Watch this 93-second clip and see if you can identify the pricing pitfall addressed in this humorous clip. Caution: the clip contains a bit of profanity. It is Chris Rock, after all.

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A recurring entrepreneurial challenge is to determine the optimal price of a new product, especially absent a directly competitive alternative. This issue is often further complicated by users who request that individual features be unbundled so they can limit their purchase to a portion of the overall solution.

The questionable “logic” of such requests is, “I only need a fraction of the features offered, so I should only pay for the features I will use.” This is analogous to asking Bill Gates for a discount because you, “never use the mail merge features in Microsoft Word.” At Citrix, GoToAssist customers would occasionally ask if they could just purchase our screen-sharing functionality because they did not intend to use the features it was bundled with, such as reporting, session recording, agent monitoring, etc. 

Resist the temptation to accommodate unbundling requests, which essentially are veiled attempts to obtain a price discount. The value of your solution is in its totality, not its individual features. Once you unbundle most solutions, you bring into question the “value” of each of the individual components, which could result in price erosion, as customers pick and choose individual features.

Ironically, similar to Chris Rock’s character, who clearly can afford more than a single rib and a handful of coke, most of the GoToAssist customers who requested that we unbundled our solution could also readily afford, and, in most instances, make use of GoToAssist’s additional features.

Price = Value

The value of your solution will vary by customer, based on the utility they derive from your product. Ideally, discriminatory pricing laws aside, you would charge a different price to each of your customers, based on their willingness to pay. Starting with this ideal and applying it to the pragmatic reality of the markets you serve, attempt to match your pricing with the value delivered to each market segment you serve. Your costs should only be considered in light of the value you deliver. To the extent you can achieve sustainable gross margins, these factors should not influence your pricing decisions.

For instance, at Citrix we offered our GoToAssist customers the option to brand the customer-facing web pages of our solution with their logo, colors and general look and feel. The process to implement this branding involved minimal effort and thus cost us very little. However, the value to our customers was significant. If we had utilized a “cost-based” pricing model, we would have charged a few hundred dollars for this option. However, using a value-based approach, we derived a fairly substantial price (much to the chagrin of some of our engineers), which our customers were happy to pay.

When we initially launched GoToMyPC, the price of the annual plan equated to $9.95 per month. Our Marketing Department championed this relatively low price, as they had received numerous emails from would-be customers who indicated they would purchase GoToMyPC “if the price were lower.” Their concern was that we were forgoing revenue that we could otherwise capture if we decreased our price.

As I was responsible for driving GoToMyPC’s revenue, I was highly motivated to test its price elasticity. To this end, we gathered two very important pieces of data: (i) the large majority of our customers were reimbursed by their employers, and (ii) our customers used GoToMyPC an average of over four hours per month. At the time, our customer demographic was white-collar professionals, whom we conservatively assumed were compensated at the relatively modest rate of $35 dollars an hour, which equates to approximately $140 (4 hours x $35/hour) of “value” delivered by GoToMyPC each month.

Given GoToMyPC’s significant value, I championed a 50% price increase, from $9.95 to $14.95. Although there was significant internal resistance to such a large price increase, the company agreed to test the new pricing, based on the compelling empirical evidence that substantiated the significant value GoToMyPC delivered to our users (and their employers) each month.

Fortunately, our analysis was sound. Even this relatively large-percentage price increase had no impact on our sales. In fact, our overall revenue increased across all our market segments and marketing channels. Although we could never prove it, we suspected that the price increase enhanced the legitimacy of GoToMyPC in the eyes of corporate customers who might have otherwise been concerned that a $9.95 price could not support a sufficiently professional, secure or reliable corporate service.

Too often, entrepreneurs attempt to widen the appeal of their solutions by dropping their prices to attract a larger number of prospects. Although the appeal of this strategy is obvious, it is illusory. Focus on a value-based price that balances gross margin profitability with capturing the largest possible addressable market.

Avoid The End-Of-The-Quarter Trou Drop

Many corporate customers have become conditioned to delay major acquisitions until the end of a calendar quarter. These customers are accustomed to companies discounting their products as a quarter-end nears, in order to achieve their sales targets. As described in Private Means Private, one advantage of a private company is that it is not slavishly bound to monthly and quarterly financial objectives. As such, ignore the temptation to reduce your price at the end of a calendar quarter, simply to attain your internal sales projections.

Avoid end-of-quarter price erosion expectations by firmly communicating to each prospect early in the sales process that your company is private, focused on its long-term growth and thus not subject to quarterly sales pressures. Let your Bro Foe know that you strongly desire to close the sale as soon as possible, but you are also willing to re-initiate your discussions at the start of the upcoming quarter (after the prospective customer is done beating up all their other vendors). Once your prospects realize that you are not subject to the quarterly sales pressure, they will be less likely to withhold their order in order to extort a price discount.

That There Be One Slippery Slope

Discounting is a slippery slope. However, if you never offer price discounts to anyone, it is easier to resist such requests by deferring to your company “policy.” Clearly declaring your non-discount policy is a strong negotiating position. If you selectively compromise this position, your potential and current customers may become alienated, and feel betrayed that they were not the beneficiaries of a discount.

Steadfastly refuse to discount your product based on price. If a customer is serious about acquiring your solution, it is always possible to devise creative, non-price alternatives to deliver customers additional value without eroding your price.

Eliminating the possibility of price reductions removes a crutch which is often employed by mediocre sales people. If your sales team knows that you will approve deals with price discounts, they will be inclined to give away this relatively expensive allowance in order to close the sale and secure their commission. 

Price reductions have a dollar-for-dollar impact on your gross margins and ultimately reduce the amount of cash available to reinvest in your adVenture. As such, force your sales team to seek non-price alternatives to price reductions. If you reward your sales team for maintaining gross margin targets, they will be motivated to craft non-price deal sweeteners that can be delivered at minimal cost. To the extent that such non-price incentives have a smaller impact on your margins than a price discount, your adVenture will be well served. Some non-price methods of enhancing your overall value proposition include:

Support – If you provide various tiers of support, offer an enhanced level at no additional cost. For instance, you might provide phone support to a demanding customer, rather than lower-touch and less timely email or chat.

Volume – Offer per-unit price relief in exchange for a larger overall purchase. For instance, if you are selling ten concurrent seats of a software program, consider reducing the cost per user if the customer agrees to purchase an aggregate number of user seats which results in a larger overall sale than you would otherwise garner without the cost-per-seat discount. This strategy obviously is most effective when your product entails low variable costs.

Cash – As noted in Frugal Is As Frugal Does, cash at a startup is king, queen, duke and prince. If you offer a subscription product or a similar solution that is purchased over time (e.g., software as a service), require discount-oriented customers to pre-pay a substantial portion of the fees upfront. For capital goods that may traditionally involve extended payment plans, demand more timely payments.

Duration – Extend the duration of the purchase agreement such that the overall revenue generated exceeds that of a shorter, undiscounted sale. For instance, to the extent it is applicable, require a customer to agree to a longer-term commitment in exchange for a lower per-year or per-month price. If you are selling a product with a one-time sale, such as capital equipment or legacy software, require customers to sign an extended service or warranty agreement.

Protection – Consider offering “pricing protection” to users who are particularly price-conscious. Rather than reducing your price upfront, contractually limit future price increases. Clearly, caution must be deployed when utilizing this tactic, in order to reduce your downside exposure in the event your costs unexpectedly increase.

Transparency – Some customers will value understanding, and potentially influencing, your product roadmap. As long as such customers abide by your confidentiality covenants, your competitive exposure will be minimal. However, never allow such transparency to result in a customer exerting de facto control on your product development process.

Professional Services – Your Professional Services team can be invaluable. When properly managed and motivated, they are akin to spies who cross enemy lines and become trusted members of the opposing side, providing you with invaluable intelligence regarding your customers’ wants, needs and plans.

Your Professional Services team should also be compensated to drive incremental revenue. By solving customer issues beyond the scope of your solution’s current deployment, you deliver more value, become more ensconced within your customers’ organizations and generate additional profits. For all of these reasons, generously allocate discounted Professional Services resources to demanding customers, especially with respect to the installation and implementation stages, when ensuring a satisfied customer experience is of profound importance.

Expensive Chits

Never discounting is an ideal strategy. However, if for strategic reasons you decide to grant price allowances, tie them to one or more non-price deal points as a means of making the discount relatively expensive. A few suggestions of such “quid pro quo” provisions include:

• PR Goodies – Secure the use of a customer’s logo, testimonials, inclusion of the customer’s name in press release boilerplate text, joint press release, etc., as described more fully in Thrill The Messenger.

• Referenceable – The customer agrees to field a reasonable number of reference phone calls from future, prospective customers. Note: As a buyer, I usually agreed to this provision, as it ensured that the seller would do everything in its power to make me happy and keep me satisfied.

• White Paper – The customer agrees to participate in the creation of a marketing document which details its successful use of your solution; ensure you have access to the raw data, such as cost savings, usage, productivity enhancements, return on investment, etc.

As noted in Kiss Of Death, rebuff customers’ requests for Most Favored Nations (MFN) status. Such a provision dictates that the MFN customer is guaranteed the “best” deal that you offer to any future or current customers. MFN covenants are difficult to administer and they amplify the financial impact of any price concessions you are forced to make with any customer.

For instance, if you grant a new customer a deep discount in order to close a strategic deal, a MFN clause will require you to offer an identical discount to all MFN customers. However, if the discount is accompanied by one or more meaningful quid pro quo provisions discussed above, the discounts will only apply to MFN customers who also agree to abide by the favorable provisions.

The Customer Is Not Always King

The essence of Chris Rock’s cameo in “I’m Gonna Git You Sucka” became a watchword at Citrix. Whenever we encountered a prospect who attempted to nickel-and-dime us with an unreasonable request, we referred to them as “wanting a rib.”  In other words, they were a prospect that was unlikely to become a profitable customer.

As Chris Rock runs from the ribjoint, chased by Isaac Hayes, actor Bernie Casey enters the scene and admonishes Isaac Hayes’s character by saying, “Don’t do it. The customer is always king.” Experienced entrepreneurs know this is simply not true. Some would-be customers, such as those who are unwilling to pay an equitable price for your solutions, should be sent fleeing, just like Chris Rock’s character. If they are not, it just may be you who is gonna get it, sucka.

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John Greathouse has held a number of senior executive positions with successful startups during the past fifteen years, spearheading transactions which generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.

John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara’s Faculty where he teaches several entrepreneurial courses. He is also the author of an award-winning entrepreneurial blog infoChachkie.com. You can learn more about his experiences at johngreathouse.com
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Copyright © 2007-9 by J. Meredith Publishing. All rights reserved.

When Superman was introduced in 1939, he was truly a breakthrough comic book character. At the time, most comic heroes were very human, such as Dick Tracy, The Lone Ranger and Tarzan. The very attributes which caused Superman to be unlike anything that came before subsequently became clichéd conventions, which makes it difficult for modern audiences to appreciate just how startlingly different Superman was at the time of his debut. His super powers, costume, dual identity and crime-fighting focus have been endlessly imitated, sometimes a bit too closely.

Within months of Superman’s first appearance, Fox Features Syndicate created Wonder Comics, starring “Wonder Man.” As shown at left, he had super powers, wore a red uniform, fought crime and had a large “W” on his chest. Sound familiar? The public rejected this dismal imitation and the comic sold poorly.

Copies which lack originality are similar to those successively made on a Xerox machine. Each copy is an inferior imitation of that upon which it is based.

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Subtle Innovations

Innovation is commonly associated with either the introduction of new products or new features added to existing products. Such innovations are often focused on making products stronger, faster, smaller, lighter and cheaper. The relative dominance of product-oriented innovations is clearly depicted in the graph at above.

However, Doblin points out in On Innovation Effectiveness, such product innovations are often the least financially rewarding. As shown in Doblin’s second graph, improvements related to customer service, product delivery and company infrastructures historically deliver higher rates of return than product performance innovations. Let The Herd focus on such mundane innovations while you seek enhancements that are less obvious and more financially rewarding.

Slow Follower – GoToMyPC Vs. pcAnywhere

“We had the 32nd mover advantage”
– Scott Cook – Founder of Intuit, describing the state of the market upon Quicken’s release

Released in 1986, pcAnywhere was the dominant remote access software solution in 2001. In fact, in an August 1999 press release titled, "pcAnywhere 9.0 Distinguished as Analysts Choice,” Symantec claimed a market share equal to, “76 percent of the retail remote control market according to PC Data’s retail share report — and 85 percent of the corporate market,” in an otherwise fractional market. Like most legacy software solutions, pcAnywhere had become bloated with features that most users never became aware of, let alone used.

Despite the excess of pcAnywhere’s features, the primary value proposition of GoToMyPC and pcAnywhere was the same – remote access to a geographically distant computer. One of GoToMyPC’s distinct points of differentiation was that users could download it via the Internet, use if free for 30 days and then decide if they wanted to keep it. In contrast, in order to “test drive” pcAnywhere, users had to purchase the software at a retail location and then deal with a rather cumbersome, manual installation process on two PCs. If a user was not satisfied with the product, they were forced to return it to the retail location, subject to that particular store’s return policy.

In addition, GoToMyPC required no technical knowledge. Even the most unsophisticated user could access their PC remotely in a matter of minutes, without the intervention or assistance of someone with technical savvy. In fact, GoToMyPC’s tagline, “Fast, Easy, Secure,” was derived from the fact that these attributes were noticeably absent from Symantec’s solution.

Thirdly, GoToMyPC also allowed users to access a PC from any Internet connection. In contrast, the ironically named pcAnywhere limited users to a single computer from which they could access their remote desktop. In this respect, pcAnywhere was akin to a telephone that allowed you to call a single phone number. Even in 2009, pcAnywere’s marketing materials note that it only offers users a “one-to-one” connection, as opposed to GoToMyPC’s “anywhere-to-one” capabilities.

These differentiating factors – ease of delivery, ease of use and “anywhere-to-one” accessibility – allowed GoToMyPC to destroy pcAnywhere’s market leadership position.

Serving An Empty Box

There were two significant challenges we faced when we launched GoToMyPC. One was properly setting the market’s expectations. The second related to educating the market as to the power and benefit of software as a service (SaaS). At the time we launched GoToMyPC in January 2001, companies that delivered SaaS were called “application service providers” (ASPs). There was a significant lack of understanding and mistrust of ASP solutions among most Big Dumb Companies (BDCs). Numerous BDC executives derisively told me, “We will never allow software to be delivered through our firewall! If the software is not installed on one of our servers, we will never buy it.” Three BDCs that will remain nameless – … OK, Microsoft, Siebel and Oracle – all took this position, which is ironic as each of these companies later launched ASP initiatives.

Our technical team took an adamant position with respect to dealing with the market’s resistance to ASP solutions. We were unwilling to place any portion of our technology behind our customers’ firewalls. By refusing to compromise our ASP status for anyone, including Siebel, Microsoft or Oracle, we materially slowed the adoption of our technology. On technical grounds, the decision was reasonable. SaaS products are easier to develop, maintain and update, as compared to server-based software solutions. However, from a sales and marketing standpoint, our recalcitrant approach toward our prospects’ concerns was problematic.

WebEx, with whom we competed on a peripheral basis with our GoToAssist support product, took a clever, market-centric approach to customers’ distrust of ASP solutions. Rather than balking at customers’ requests to “put a server behind my firewall,” they did just that. They placed a “dumb” server that did little more than turn off and on, behind customers’ firewalls. The big red OFF button on WebEx’s servers allowed customers to feel that they were “in control” and in compliance with their BDC’s edict to avoid ASP solutions. Although simplistic, this customer-focused strategy garnered WebEx significant market penetration.

Despite the tremendous education required to acquaint users to the benefits of ASP solutions, we were able to “draft” the pcAnywhere multi-decade marketing efforts which espoused the benefits of remote access. This key fast-follower strategy is described further in Competitive Sleuthing.

GoTo My MVP

Greg Alwang, a contributing editor at PC Magazine, was a beta user of GoToMyPC who loved the product. We worked closely with Mr. Alwang, as well as other Media Messengers, to ensure that our Minimally Viable Product (MVP), which was relatively rudimentary, was not maligned for its lack of features.

Our MVP version of GoToMyPC was the cherry on top of the banana split. It offered users the feature with the highest utility, namely – fast and easy remote access. We knew that if we successfully sold the “cherry,” we could later add different flavors of ice cream, whip cream, various types of sauces, nuts, etc.

In March 2001, in conjunction with our commercial launch, Mr. Alwang wrote a glowing review of GoToMyPC, which confirmed that we had done an excellent job of proper positioning. Although he noted that our file transfer features were “basic compared with pcAnywhere,” he highlighted the ease of use and from-many-to-one differentiating aspects of our solution. We used the concluding sentence of his review in our marketing materials for several years: “GoToMyPC is revolutionary, and pcAnywhere is evolutionary.”

In July 2008, Citrix announced that GoToMyPC sales accounted for 90% share of the remote access market, while growing at an annual rate of 20%. In 2009, Symantec continued to promote pcAnywhere as, “the number one best-selling remote control solution”. However, the fine print justifying this puffery is based upon “the NPD Group/Retail Tracking Service.” Maybe it is time for pcAnywhere to update its analysis to include online sales of remote access solutions, which dwarf its legacy retail channel. Its claim is similar to identifying a particular brand of milk as, “the number-one best-selling” based on door-to-door milkman deliveries. Symantec should fess up and admit it lost its leadership position to GoToMyPC many moons ago.

Fast Follower – GoToMeeting Vs. WebEx

As noted in Fast Follower I, successful fast followers devise products which embody the critical features most valued in legacy solutions, while enhancing their offerings with one or more memorable, highly salient and unique features.

When we revised our business model from the “marketplace for expert services” to a SaaS solution, we repositioned our remote access core competency as a technical support solution called GoToAssist. This focus on the support market allowed us to avoid head-to-head competition with WebEx. Our strategy was sound, as there were plenty of green-field opportunities for both companies to pursue, without battling each other. However, once GoToMyPC was successful, we placed our sights on the online collaboration market, which forced us to directly compete with WebEx, the undisputed market leader.

As described in Fast Follower I, we gave our elephant vibrant pink sunglasses, in an attempt to avoid a “Coke versus Pepsi” battle. GoToMeeting’s differentiating characteristics were identified and evaluated via a rigorous, iterative product validation process, which entailed:

Meet – We met with numerous current and former WebEx customers as well as individuals who had never used a collaboration product

Discuss – We discussed their likes, dislikes and concerns

Propose – We then proposed a variety of differentiating characteristics and asked them to prioritize a list of proposed features

Evaluate – We then evaluated the respondents’ feedback

These steps were repeated a number of times until we finally honed the characteristics of our MVP, which balanced ease of use with the features users had identified as having the highest utility.

Throughout this process, we heeded Doblin’s advice and focused on non-product-centric innovations. After thousands of surveys and hundreds of interviews, we identified the following four innovations, which enabled us to attract both customers who had not previously purchased an online collaboration solution, and current and previous WebEx users to purchase GoToMeeting:

Self-serve – Current and former WebEx customers were frustrated that the product required significant technical expertise, especially with respect to setting up large meetings. GoToMeeting allowed users with little to no technical capabilities to set up a web meeting without involving their technical team. This was especially important, as our analysis showed that a significant percentage of web meetings involved little to no planning and thus, we knew that a solution that could be deployed spontaneously would have broad applicability.

Easy to Use – Although still a relatively young company, WebEx had become a victim of the Innovator’s Dilemma by the time GoToMeeting was released. With each development cycle, WebEx added additional features. Similar to pcAnywhere, WebEx’s solution was so feature-rich that it was not easy to use. Our research indicated that most users wanted to simply display their screen to a few people at a time and that WebEx’s more esoteric features were seldom used. As such, our GoToMeeting MVP did little more than allow a user to simply and easily share their PC screen with a small, remote audience.

All You Can Meet Pricing – In our customer discussions, it quickly became clear that there was significant dissatisfaction with WebEx’s pricing model, which included a substantial setup charge (averaging $4,000) and required meeting organizers to pay an incremental fee for each meeting attendee. There were also bandwidth charges, based on the length of each meeting. For instance, WebEx charged $54 for a 60-minute meeting with one attendee. This pricing strategy, which is analogous to pricing plans in the early days of cell phones, discouraged usage, as customers were reticent to host web meetings unless they could “justify” the expense. It also wreaked havoc with users’ budgets, as they could not accurately predict their monthly WebEx expenditures.

We addressed the market’s pricing concerns by instituting a flat monthly fee that allowed users to hold an unlimited number of meetings, irrespective of the number of participants (within reason – a de facto limit was implemented to preclude usage of GoToMeeting as a webinar solution). When presented with this proposed pricing paradigm, one survey respondent declared, “That is ‘all  you can meet’ pricing.” We liked phrase “All you can meet” so much that it became GoToMeeting’s tagline. Customer reaction to our pricing model was so strong that WebEx eventually copied it – a case of the followed becoming the follower.

Online Distribution – WebEx had invested in an expensive, direct sales force and had not developed the in-house expertise required to sell products online. This lack of online sales and marketing acumen led to the failure of its me-too GoToMyPC alternative, PCNow. By offering our collaboration solution online, we were able to reach a much larger audience than was addressable by WebEx’s direct sales team, while maintaining lower overhead costs, which supported our aggressive, flat-fee pricing strategy.

Follow Yourself And Take The Lead

The punch line of Clay Christensen’s highly influential book, The Innovator’s Dilemma, is <spoiler alert> “you must eat your own lunch before someone else does.”  DC Comics put Christensen’s self-evident sentiment into effect decades before Clay was born.

Despite the fact that Superman was an immediate success, no comic publisher was able to devise a similarly successful character. In fact, some pundits declared that Superman was a “fluke” and that the public’s appetite for such costumed heroes was limited.

DC Comics, Superman’s publisher, did not agree. Understanding that simple replication is seldom an adequate fast-follower strategy, DC Comics did not attempt to recreate Superman’s success with derivative incarnations. Instead, it innovated on Superman’s formula.

DC Comics repurposed some key aspects of Superman’s persona, such as his costume, dual identity and crime-fighting preoccupation, and melded them with some of the pre-Superman heroes’ characteristics, including deductive reasoning, acrobatic skill and physical prowess. The result was the second comic book “hit” – Batman.

This is Part 2 of the three part series on Fast Followers. The first part Fast Followers I is here, and the third part will be posted next week.

______________________
John Greathouse has held a number of senior executive positions with successful startups during the past fifteen years, spearheading transactions which generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.
John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara’s Faculty where he teaches several entrepreneurial courses. He is also the author of an award-winning entrepreneurial blog infoChachkie.com. You can learn more about his experiences at johngreathouse.com
______________________

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Copyright © 2007-9 by J. Meredith Publishing. All rights reserved.

Lou Pearlman, owner of Trans Continental Airlines, watched five teenagers crowd into one of his private planes. He asked himself, “How the hell can these kids afford to charter a private plane?” The answer surprised him.

The “kids” were the pop singing group “New Kids on the Block” (New Kids or NKOTB), which at the time was one of the most successful musical acts in the world.

Pearlman was unimpressed with the group, but his chance meeting with them sparked an entrepreneurial adVenture. He wondered, “How hard can it be? Get some cute kids who can sing, teach them to dance and unleash them on the public.”

With no experience in the music industry, no musical talent and no fear, he developed musical groups and solo artists that collectively sold over 160 million records, twice as many as NKOTB. Pearlman’s most successful artists include The Backstreet Boys, ‘NSync, Aaron Carter and Jordan Knight.

Whether or not you like or even respect the music created by Pearlman’s performers, the manner in which he conquered the music industry offers relevant lessons for any entrepreneur attempting a fast-follower market-entry strategy.

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Fast followers learn from the costly investments made by the company (or companies) which first enter a market. As described in Fast Follower III, a savvy fast follower can overtake first movers by leveraging the foundation laid by the early market entrants, including the education of consumers regarding the benefits of the new offer, the development of new distribution channels, and the validation of the new product’s features and benefits. However, as noted in Fast Follower II, simply copying what has come before is seldom an effective follower strategy, even when the copy is significantly less expensive than the original.

Bratty Barbie

Not exactly a “fast follower,” Bratz dolls were introduced in 2001 as a sexy, edgy alternative to the Barbie doll, which had been a perennial best-seller for the previous 40 years. The dolls were similar in many respects. Both were approximately the same size, targeted to the same demographic, and offered consumers a shopping mall’s worth of associated merchandise.

However, there were also significant differences. For instance, the Bratz dolls wore heavy makeup and their garments were sexually suggestive, as depicted in the photo at left. Parents’ reactions to Bratz were generally negative. Ironically, by 2001, Barbie had been on the market so long, few people recalled that she was inspired by a German sex doll named Lilli. After decades of being derided as harmful to young girls’ self-images, many Americans viewed Barbie as a wholesome alternative to its coquettish Bratz counterpart. In contrast to the threatening Bratz dolls, Barbie’s ample chest and impossibly long legs seemed tame.

Not surprisingly, the more parents were offended by the sexy Bratz dolls, the more their children craved them. Over the next eight years, the Bratz brand grew to over $2 billion in annual sales and became the second-biggest-selling fashion doll behind Barbie, with a 40% market share.

Whenever creating an imitation of a successful leader, great care must be taken to avoid outright intellectual property infringement; the closer the duplication, the greater the care which must be exercised. MGA Entertainment (MGA), which produced the Bratz dolls, learned this the hard way. Late in 2008, U.S. Courts forced MGA to cease and desist in the manufacture of the dolls. A jury deemed that the creator of Bratz, Carter Bryant, devised the idea while he was an employee at Mattel. In the Spring of 2009, a U.S. Court of Appeals upheld the jury decision, mandating that the intellectual property associated with Bratz dolls was the sole property of Mattel.

At the time Mr. Bryant created the doll, Mattel rejected the idea, as it was reticent to risk a new offering which might “sully” the reputation of its cash cow. Like many Big Dumb Companies, Mattel did not realize that if a company is not willing to turn its cash cow into a sacrificial cow, someone else will do the honors. An example of how DC Comics was able to continue milking its cash cow while creating a new one is detailed in Fast Follower II.

Newer Kids

“Nostalgia isn’t what it used to be.”
Peter De Vries, American Editor and Novelist

Like the Bratz dolls, Pearlman’s groups were not mere duplicates of what had come before. Rather, he leveraged the most salient aspects of the NKOTB’s “boy band” formula, while making subtle changes that sufficiently differentiated his acts from the numerous boy band clones which arose in the wake of the New Kids’ success.

Some of the specific tactics deployed by Pearlman in the development and launch of his artists include:

Make Meaningful Investments – Pearlman reportedly spent three million dollars selecting the members of his first group, The Backstreet Boys. Significant investments were also made with respect to marketing, public relations, touring and hiring a strong supporting cast (as noted below), before any revenue was generated. The necessity of such investments often makes it challenging for fast followers to bootstrap their operations. For a list of the other characteristics that dictate whether an adVenture should be a first mover or a fast follower, see Fast Follower III.

Hire A+ Players – In addition to hiring talented performers, Pearlman recruited the former New Kids’ manager. In addition, he added to his team the song-writing and production talents of Max Martin, who eventually crafted hits for a number of Pearlman’s artists, as well as Britney Spears, Pink and other notable performers. For more on the characteristics which distinguish top-notch team contributors, see A+ Players.

Test in Safe Markets – Pearlman’s groups initially released their songs in secondary European markets, such as Germany and England. The songs which were well-received were then Americanized with a funkier, hip-hop sound before their launches in the U.S. This judicious approach to product validation allowed Pearlman to make mistakes in smaller, less significant, markets and reduce the risk of marketing a dud song in a large, expensive market.

Focus On Initial Win – Pearlman refined the formula with the Backstreet Boys before he focused his energy on developing additional artists. Once he codified his “formula” for pop star success, he then made slight modifications to differentiate each subsequent performer.

By creating multiple artists, he undoubtedly cannibalized the Backstreet Boys’ sales. However, he ultimately generated more revenue by crowding the market with similar products, thus making it more difficult for non-Pearlman pop groups to compete. This “product line” method of artist development also made it possible for Pearlman to allocate his fixed costs over multiple revenue streams. Unlike Mattel, Pearlman was willing to risk adversely impacting his primary brand in order to enhance his overall competitiveness.   

Define Your Elephant’s Pink Sunglasses – When entering a market as a fast follower, you cannot simply sell a “me too” product. Your offering must have a highly visible and memorable trait which immediately differentiates it from the competition. For instance, an elephant wearing pink sunglasses is far more memorable and impactful than an elephant devoid of striking eyewear. A similar sentiment regarding the importance of differentiation is expressed by Seth Godin in his book Purple Cow.

In the cases of the Backstreet Boys and his subsequent artists, Pearlman’s approach was similar to that taken by the creators of Bratz. In contrast to the New Kids’ clean-cut image, Pearlman gave his other acts a rougher, more mature look, even though he was appealing to the same young female demographic. For instance, many of his artists had prominent facial hair and utilized choreography taken directly from male burlesque acts, such as the Chippendales. Even the name “Backstreet Boys” was selected for the bad-boy, dark images it connotes.

Pearlman’s artists, like the Bratz dolls, offended parents, who longed for more “wholesome” acts, such as the New Kids. Despite parents’ misgivings, Pearlman’s acts proved immensely popular with prepubescent girls. 

Another Heel Wounded By Time

Lou Pearlman may have been a clever, fast follower, but he did not suffer from Humble Pride. As noted in Time Wounds All Heels, dishonesty is a significant handicap to anyone who aspires to be a successful serial entrepreneur.

Mr. Pearlman’s penchant for cutting one-sided deals and cheating his business associates, including his performers, out of their rightful earnings finally caught up to him in 2007. After his arrest on a variety felony charges, he was eventually convicted and sentenced to 25 years in federal prison. I wonder, as the new kid on the cell block, if he was given the prison moniker, “Backstreet Boy.” Hmmm….

This is Part I of the three part series on Fast Followers. The second part is here and third part will be posted next week.

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John Greathouse has held a number of senior executive positions with successful startups during the past fifteen years, spearheading transactions which generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.
John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara’s Faculty where he teaches several entrepreneurial courses. He is also the author of an award-winning entrepreneurial blog infoChachkie.com. You can learn more about his experiences at johngreathouse.com
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Copyright © 2007-9 by J. Meredith Publishing. All rights reserved.

My intent in referencing this egregious article is not to debate “global cooling” – I mean “global warming” – I mean “climate change.” Rather, it is to highlight that journalists often have a very hopeless world view. Irrespective of the facts at hand, they often relish in proclaiming mankind’s imminent demise. Let’s face it, sex sells and so do doom and gloom.

Fortunately for mankind, entrepreneurs do not hope they can make an impact. They act. Improvements in mankind’s lot arise from entrepreneurs who ignore the headlines, hope less and act more to improve their lives as well as the well being of those around them.

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Hope of Deliverance

There are two kinds of discontent in this world: the discontent that works, and the discontent that wrings its hands. The first gets what it wants. The second loses what it has. There’s no cure for the first but success, and there’s no cure at all for the second.
– Gordon Graham, Author and Philosopher

Hope is the confident expectation that someone or something will change one’s circumstances for the better.  Hope is passive. Hope changes nothing. As such, successful entrepreneurs do not rely on hope.

Hoping less is not equivalent to defeatism, nor does it imply that entrepreneurs should be pessimists. On the contrary, entrepreneurs who perpetually see the proverbial glass as overflowing are properly motivated to survive a startup’s grueling emotional rollercoaster. As discussed in Great Expectations, such perpetual optimism is necessary to maintain the confidence of employees, investors and other stakeholders. 

However, a successful entrepreneur’s optimism is not baseless. On the contrary, it is founded on the Three C’s Of Wealth Creation – confidence, courage and conviction – not on an idle hope that some exogenous factor will cause him to succeed.

Good News Is Bad News – Bad News Is Great News

In contrast to the typical entrepreneur’s sanguine view of the world, as noted in Conventional Wisdom Isn’t, many journalists see the world in a much more negative light. During the typical television news hour, good news is often relegated to the final minutes, after the viewer has been subjected to assorted murders, accidental deaths, fires, scandals, etc. Unfortunately, there is a lot of truth to the TV News adage: “If it bleeds, it leads.”

Contrary to the predominately negative headlines, the world has been and continues to “get better,” largely because of the efforts of entrepreneurs who ignore the continuous flow of bleak media messages and focus on creating something out of nothing.

Stephen Moore’s and Julian Simon’s book, It’s Getting Better All The Time is a testament to the dramatically positive impact entrepreneurs have had on mankind’s collective quality of life during the past century.  The book depicts “The Greatest Trends of the Last 100 Years” via pithy text, charts and straightforward graphs. 

I culled a few trends which are most representative of the fact that “the good old days” were not nearly as good as our primitivism tendencies would lead us to believe. Each of these trends was born from the dedicated, hard work of one or more entrepreneurs who worked more and hoped less.

Note: Source of all the following charts and graphs: It’s Getting Better All The Time

As noted at left, the average American’s lifespan increased nearly 64% during the 20th century. More significantly, life spans for both sexes and all races also increased significantly during the same period. Not just the wealthiest members of our societies are enjoying longer lives – all socioeconomic stratas have reaped the rewards of medical and life science innovations.

Hopeless headlines decry the increasing rates of heart disease and cancer. What the accompanying stories often do not communicate is that such debilitating ailments claim more lives each year because fewer people in past generations lived long enough to fall victim to such “old age” diseases.

Despite the pop culture myth that “we are working more and more for less and less,” the facts tell a different story. As noted in the accompanying graph, the average work week in the U.S. has decreased nearly 50% during the past 150 years.

Not only have entrepreneurial breakthroughs led to longer life spans, entrepreneurial innovations have transformed the quality of modern life such that today’s poor routinely enjoy luxuries unheard of 100 years ago, even among the aristocracy of the 19th century.

Given that Americans are working less and living longer, their leisure time has risen substantially. When this discretionary time is converted into years, the advancement over the past 120 years is dramatic, rising from a measly 11 years (essentially one’s childhood) to a threefold increase of 35 years. Modern man’s leisure time is nearly equivalent to the average 19th century worker’s entire lifespan.

As noted in the chart at left, Americans have consistently started working later in life and have enjoyed a growing number of years of retired living. However, a hopeless headline that could be drawn from this data is “Americans Now Spending More Years On The Job Than Ever Before.” Although such a headline would be factually correct, it would omit the positive market factors underlying the data.

A common refrain when people recall the past is a longing for yesteryear’s “low prices.” For instance, one might ask, “Whatever happened to McDonald’s thirty-cent hamburger?” The answer is that the price has not increased. Rather, it has diminished steadily over the past seventy years.

In 1940, that thirty-cent hamburger represented approximately one half-hour of the average worker’s wage. Modern McDonald’s customers only have to work approximately nine minutes to earn the income required to purchase a Big Mac, which is larger and more nutritious than its 1940s predecessor. The current price of a Hershey’s chocolate bar is equivalent to a few minutes of the average American’s labor, one-tenth of the equivalent price of the same candy bar 100 years ago.

In reality, most historical prices were considerably higher than their modern equivalents, when the amount of work required to purchase the goods is taken into account. As the chart below makes clear, necessities such as baking soda, pencils, nails and socks all cost modern buyers a fraction of the prices paid by consumers 100-years ago. The next time you read a headline condemning price increases, keep in mind that the continual march toward greater efficiencies and productivity serve to reduce many prices, in real terms. 

Not only are Americans living longer, with greater leisure time and lower prices, they can expect more of the same in the years ahead. The rate of innovation accelerated with each passing year during the past century, as evidenced by the continual rise in the number of patents issued during the 20th century. As noted in the graph below, from 1978 to 1998, the total number of patents issued more than doubled.

Newsweek’s Wrong Again

In 1980, Newsweek magazine reported the following, based on a U.S. Government Report entitled Global 2000.

“The year: 2000. The Place: Earth, a desolate planet slowly dying of its own accumulating follies. Half the forests are gone; sand dunes spread where fertile lands once lay. Nearly 2 million species of plants, birds, insects and animals have vanished. Yet man is propagating so fast that his cities have grown as large as his nations a century before.”

Do not hold your breath waiting for a retraction. Instead, hope less and focus on turning your entrepreneurial dreams into commercial realities that will benefit all of mankind, even the naysayers at Newsweek and their hopeless brethren.

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John Greathouse has held a number of senior executive positions with successful startups during the past fifteen years, spearheading transactions which generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.
John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara’s Faculty where he teaches several entrepreneurial courses. He is also the author of an award-winning entrepreneurial blog infoChachkie.com. You can learn more about his experiences at johngreathouse.com
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— Get real world advice from John Greathouse, Subscribe Today. —

Copyright © 2007-9 by J. Meredith Publishing. All rights reserved.

The banker initially thought George to be “something of a shambler*.” However, after asking him what he intended to use the money for, he became convinced that there was something special about Wingfield, “the kind of square Western gambler that even a Nevada banker could rely upon.” He loaned him a nominal amount of money; the exact amount is lost to history, but is generally agreed to be between $25 and $75. The loan was quickly repaid, and the banker agreed to provide Wingfield with a $1,000 grubstake, in exchange for fifty percent of the future wealth created by the cowboy’s efforts.

Within five years of their initial meeting, Wingfield had leveraged his modest grubstake into a mining enterprise worth in excess of $50 million, making the former cowboy and his banker two of the richest men in the Western United States.

The factors that led the banker to grant Wingfield his grubstake are the similar to those which drive modern-day, high-tech venture capital investments.

What is a grubstake and how did Wingfield convince the banker to grant one to him? Read on. 

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“Grubstake” is a very American word, combining “grub” meaning “food” with “stake” meaning “a share or interest in a commercial enterprise.” Merriam-Webster defines Grubstake as:  “Supplies or funds furnished a mining prospector on promise of a share in his discoveries; material assistance (as a loan) provided for launching an enterprise or for a person in difficult circumstances.”

As described in the excerpt from Old Grubstake Days In Joplin above, a grubstake often involved the financier or Grubstaker funding the entrepreneur’s or Grubstakee’s food, lodging and tools required to execute the adVenture.

Wingfield’s fortune was not the only one derived from a small grubstake. Old Grubstake Days In Joplin goes on to describe how Dan’s tireless labor and his keen eye for geological anomalies, combined with his uncle’s financial wherewithal, resulted in the discovery of the fourth-largest U.S. lead mine and the most productive zinc mine of its era.

The Less Things Change, The More They Stay The Same

Although it is tempting to over-intellectualize modern-day venture capital, when boiled down to its essential elements, it differs only slightly from the Grubstaking which took place in the Western United States during the latter portion of the 1800s.  Contemporary venture capitalists do not typically provide an entrepreneur room and board, but they do often establish salaries based on an entrepreneur’s nominal living expenses. In this way, the majority of a startup’s funds can be applied directly to further the adVenture’s success, rather than to make life comfortable for the entrepreneur.

Grubstakers sought Grubstakees with the traits described in Youthful Discretion – usually a young person with passion, hunger and sufficient skills to autonomously pursue the adVenture. Frontier financiers put credence in the same characteristics that are valued by contemporary venture capitalists, including:

Informal Education – Consideration of a Grubstakee’s formal education was usually irrelevant. If the Grubstakee had any “book learning,” it was seldom directly applicable to the nature of the grubstaked adVenture. A Grubstaker focused on proof of an individual’s ability to perform the skills required to succeed at the proposed enterprise, not his ability to prosper in otherwise esoteric environments, such as a classroom.

Stewardship – Judicious use of funds was of the utmost importance, because the Grubstaker was directly footing the Grubstakee’s bills. As such, the miserly spending approach described in Frugal Is As Frugal Does was a prized Grubstakee trait.

Clean Backtrail – Without email, Twitter or an iPhone, Grubstakers verified a Grubstakee’s propensity toward honesty, integrity and hard work by asking a few well-placed questions to the folks who had previously crossed paths with the Grubstakee. 

No B.S. – A firm handshake, coupled with direct eye contact, was often the only contract underlying a Grubstake deal. As such, communications had to be clear, open and direct. If a Grubstaker asked, “Where do you intend to mine for gold?”, a response of, “That is confidential information, but I will consider sharing it with you once you sign my NDA,” would not result in a Grubstakee receiving subsidized room and board.

Sticktoitness – Most men who accepted a grubstake felt honor-bound to repay them, even if the funded adVenture never generated a profit. Grubstakers funded Grubstakees who demonstrated a Humble Pride and considered failure a personal affront. 

Shared View Of Success – The Grubstaker won when the Grubstakee won. Such alignment minimized the risk that Founderitis would arise and derail the adVenture. A Grubstakee who attempted to withhold profits rightfully earned by a Grubstaker usually met his demise face-down on a barroom floor, as opposed to in a courtroom.

Fear Of Failure – A grubstake was intended to facilitate the Grubstakee’s basic survival while he pursued his adVenture, not satiate his hunger for success. If the grubstake was too large and the Grubstakee was not properly motivated, the adVenture would fail. Effective Grubstakees were sufficiently dissatisfied with the lifestyle afforded by the grubstake and did not consider free room and board “success,” just as veteran, modern-day entrepreneurs do not consider a funding event a “victory.”

Fill The Scarcity Void

“I don’t ask for much, I only want your trust.
But you know, it don’t come easy.”
Ringo Starr and George Harrison, It Don’t Come Easy

As noted in Spilling The Beans, ideas are innumerable, and in the absence of competent execution, they are worthless. Conversely, money in pursuit of outsized returns is plentiful. Thus, if both ideas and money are abundant, what is the scarce constraint in the entrepreneur/venture capital fundraising equation?

The scarce commodity is trust. Trust brings ideas and money together. As such, an entrepreneur’s task is to create a bridge of trust between his ideas and the venture capitalist’s cash.

Trust is what brought together George Wingfield’s energy, drive, ambition and ideas with his banker’s grubstake funds. Wingfield went on to become known as “King George,” due to his political influence, which was so pervasive that he turned down an appointment to the U.S. Senate because he feared that relocation to Washington, DC, would dilute his power.

King George was also known for his generosity and willingness to grubstake miners and ranchers whose earnest work ethic and Creed were sufficient to earn his trust. This approach allowed King George to reap the rewards of numerous entrepreneurs’ hard work, without getting his hands dirty – just like a modern-day venture capitalist.

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John Greathouse has held a number of senior executive positions with successful startups during the past fifteen years, spearheading transactions which generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.
John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara’s Faculty where he teaches several entrepreneurial courses. He is also the author of an award-winning entrepreneurial blog infoChachkie.com. You can learn more about his experiences at johngreathouse.com
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Copyright © 2007-9 by J. Meredith Publishing. All rights reserved.

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George Wingfield: Owner and Operator of Nevada  <Return to Article>