past year to reach out across campus to help draw in students from every discipline. The effort definitely worked as we increased participation. But it turned out that there were places that just weren't natural. You might think that the med school, for example, would be a good place to look given the strength in health care at Duke. As it turns out, though, it just wasn't natural. Students were there to become doctors, not entrepreneurs. So, in this case, fishing where the fish are actually does make sense.

9. Reform legal, bureaucratic, and regulatory frameworks -- make failure ok, shield students from their parents, and four years means a lot of chances
Extensive research points to a number of reforms that have a positive impact on venture creation: decriminalizing bankruptcy, shielding shareholders from creditors, and allowing entrepreneurs to quickly start over.
We'll obviously have to continue the analogy here to make this prescription applicable to Duke. Let's take each suggestion in turn and see how it could be applied:
  • Make failure ok -- Given the cultural context of Duke and the stigma around failure, this is the equivalent of decriminalizing bankruptcy. You have to get students comfortable with professional failure. See prescription 6 for a more detailed discussion of this.
  • Shield students from their parents -- Who's financing a Duke student's education? Their parents of course. And in this context, we can say that the "creditors" are the parents (the ones that don't benefit from upside) and the "shareholders" are students (the ones that do share in the benefits of upside). Investing $200k, parents are naturally going to be risk-averse investors. They'll be pushing their kids into becoming lawyers, investment bankers, and consultants. So how do you shield students from their parents? You could do things like grade non-disclosure, which is always a hot topic. But I doubt you could really ever fully shield grades from parents. This is a tough one actually. What do you think? Any good ideas here?
  • Provide multiple chances -- The fortunate thing about school is that you literally have years to try stuff out. Undergrads have four years at Duke. That means four full DSC competitions. Four shots to apply to DUhatch. Four shots at a lot of things. So I think this one is inherently built into the structure of school.
What are your thoughts?
These were my thoughts on how we could build up the Duke entrepreneurial community. But what are yours? I'd love to hear what people are thinking on this topic.

Sunday, June 6, 2010

The Inmates are Running the Asylum

I just finished a great book on product design called The Inmates are Running the Asylum by Alan Cooper. Computers have really reached into every aspect of our daily lives. Whether in the bedroom, kitchen, automobile, office, or on the go in our cell phones, a computer is present behind the scenes. The problem, Cooper argues, is how horrible the interactions are with the vast majority of those devices and software programs. Not just the interfaces, but the entire interaction. And it's these horrible interactions that are generating a digital divide across the world between those that put the time in to accommodate and learn the poor design (apologists) and those that just suffer silently (survivors).

I'm certainly not a stranger to some of the concepts around design. I studied human computer interaction while I was at Berkeley, tasking several classes in user-centered design, UI design, and usability and even did a research project on an alternative handwriting recognition option for the Palm platform. Berkeley definitely opened my eyes to the importance of design in building technology solutions. We never talked about "interaction" design, though. Perhaps we just never called it that. But Cooper outlines an alternative to the traditional product design and development process that is meant to regain control of design from where it's held today -- with engineers.

Cooper feels that the current product development process gives engineers too much control of design and these "inmates" are designing for themselves (advanced users that think like computers) rather than the actual people that will be using the end product. Having worked at an enterprise software company, I can definitely attest to having witnessed many of the symptoms Cooper highlights - features that never get used, extensive training sessions required for end-users, difficulty in writing documentation, etc. These symptoms point to a deeper underlying issue - the lack of up-front interaction design. (It's not surprising that we didn't have an interaction designer on staff ... or any HCI person at all for that matter! The engineers indeed owned the product.)

The solution is to give control of the design back to the designers and to utilize an interaction design process before any implementation begins. The main components of Cooper's interaction design process are 1) personas, 2) goals, and 3) scenarios. More on each:
  1. Personas - First, come up with a few personas of people that you're designing for. You generally only have a handful of these (around 3 - 5). These are very detailed descriptions of "representative" users. But they're more than representative. They're specific and specific for a reason. They need to have names, backgrounds, and stories because the objective is to make the users real in the mind of the entire team (designers, programmers, testers, etc.). Each primary persona has their own interaction design. That's important because it means that if you have two primary personas, you have two completely different products you're building.
  2. Goals - When I was studying user centered design at Berkeley, we talked a lot about task analysis and designing systems to help end-users complete their tasks. What we didn't talk about was goal-directed design. Goals describe the desired end-state. Tasks, while important, shouldn't be the main focus because many of them will likely become obsolete. Each persona has goals that they are trying to achieve, both personal and practical. Personal goals might be "I don't want to feel stupid" while practical goals might be "I want to fulfill the client's order". But a main constraint in design is that you must support the user in achieving both practical and personal goals.
  3. Scenarios - Scenarios are detailed descriptions of how personas achieve their goals through interaction with a system. Seems consistent with other definitions of use-cases and scenarios. What's new here is what your focus should be. Instead of trying to support every scenario, you should instead focus on the ones that are most frequent - e.g. daily uses. Edge cases should not get attention! Having developed systems during my consulting days, it's amazing how much time is invested in talking about edge cases ... scenarios that rarely if ever happen. So invest your time wisely - spend your time designing the interaction for the most frequent scenarios.
Cooper also explains why traditional usability testing (which happens after implementation) is wasted effort -- because it happens after you can really affect design! He makes another point about the customer-driven death spiral, a tendency to listen and respond to your customer's feature requests rather than focusing on the personas and goals you're trying to support. The argument is reminiscent of The Innovator's Dilemma.

A lot of what Cooper argues for seem initially like subtle changes on the process, but they're not. I am curious, though, to learn more about how new development approaches like agile blend with the interaction design process that Cooper argues for. With agile, you don't necessarily design everything before you start coding. So how do you reconcile this? I know Cooper's a strong believer that the two are mutually supportive, so I just need to read up on them more. At any rate, great book.

Wednesday, June 2, 2010

The Four Steps to the Epiphany and the Customer Development Model

When I visited FlightCaster over spring break as part of the Duke Week-in-Cities trip, Jason Freedman (founder and CEO) suggested that we all read The Four Steps to the Epiphany by Steve Blank. FlightCaster went through the YCombinator program in 2009 and from what I gathered the book was required reading. I had never even heard of it and it was required reading! I just finished it and I certainly understand why that's the case now.

I have to admit the book wasn't necessarily what I expected. It certainly wasn't product management 101. It turned out to be much more about navigating the start-up process rather than specifics about how to design great products. But I can't believe I almost missed out on this one.

The book outlines the Customer Development model, a parallel technique to product development that is meant to guide you in the process of iterating and testing each part of your business model until you find one that is repeatable and scalable. The model starts with the Customer Discovery phase where you test your hypotheses (about the product, customers, distribution, pricing, demand creation, market type, and competition). Once you've battle tested your hypotheses, you move on to the Customer Validation phase where you validate that you have a scalable and repeatable business model before turning up your burn rate. Next, you turn up that burn rate in the Customer Creation phase where you create and drive end-user demand into your sales channel. You're positioning yourself in the market as you launch your product (albeit which has already been in the market for a while now selling to earlyvangelists). Finally, you enter the Company Building phase where you reorganize for scale (i.e. to cross the chasm).

There are some excellent other posts by Eric Ries (What is Customer Development?) and VentureHacks (How to develop your customers like you develop your product) that provide insights and perspective on the book. The main take-away for me is that it is indeed a must-read and perhaps the best book I've read outlining the roadmap that great start-ups go through. I saw much of this executed on in my last company (as employee 16 I started around the Customer Validation phase), but certainly not all of it.

The three main things that stuck out for me were the following (similar to Eric Ries' key points):
  • Find customers for the product as spec'd rather than customizing it for each - This is not at all what I would have expected. My intuition actually ran completely counter to this. My expectation was that you would identify a market (e.g. call centers), talk to all the customers you could in that market, and then put in all the features that they requested. Wrong. The goal instead is to find the minimum feature set to get early customers to adopt. Product companies scale very profitably, service business do not. You goal is to find the product that will scale. Building every feature request is not scalable ... so why approach things that way?
  • Market types make a huge difference - There's a huge difference between launching a product in an existing market vs. a new one (or a resegmented one). I never gave this much thought previously, but the book outlines a ton of reasons why this is the case and the implications this has on how you launch your product. Marketing should be approached very differently in different market types.
  • Organizing for the task at hand - The book also outlines how your company should be organized at different phases of growth. The way an established company in a mature market is organized is completely different than an early or mid-stage start-up. Functional departments, for instance, like marketing, sales, and business development don't necessarily make sense when you're still learning and iterating on your product and business model. In the early stages, you should organize to learn. Again, I would not have thought of this.
All in all a great book and should be required reading for any entrepreneur. I'm sure I'll re-read this later in my career (perhaps several times). The book has an impressive and incredibly useful bibliography that pulls together a ton of best practice thought as well - everything from marketing strategy to product design to war to sales to VC to manufacturing. I was happy that I had read many of the books listed, but interested to see so many I had never even heard of! A lot of good follow-up research to do. In addition, Scott Caruso suggested that I also read-up on lean startup practices (and agile development). Another great topic.

Friday, May 21, 2010

Integrated Marketing Communications

In my continued efforts to learn about the advertising industry, I read a great textbook called Advertising and Promotion, An Integrated Marketing Communications Perspective. There are far too many topics to summarize here, so I'll cover my main take-aways.

The book covered the integrated marketing planning process and aspects of the promotional mix, including: advertising, direct marketing, interactive and internet marketing, sales promotion, publicity and public relations, and personal selling. The book was well-written, interesting, and included up-to-date anecdotes and stories. It definitely reinforced much of what I learned in brand management and other marketing classes, particularly the marketing planning process. It was a great overview text.

A couple of the things I found most interesting (major take-aways):
  • Companies spend an unbelievable amount on advertising and promotion. If you add it all up, companies spend in excess of $1 trillion. U.S. media expenditures alone exceed $500B (as of 2009 it was $504B).
  • Despite the fragmentation of media, the majority of spending is still done on television (38%) in the U.S. Advertisers still feel that the combination of visual and auditory experience that can be delivered in that medium conveys their message the best. But the internet is fast growing, now having about 9.5% ($48B) in spending. Much of those gains are coming at the expense of newspapers (26%) and magazines (12%) and to a lesser extent radio (7.8%).
  • Targeting has become both easier and more difficult. With the fragmentation of media, there are more avenues for marketers to reach niche segments (e.g. think of all the niche cable TV channels available now compared to the three or four networks available 30 years ago). But, that also makes the job more challenging for marketers. You can target down to specific DMA's via TV, radio, and even the internet (via location). But its the media buyers that have to figure out what to buy where. It requires media buyers to deal with a lot of information. This is where many of the demand-side platforms are coming in like Invite Media (just acquired by Google), Lucid Media (who just raised $4.5M), or Marin Software (just raised $11M).
  • Measurement is incredibly imprecise. Measurement systems like Nielsen or Arbitron leave a lot to be desired and many marketers debate what should be measured in the first place - exposure, recall, recognition, purchase intent, etc. There are a variety of tests that can be done to help refine messages and media selection (e.g. both laboratory and field methods), but measuring efficacy is pretty difficult. How many exposures are necessary? Are you reaching your target audience? Which media work best? Best practice is to measure based on your objectives, use multiple measures, use a consumer response model, and use both pre- and post-tests.
There is a lot of information available on measurement out there worth looking into more. Particularly on the internet and interactive side. Here's a list to follow-up:
  • - Consortium of advertisers and providers outline guidelines and definitions of measurements for interactive media.
  • Sources of measurement data:
  • - Arbitron
  • - MRI and SMRB
  • - Ad analyzer
  • - Audit Bureau of Circulations
  • - Interactive Advertising Bureau
  • - eMarketer
  • - Nielsen Net Ratings
  • - Jupiter Research

Wednesday, May 19, 2010

Ogilvy on Advertising

I've been wanting to get up-to-speed on online advertising and how it works. But I figure before I do that I should learn a thing or two about advertising. Based on the suggestion of my friend and classmate Nate Jaffee (a marketing genius), I'm starting with one of the basics - David Ogilvy of Ogilvy & Mather. He wrote a book, published in 1985, called Ogilvy on Advertising. The following are my notes from reading the book - apologies if they seem terse ... it's how the book is written and saves me time in writing up this post.
"Consumers still buy products whose advertising promises them value for money, beauty, nutrition, relief from suffering, social status and so on. All over the world."

How to Produce Advertising that Sells

Do your homework - learn about the product, what kind of advertising your competitors are doing and how successful they are with it, learn about your consumers (how they think about your product, what language they use, what attributes are important to them)

Brand image - everything you project about your product is contributing to its personality -- name, packaging, price, style of ads, nature of product itself. Should remain consistent and be reinforced by ads over many years.

Big ideas - do a lot of research and then let your unconscious take over. Tests for a big idea: 1) Did it make me gasp when I first saw it? 2) Do I wish I had thought of it myself? 3) Is it unique? 4) Does it fit the strategy to perfection? 5) Could it be used for 30 years?

Make the product the hero - there are no dull products, only dull writers. Selling 'parity' products, all you can hope to do is explain the virtues more persuavively than your competitors. The concept of "positively good" - don't try to show that your product is better - just say what's good about your product.

Repeat your winners - Don't throw away ads that are working. Keep running them until they don't work anymore.

Pursuit of knowledge - its really important to know your craft and to do research. What works and what doesn't. And then apply and measure the results of those.

The cult of 'creativity' - 'If it doesn't sell, it isn't creative'. "Mozart said, 'I have never made the slightest effort to compose anything original." Don't worry about being too original. Focus on producing results.

Jobs in Advertising

Ogilvy touches on copywriters, art directors, account executives, researchers (including gripes about how they take so long, seek perfection, and use pretentious jargon), media, CEO, and creative directors. An interesting suggestion on how to choose your job - "In the words of the Scottish proverb, 'Be happy while you're living, for you're a long time dead'."

How to Run an Advertising Agency

Great quote about how to hire people:
"When someone is made head of an office in the Ogilvy & Mather chain, I send him a Matrioshka doll from Gorky. If he has the curiosity to open it, and keep opening it until he comes to the inside of the smallest doll, he finds this message: If each of us hires people who are smaller than we are, we shall become a company of dwarfs. But if each of us hires people who are bigger than we are, we shall become a company of giants."

Print Advertising

Headlines - they promise the reader a benefit, contain news, contain helpful information, include the brand name, help flag down your target audience, ten word headlines sells more than short headlines, specifics better than generalities, quotes increases recall, include city names in local advertisements, aren't tricky or obscure,.

Illustrations - have "story appeal" (arouse the reader's curiosity - 'What goes on here?', then reads your copy to find out), show the package, illustrate the end-result (e.g. before and after)

Body copy - average readership of body copy is less than 5%. Short sentences and paragraphs, write in form of a story, avoid analogies (they confuse people), avoid superlatives (brag and boast), use testimonials (increases credibility), avoid celebrities (they increase recall, but not of your product), include the price (get the consumer to consider the purchase)

Layouts and Typography - Order should be illustration, then headline, then copy. Use serif fonts, three columns that are around 40 characters wide, every photograph should have a caption (more people read captions than body copy), start the copy with drop-initials, avoid two page layouts (no benefit), 11-pt font, don't square-up paragraphs, limit your opening paragraph to 11 words max.

TV Commercials

Success is measured by changes in brand preference -- not recall. There is not a strong correlation between recall and changes in brand preference. And brand preference leads to increases in purchase behavior, so focus on that.

10 kinds of commercials that increase brand preference:
  1. Humor - difficult to write funny commercials though
  2. Slice of life - one actor argues with another about the merits of the product until the doubter is converted (corny, but effective)
  3. Testimonials - loyal users testifying to the virtues of your product - especially when they don't know they're being filmed.
  4. Demonstrations - show how well your product performs. Avoid comparing your product to your competitors as its confusing to viewers and less believable.
  5. Problem solution - show the problem and then how your product solves it.
  6. Talking heads - pitchman extols the virtues of your product. Although considered non-creative, they are quite effective.
  7. Characters - character becomes the living symbol of your product.
  8. Reason why - provide a rational reason to buy your product
  9. News - new product launches and the like. You can also create news by advertising new ways to use your product.
  10. Emotion - nostalgia, charm, sentimantality. But always include a rational excuse to justify the emotional decisions.
Radio Commercials

No one really knows what makes effective radio ads. But here are four positive factors: 1) identify your brand early in the commercial, 2) identify it often, 3) promise the listener a benefit early in the commercial, 4) repeat it often.

Advertising Corporations and B2B Sales

Nothing that notable here. Basically, corporate advertising needs to be done over long periods of time in a consistent way. Similar to brand building. And B2B ads follows similar best practices to B2C ads.

Direct Mail & Direct Response

The big thing that direct mail allows you to do is to test and measure very accurately - down to the dollar spent. Most important things to test are positioning, pricing, terms of payment, premiums, and mailing format. Best times for TV commercials are early morning, late evening and weekends and months of January, February, and March are the most profitable months.

Miracles of Research

I thought this quote summed up this topic pretty well:
"I admit that research is often misused by agencies and their clients. They have a way of using it to prove they are right. They use research as a drunkard uses a lamppost - not for illumination but for support. On the whole, however, research can be of incalculable help in producing more effective advertising."

Six Giants Who Invented Modern Advertising

This list only includes admen that were deceased as of the writing of the book. But here they are:
  • Albert Lasker (Lord & Thomas)
  • Stanley Resor
  • Raymond Rubicam (of Young & Rubicam fame)
  • Leo Burnett (of the "Chicago-style", "There is an inherent drama in every product. Our No. 1 job is to dig for it and capitalize on it")
  • Claude C. Hopkins (invented test marketing, sampling by coupon, copy research; wrote the book Scientific Advertising)
  • Bill Bernbach -- great quote about why advertisers need to understand human nature:
"Human nature hasn't changed for a billion years. It won't even vary in the next billion years. Only the superficial things have changed. It is fashionable to talk about changing man. A communicator must be concerned with unchanging man - what compulsions drive him, what instincts dominate his every action, even though his language too often camouflages what really motivates him. For if you know these things about a man, you can touch him at the core of his being. One thing is unchangingly sure. The creative man with an insight into human nature, with the artistry to touch and move people will succeed. Without them he will fail".

Wednesday, May 5, 2010

Lessons from The Tipping Point

I listened to The Tipping Point by Malcolm Gladwell on CD on a flight close to a year ago and took some notes on it. I wrapped up my classes and have a little time, so thought I'd finally summarize some of those notes here. In the interest of saving myself time, I'm going to leverage the Wikipedia article liberally (via quoting) and then add my notes on top of that.

What is a Tipping Point?
From Wikipedia:
Tipping points are "the levels at which the momentum for change becomes unstoppable."[1] Gladwell defines a tipping point as a sociological term: "the moment of critical mass, the threshold, the boiling point."[2] The book seeks to explain and describe the "mysterious" sociological changes that mark everyday life. As Gladwell states, "Ideas and products and messages and behaviors spread like virusesdo."[3] The examples of such changes in his book include the rise in popularity and sales of Hush Puppies shoes in the mid-1990s and the precipitous drop in the New York City crime rate after 1990.
Main Lessons:
The main take-aways and lessons from the book are as follows:
  • Concentrate your resources on connectors, mavens, and salesmen
  • Manipulate size of the group you are addressing to alter how well they can accept your message
  • Change your message or presentation to be more sticky
  • People are powerfully influenced by their surroundings, so make changes to that environment that can serve as subtle cues to people
  • We are moving into an age where word-of-mouth is even more important than before
The Laws of Epidemics:
Gladwell describes three laws or rules governing epidemics and their ability to achieve critical mass. Those are the following:

1. "The Law of the Few"
Here's how the Wikipedia article summarizes it:
  • "The Law of the Few", or, as Gladwell states, "The success of any kind of social epidemic is heavily dependent on the involvement of people with a particular and rare set of social gifts."[4]According to Gladwell, economists call this the "80/20 Principle, which is the idea that in any situation roughly 80 percent of the 'work' will be done by 20 percent of the participants."[5] These people are described in the following ways:
  • Connectors are the people who "link us up with the world ... people with a special gift for bringing the world together."[6] They are "a handful of people with a truly extraordinary knack [... for] making friends and acquaintances". [7] He characterizes these individuals as having social networks of over one hundred people. To illustrate, Gladwell cites the following examples: themidnight ride of Paul Revere, Milgram's experiments in the small world problem, the "Six Degrees of Kevin Bacon" trivia game, Dallasbusinessman Roger Horchow, and Chicagoan Lois Weisberg, a person who understands the concept of the weak tie. Gladwell attributes the social success of Connectors to "their ability to span many different worlds [... as] a function of something intrinsic to their personality, some combination of curiosity, self-confidence, sociability, and energy."[8]
  • Mavens are "information specialists", or "people we rely upon to connect us with new information."[9] They accumulate knowledge, especially about the marketplace, and know how to share it with others. Gladwell cites Mark Alpert as a prototypical Maven who is "almost pathologically helpful", further adding, "he can't help himself".[10] In this vein, Alpert himself concedes, "A Maven is someone who wants to solve other people's problems, generally by solving his own".[11] According to Gladwell, Mavens start "word-of-mouth epidemics"[12] due to their knowledge, social skills, and ability to communicate. As Gladwell states, "Mavens are really information brokers, sharing and trading what they know".[13]
  • Salesmen are "persuaders", charismatic people with powerful negotiation skills. They tend to have an indefinable trait that goes beyond what they say, which makes others want to agree with them. Gladwell's examples include California businessman Tom Gau and news anchor Peter Jennings, and he cites several studies about the persuasive implications of non-verbal cues, including a headphone nod study (conducted by Gary Wells of the University of Alberta and Richard Petty of the University of Missouri) and William Condon'scultural microrhythms study.
There were a couple things that I noted while listening to the book that I'll highlight out of the above. First was related to connectors. The main criteria for these folks is that 1) they know lots of people, and 2) that they know a diverse set of people - i.e. they are able to span cultures. As linked above, this highlights the importance of weak ties and how these actually prove to be more important than strong ties. Gladwell also talks about the connectors' importance in the diffusion model, particularly in crossing the chasm. Because these people are the translators between worlds, they can make your product more palatable or usable for the mainstream.

Second was related to mavens. These are folks that want and like to help others. They don't persuade, they just broker information. They keep the markets honest. As an example, "market mavens" keep track of prices for you to let you know when there are legitimate deals to be had.

2. "The Stickiness Factor"
From Wikipedia:
The Stickiness Factor, the specific content of a message that renders its impact memorable. Popular children's television programs such as Sesame Street and Blue's Clues pioneered the properties of the stickiness factor, thus enhancing the effective retention of the educational content in tandem with its entertainment value.
This reminds me of a book that we read at Duke called Made to Stick: Why Some Ideas Survive and Others Die. The book extends the concept of "stickiness" explaining why some ideas are memorable and impactful and why others are not. One example from Gladwell's book that I found interesting, in addition to the Sesame Street example, was the tetanus shot booklet. The key change that the school health administrators made to the book to increase participation by students was something simple - the addition of a map and the times the clinic were open. Why? Because it was practical and personal and showed how the idea fit into the students' lives.

3. "The Power of Context"
From Wikipedia:
The Power of Context: Human behavior is sensitive to and strongly influenced by its environment. As Gladwell says, "Epidemics are sensitive to the conditions and circumstances of the times and places in which they occur."[14] For example, "zero tolerance" efforts to combat minor crimes such as fare-beating and vandalism on the New York subway led to a decline in more violent crimes city-wide. Gladwell describes the bystander effect, and explains how Dunbar's number plays into the tipping point, using Rebecca Wells' novel Divine Secrets of the Ya-Ya Sisterhood, evangelist John Wesley, and the high-tech firm Gore Associates. Gladwell also discusses what he dubs the rule of 150, which states that the optimal number of individuals in a society that someone can have real social relationships with is 150.[15]
I was familiar with the broken windows theory (as well as the criticisms of it from reading Freakonomics), so I found the "Rule of 150" most useful here. The rule basically states that 150 is the maximum number of people with which we can have a genuinely social relationship. For me personally, I can guarantee you that number is a little high. But the main takeaway is that if you're looking for groups that can serve as incubators for your epidemic, they must be below 150 people in size. Your goal should be to create many small movements first. These will spawn larger movements.

Moving into the Age of Word-of-Mouth:
Gladwell provided some additional perspective on why he thinks we're moving into an age where word-of-mouth will be even more important. He provided several reasons:
  1. Rise of isolation - Teens today have become increasingly isolated in their lives. The use of cell phones, emails, social networking sites, etc. have assisted this, but at the same time has allowed teens to fill the "dead spots" in their lives with additional time interacting with their friends. This world is ruled by word-of-mouth.
  2. Rise of immunity - This is an interesting argument for why mavens are so important now. Traditional notions of value have been based on scarcity - the less of something there is (e.g. gold) the more valuable it is. The opposite tends to be true today. The network effects associated with things like phones, fax machines, and social networking sites suggest the law of plentitude. The proliferation of these things also means inundation - of phone calls, emails, etc. You become more selective in your use of these and become immune to these traditional forms of communication, instead relying on people who you admire, respect, and trust. The cure, then, to break through this immunity is by finding and leveraging mavens.
  3. Critical role of maven - As was just discussed, mavens are critical in breaking through the immunity that has been build up to traditional forms of communication. How do you find these mavens, though? Connectors will find you (that's what they do). But mavens are more difficult to find. You have to set "maven traps". An example provided was with Ivory soap. From Wikipeida: "In the book he gave the example of the toll-free telephone number on the back of a bar of Ivory soap, which one could call with questions or comments about the product. Gladwell's opinion is that only those who are passionate or knowledgeable about soap would bother to call and that this is a method by which the company could inexpensively glean valuable information about their market.".