Insight+: Whitepapers

Online Reviews Second Only to Word of Mouth as Purchase Influencer in US

2008-10-23T12:53:30Z

A broader investigation into how business can exploit online community underlines the importance of online information in driving purchase decisions, but the most influential information is beyond the direct control of companies selling products and services. Courting the small fraction of Internet users who write online reviews and comments is a very important task for many companies, but one they often neglect.

Many companies downplay the importance of online communities because only a few percent of all Internet users contribute to them heavily. What they don't understand is that most other Internet users read those reviews and rely on them heavily when making purchase decisions. Taking good care of online communities can be a huge money-saver for companies trying to get more marketing impact from limited budgets.

The Apple iPhone: Successes and Challenges for the Mobile Industry

2008-04-01T15:00:00Z

Quick Facts

The Apple iPhone is easily the most publicized new mobile device in recent memory. But despite all the discussion about the product, there's relatively little hard information available to the public on its impact. How is it being used? What effect is it having on customers and on the technology industry?

To help answer those questions, Rubicon Consulting conducted a detailed survey of 460 randomly-selected iPhone users in the US. This report summarizes the findings from the survey, and what they mean for users and other companies.

Here are some of the key findings:

iPhone users are very satisfied. The iPhone users we surveyed report very high levels of satisfaction with the product. They are using its features extensively. (Page 12.)
E-mail is the #1 function. The most heavily used data function on the iPhone is reading (but not writing) e-mail. (Page 13.)
The iPhone increases mobile browsing... More than 75% of iPhone users say it has led them to do more mobile browsing. (Page 14.)
...but it has drawbacks. About 40% of iPhone users say the iPhone has trouble displaying some websites they want to visit. (Page 25.)
The iPhone is expanding the smartphone market. About 50% of iPhones replaced conventional mobile phones, 40% replaced smartphones, and 10% replaced nothing. Among conventional phones, Motorola Razr was the phone most often replaced. Among smartphones, Windows Mobile and RIM Blackberry were most often replaced. (Page 19.)
A third of iPhone users carry a second phone. There have been anecdotal reports of iPhone users carrying a second mobile phone, either for basic voice calling, or for other functions like composing e-mail. The survey confirmed those reports. (Page 20.)
A quarter of iPhone users say it's displacing a notebook computer. 28% of iPhone users surveyed said strongly that they often carry their iPhone instead of a notebook computer. (Page 22.)
Users are young. About half of iPhone users are under age 30 (page 29) and about 15% are students (page 31).
Apple sells to its installed base. At least 75% of US iPhone users are previous Apple customers -- they used either iPods or Macintosh computers. (Page 28.)
The iPhone increases phone bills. The iPhone has increased its users' monthly mobile phone bills by an average of 24%, or $228 extra per year. (Page 17.)
The iPhone leads people to change carriers. Almost half of iPhone users changed carriers when they got the iPhone. (Page 18.)
AT&T's gamble pays off. The iPhone has probably increased AT&T's gross service revenue by about $2 billion per year. (Page 4.)

Implications

What do these findings mean for the mobile industry and mobile users, and what will happen next?

Can Apple reach beyond its early adopters?

The survey showed that most iPhone users are relatively youthful technophiles; half are under age 30, and a third of them even carry more than one mobile phone. This group of customers is great for launching a product, but there aren't enough of them to create sustained growth. The biggest question about the future of the iPhone is whether Apple can reach beyond the early adopters to generate substantial amounts of mainstream demand for the iPhone.

Apple has a history of doing that successfully with products like the iPod, but that was much more narrowly focused on a single usage -- it was a mobile appliance rather than a mobile computer. The iPhone's multiple features make it very appealing to technophiles, but potentially confusing to mainstream customers. The history of the mobile industry is littered with products that sold well at first but then fizzled out. Although the iPhone's future looks very promising today, its long-term success is not guaranteed.

A good example of how to grow adjacent markets

Apple's growth in the last ten years is a case study of growing a company through expansion into adjacent markets. Apple leveraged its Macintosh installed base to establish the iTunes music store, and then built the iPod business on top of that. iTunes and the iPod enabled Apple to renew its franchise with young people, and attracted millions of Windows users into becoming Apple customers.

Now Apple is leveraging both the Macintosh and iPod customer bases to kick-start the iPhone. More than half of the iPhone customers we surveyed are iPod owners, and another 25% use Macintosh computers. Apple's large and very loyal installed base makes it much easier for the company to branch into a related market.

The lesson for other companies is that satisfying customers is about a lot more than just selling them upgrades of what they have today. Managed properly, a loyal user base is also a springboard for creating new businesses.

AT&T made a good choice

When AT&T decided to offer the iPhone, some people in the mobile industry criticized it for making too many concessions to Apple. The terms of the Apple-AT&T deal have not been released to the public, so it is impossible to judge its precise effect on AT&T. But based on the findings of our study, it looks very likely that AT&T made a good decision.

AT&T gains services revenue from the iPhone in two ways. First, the iPhone increases the average monthly phone bills of existing AT&T customers who switch to the iPhone. Second, because AT&T is the exclusive carrier for the iPhone in the US, it causes some people to switch from other carriers to AT&T.

Based on the findings of the study, AT&T is probably getting about $2 billion in incremental yearly service revenue due to the iPhone deal, and that figure will increase as more iPhones are sold.

Here's how the $2 billion figure was calculated:

Total number of iPhones activated by AT&T to date:	3,000,000

Number switching from other operators (47%):	1,410,000
Annual revenue increase from switchers (@ $97/month):	$1.64 billion

Number upgrading current AT&T accounts (53%):	1,590,000
Annual revenue increase from upgraders (@ $19/month):	$360 million

Total revenue increase per year:	$2 billion

An unannounced part of that revenue gets shared with Apple, so not all of it goes to the bottom line for AT&T. But it is still a substantial source of growth in a US mobile phone market that is saturating, and doesn't have many new users available.

These numbers mean the iPhone probably accounted for a substantial proportion of AT&T Wireless' total new subscriber growth in the second half of 2007.

A shift in power

Traditionally, mobile operators have controlled the decisions about which phones will be offered to users. The success of the iPhone in getting people to switch operators in the US shifts power away from the operators and toward handset companies that can demonstrate the ability to generate demand. A company with that power has enormous leverage over the operators, because it can play them off against each other.

However, Apple's type of product design is incredibly difficult for most other companies to imitate, because they don't have expertise in tying together OS, user interface, online services, and hardware design. The path to success in smartphones is clear, but it's not clear how many companies have the skills to walk it.

The resurrection of the notebook replacement

In the early days of the PDA market, many people predicted that PDAs would replace notebook computers. By and large, it didn't happen; a PDA was not a good enough substitute for the core things that people did with notebooks. So we didn't expect to hear that iPhone users were replacing notebooks. But to our surprise, about a quarter of iPhone users strongly said that they often carry the iPhone instead of a notebook computer.

This statistic deserves watching. As the iPhone attracts mainstream users, will they be less willing to replace a notebook with something else? Or will the availability of third party software for the iPhone make it an even more attractive notebook replacement?

The iPhone has been viewed as a way for Apple to attack the mobile phone market, but it and its sister device, the iPod Touch, might also turn out to be a back door opportunity to take a chunk out of the PC notebook market. The PC companies should take notice.

A glass that's half full for software developers

About 40% of the iPhone users surveyed said strongly that they want to add new software applications to their iPhones. This is both encouraging and a caution for software developers. The good news is that there's a lot of demand for add-on applications, even before the iPhone software store opens this summer. That demand will only increase as store begins operation. The caution for developers is that current iPhone owners are tech-loving early adopters, the most likely people to demand new software. Even among those users, a third showed at best lukewarm interest in adding new application. That percentage will probably increase as Apple reaches out to more mainstream customers. Developers should absolutely not assume that the whole iPhone user base will be on the market for third party apps. Unlike PCs, many iPhones will never get a third party application added to them.

What the iPhone means to competitors

To Microsoft: Severe challenges. Microsoft's Windows Mobile is sandwiched between two big competitors, Google and Apple. Apple is crafting hardware-software systems that deliver a great user experience, while Google is giving away an operating system to the very companies that license Windows Mobile today. It's possible for Microsoft to try to compete on both fronts, but creating a proprietary device and at the same time selling an operating system to others is extraordinarily difficult (Palm tried to do it and ended up splitting the company in two).

We think Microsoft should probably decide whether it wants to compete in devices (in which case it will need to create its own phones, as it did for music players with the Zune) or compete in operating systems (in which case it will probably have to give away Windows Mobile for free).

Both alternatives are very high-risk, and require business models that are outside Microsoft's core competencies. The company's recent purchase of Danger, which designed the TMobile Sidekick, may indicate that it intends to go the device route.

The partial collision of Apple and RIM. Apple and RIM approach the smartphone marketplace from very different perspectives. Apple's device is entertainment-centric and, as this survey showed, it sells to young people. RIM's devices are communication-centric and have traditionally sold to businesspeople in a higher age bracket. There has been a lot of media speculation of a smartphone war between RIM and Apple, but actually they occupy very distinct territories in a highly segmented market.

But each company wants to grow into the other's space. RIM has been adding entertainment features and consumer-friendly designs to its product line, while Apple has promised to add Microsoft Exchange compatibility to the iPhone. This will create more competition between the companies.

If Apple really wants to target RIM, though, it will need to create an iPhone with a thumb keyboard, something that Steve Jobs has spoken against in the past. We don't think RIM would be wise to try to enter the entertainment market against Apple; the infrastructure investment would be too large, and besides RIM's brand image is all wrong for that. RIM would be much better served to defend and grow its business market by adding more types of business communication to the Blackberry, such as videoconferencing, whiteboarding, and business travel functions.

Will Apple and Nokia compete, or just divide the world? The iPhone is very strong in the US, but its sales in Europe have been less effervescent. Nokia is very strong in most of the world's mobile phone markets, but is just another phone company in the US.

Although Apple clearly hopes to sell the iPhone outside the US, and Nokia definitely covets the youth market that Apple dominates, the real battle between them has yet to happen. Each company faces significant challenges when playing on the other's turf. The iPhone doesn't yet take advantage of the 3G data networks in Europe and elsewhere, the company doesn't own an extensive chain of retail stores outside the US, and the strength of the Macintosh business varies from country to country. That makes it much harder for Apple to duplicate the intense buzz that the iPhone generated in the US.

Nokia's challenges are more about process. The company's habits and business practices are all optimized around producing hundreds of millions of mobile phones a year quickly and at low cost. The sort of hand-crafted hardware-software integration that Apple does has no place in Nokia's system. But without it, Nokia will be very hard-pressed to match the iPhone's user experience.

Changes to watch for

New form factors. The market for mobile data devices has always been heavily segmented, so it's impossible for a single hardware design to please everyone. The iPhone users we surveyed confirmed that -- 43% of them strongly supported making at least one major physical change to the iPhone: making it larger or smaller, adding a keyboard, or adding a keypad.

Undoubtedly there are also other customers who want those features so badly that they haven't bought an iPhone at all. This is an opportunity for Apple to increase its sales by serving those customers, or it's an opportunity for competitors to steal share by addressing segments that Apple's not serving.

Better browsers. The improved, more PC-like browsing experience of the iPhone is clearly one of its major draws. But as the survey respondents pointed out, the iPhone browser fails to properly display a lot of websites, most notably those using Adobe Flash. About 40% of iPhone users said the browser has trouble displaying some web pages they want to visit.

Apple and Adobe are feuding in public over whether and how Flash can be made available on the iPhone. The dispute punishes users and is damaging to both companies. It's also an opportunity for Apple's competitors. Until and unless Flash becomes available on the iPhone, another mobile company might be able to steal away iPhone customers by creating a better browsing device. Apple needs to continue improving the iPhone browser, and that means settling its dispute with Adobe.

For other mobile companies, we think there will be intense pressure to ship more PC-like browsers, especially in devices that have larger screens. Although many very smart observers of the industry have pointed out that the mobile web would work better if it were reformulated for small screens, that process will take years, and in the meantime a lot of mobile users appear to be willing to pay extra for mobile access to the PC web, even if it's a little awkward. Smartphone companies that fail to deliver good browsing risk being ignored by mobile operators and users.

See link to full report (PDF).

Growth of web applications in the US: Rapid adoption, but only when there's a real benefit

2007-09-26T03:53:02Z

Status and implications for the tech industry

September 25, 2007

Summary: Adoption of web applications is moving faster than most observers realize

The rise of web applications -- websites that replace the functions of a software program that was traditionally installed on a personal computer -- is one of the hottest topics in the tech industry. Huge numbers of "Web 2.0" startups are competing for user attention, and many observers predict rapid growth for web applications.

But most of the analysts refer to web application growth as something that's going to happen in the future. The reality is that web app usage has already stretched far beyond early adopters, and is moving rapidly into the mainstream of US home computer users. A recent survey, conducted by Rubicon Consulting, showed that more than a third of them already use at least one web application on a regular basis. Students are moving especially fast, with more than 50% using web applications.

Other key findings of the research included:

Adoption of web applications varies tremendously by category. E-mail and games are the leaders at the moment. Other categories, such as word processing and spreadsheet, still have extremely low adoption of web apps.
Web applications displace traditional application usage. Among people who use any web applications, those apps consume about 40% of the user's total application usage time. So web apps are already displacing traditional application usage for many people. This trend is very likely to cut into sales of conventional applications over time.
Security is a looming problem. Fear of security problems is one of the biggest barriers to further adoption of web applications.

Implications for the industry

Web apps need to solve practical problems. Users don't care whether they're using a web application or a traditional application; they just want to get on with their lives. The good news for web app companies is that there's very little barrier to adoption of web apps. The challenging news is that users expect the apps to solve real-world problems. Web app companies must make sure they're offering a service that users really care about, and must explain the benefits of it in terms users can understand.

Traditional software companies are very vulnerable. The low adoption barriers to web applications mean that no traditional packaged software company is safe from web-based competition in the near term. The time to embrace "Web 2.0" development and business practices is now. If packaged software companies wait for the competition to intensify, it will probably be too late.

Improve web app security now. The latent security fears of many PC users could explode if there's a well-publicized security meltdown in a major web application. This could derail the current growth in web app usage. It's very important that web app companies take steps to make their software more secure now, before the insecurities turn into outright fear.

Methodology

More than 2,000 US adults who have personal computers at home were surveyed in summer of 2007. Windows, Mac, and Linux users were included. Survey participants were randomly selected through a third-party sampling firm.

Adoption and awareness of web applications

80% of US home PC users say they have heard of web applications. More than half of them have tried at least one web app, and more than a third -- 37% -- say they use at least one web application on a regular basis.

That means use of web applications has already spread far beyond the 16% of the population traditionally identified as innovators and early adopters. Web applications are entering the mainstream of US PC users.

(Base: All respondents. Web applications were defined as websites that replace a task the user previously performed using a software application installed on the PC. Examples were given to ensure comprehension.)

E-mail and games are the leading web application categories

Among people who use web apps, the most popular usage is sending and receiving e-mail through a browser-based client. Games are next, used by just over 50% of the web app users, followed by music and photo management and editing.

Web app adoption differs dramatically by application category. Some of the most discussed web app categories, such as word processing and spreadsheets, have attracted only a very small percentage of home PC users to date.

(Percent of web app users who say they use a web app in each category. Multiple responses allowed. Base: People who use at least one web application on a regular basis. To get the percentage of the total home PC population using an application category, multiply these numbers by 37%. For example, less than 2% of US home PC users say they use a web-based database.)

Web applications consume 40% of total application usage time

Another way to measure the impact of web apps is to ask how much time people spend using them. People who use at web applications say that they spend about 22% of their total computing time doing so. That amounts to about 40% of the total time they spend with applications of any sort.

That implies that for these users, web applications are already crowding out much of the user's total application activity. Over time, that is very likely to reduce the demand for traditional applications.

(Percent of total computing time devoted to each activity. Base: People who use at least one web application on a regular basis. To get the percentage of the total home PC population using an application category, multiply these numbers by 37%. For example, less than 2% of US home PC users say they use a web-based database.)

Web application users vs. non-users

The research attempted to identify characteristics of the people who use web applications. Are web apps being adopted most by a particular demographic segment? The answer is generally no, but there are some differences:

The people who use web applications are heavier users of applications in general, both web-based and traditional. Web app users have 28% more applications installed on their computers compared to non-users. The web app users also use their computers more heavily.
Web app users are somewhat more likely to rate themselves as having good technical skills.
Web app users are slightly better-educated, but the difference is only a few percentage points.
There was no significant difference between web app users and non-users in income, sex, marital status, and presence of children in the family.

Adoption by students. The most striking difference of web app users was that they're more than twice as likely to be enrolled in college or graduate school. So we analyzed students separately from the rest of the population, and found some interesting results...

Student adoption of web apps is much more advanced

More than half of college and graduate school students said they use one or more web apps on a regular basis. Only 11% said they had not heard of web applications.

It's safe to say that among US college students, web app usage has become a mainstream activity.

(Base: All respondents.)

Web applications used by students and non-students

The students' web app usage patterns were similar to those of non-students. Students were somewhat more likely to do blogging and webpage creation via web applications, and somewhat less likely to do security, finance, word processing, and spreadsheets.

(Base: People who use web applications on a regular basis.)

Time spent using web applications

Although students are more likely to use web applications on a regular basis, they don't necessarily spent more time with them. Students who use web applications spent about 15% of their total computing time using those applications, compared to 22% for nonstudents.

(Percent of total computing time devoted to each activity. Base: People who use web applications on a regular basis.)

Security fears limit growth of web applications

(Reasons why web apps are not used. Multiple responses permitted. Base: People who do not use web applications.)

Although web applications usage has grown rapidly, there are storm clouds on the horizon. When people who don't use web applications were asked why they don't use them, two answers stood out:

"I have no need for them." This is a common response in any developing market for a technology product -- many people just haven't yet seen a web application they need.
"I'm worried about security risks." This is not a typical response in most tech market surveys, and it was cited by 38% of the respondents, making it the second most common response.

Based on this research, security fears appear to be a significant barrier to future growth of web applications. Those fears are not unjustified, considering what's being said online about web applications. Here are two examples:

Symantec Corporation issues a semi-annual report on Internet security trends, called the Internet Security Threat Report. The September 2007 edition calls out web applications as a major risk area:

"61 percent of all vulnerabilities disclosed were in Web applications. Once a trusted Web site has been compromised, cyber criminals can use it as a source for distribution of malicious programs in order to then compromise individual computers. This attack method allows cyber criminals to wait for their victims to come to them verses actively seeking out targets. Social networking Web sites are particularly valuable to attackers since they provide access to a large number of people, many of whom trust the site and its security. These Web sites can also expose a lot of confidential user information that can then be used in attempts to conduct identity theft, online fraud or to provide access to other Web sites from which attackers can deploy further attacks."
http://www.symantec.com/enterprise/theme.jsp?themeid=threatreport

IBM published a whitepaper on the security of "mashups," web applications that combine functionality from several different websites. Mashups are a very common procedure for producing a web app. IBM wrote:

"The workarounds currently in wide use to enable Ajax mashups each come at some cost. When stretching a browser's designed limits, you affect other aspects of the application's overall operation....The tools that browsers currently provide for mashups are insufficient to allow you to build applications that are both scalable and secure."
http://www-128.ibm.com/developerworks/library/x-securemashups/

Implications for the industry

To web app companies: Users are incredibly practical; the products must be as well. Although the tech industry spends a lot of time drawing distinctions between traditional software and "Web 2.0" apps, computer users don't care. They just want to solve their problems. Since virtually all US PC users have a web connection and a browser, if a web app solves their problem, they won't hesitate to use it. So the barrier to adoption for web applications is extremely low.

But this also puts important responsibilities on web app developers. The research didn't detect any significant group of people who are biased strongly toward adopting web applications for their own sake. Again, they just want their problems solved. If a web application isn't better than a traditional software app, or doesn't solve some new problem, most people won't adopt it just because it's on the web.

Web app companies need to ensure they solve real-world problems that significant numbers of people care about, and they need to communicate those benefits clearly.

To traditional software companies: No traditional software application is immune to web-based competition, so adopt web app practices now. It's easy for traditional packaged software companies to convince themselves that web applications are not an immediate threat. In Rubicon's work with them, we often hear software company executives say things like, "web applications will be a big challenge to us in three or four years." Assuming that web app growth will be moderate and predictable is extremely dangerous. Since web app adoption has already moved fast in some software categories, it can move fast in any software category if the web app company gets its features right.

The time for traditional software companies to adopt web app technologies and business practices is now, before they're in a crisis. If they wait for a crisis to develop, it will probably be too late to respond.

Everyone: Address security now. The security fears of many people who don't use web applications should be taken very seriously. They show a latent undercurrent of fear that could grow rapidly in the future. A single well-publicized security disaster in a major web app could discredit the entire category and severely limit web app growth, just as safety problems in a few Chinese products have affected the image of the country's entire manufacturing sector.

The IBM report on mashups acknowledged that there are several efforts underway to make web apps more secure. Web app companies should embrace solutions like these aggressively.

Even Steinways Get Out of Tune

2006-11-08T19:32:34Z

What's the difference between an ethical leader and a business leader? Are they mutually exclusive, a subset of each other, or one and the same?

Like the best Steinway can get out of tune, we humans can get slightly off kilter in small ways. The many decisions that lead to "right or wrong" are often more like shades of grey or unclear forks in the road. Ethics are fundamentally about a set of gradual and subtle decisions that lead to a larger impact.

What can people can put into place to make perhaps better decisions? We can move from being experts on facts and novices on values to experts on values, and students of fact.

Is morality a sometime thing?
The newspaper headlines are full of accounts of CEOs lining their pockets, making decisions that are not transparent, and outright lying. These are not some no-name, aggressive companies on their way up, but leaders of notable companies that have held strong brands for years: HP's Patricia Dunn, über-attorney Larry Sonsini, Greg Reyes of Broadcom, and Jeffrey Skilling of Enron.

Could this be proof that even those at the top can lose their way? While I would argue this is true, it is not that they as people are bad, but that they made some bad decisions. Bad decisions that any of us could make, unless we build a system around us to prevent this. And even then, we'll likely still make some bad decisions, but maybe we'll learn from those as well.

Where does morality come from?
Morality, ethics, and spirituality in business are funky topics in today's 21st century results-oriented business culture. My own story of why I care about this topic is, of course, personal. I am loath to suggest I "know" ethics as much I say I admire certain things and wish to integrate them into everything I do so that they feed what I do and how I do it. I got into a huge brou-ha-ha back at Autodesk where I chose a series of decisions that ultimately cost me a friendship of a long-time girlfriend. I didn't intend to go down that path, to lose sight of personal values of respect or to terminate relationships for the expense of business decisions. But at that time I didn't have a framework for what to consider and what choices were available to me.

A framework for morality and ethics in business today
Okay, aren't all business school people trained to come up with frameworks for business concepts, so why not about morality? Here is mine that I've adapted from a combination of some older books as well as Harvey Fox's book on business and spirituality and a course he taught at Harvard.

Recognize: We must have the ability to recognize an issue as a moral issue
Options: We need to frame "what should I do" choices
Filter: We need to have a filter mechanism designed to sort options
Courage: And then we need to have the moral courage to act a way we see as "right."

Recognize issues as moral
When is something a moral issue? If you were Patricia Dunn and you had a leak on the board, would you view that as a moral issue, an investment decision, a process issue or a political issue? Maybe the issue at hand was all four. But the question is whether we look at what we are doing not only for the immediate impact, but also look to understand or intuit what it could be. While many decisions we make in the workplace are binary yes/no decisions, some have more long-lasting implications. Especially when people are at odds with one another, there is almost always a moral question. The question might be which division to shut down, how to "downsize" a team, whom to promote to lead a new initiative, or what the compensation plan will reward. Each and every one of these embed a moral question.

Framing "What should I do" choices
A good friend of mine, Marc McGee, said "About all things, ask yourself 'Who do you want to be?' and that will tell you what you do." This concept is one that assumes we have some experience of morality in our life and the ability to draw out right from wrong within us. The notion of looking in versus looking out seemed like such a foreign concept to me at the time--as if I had the time or inclination for that kind of relentless self-examination. But Marc was right then, and he is right now.

Many times, things come down to "pro and con" lists. You make two columns, write all the factors in favor in one column, and then all the negative factors in the other column, and then use this to trigger a decision. I can remember doing this before business school, and I find that more education only taught me more ways to build a spreadsheet of options.

Now, let's look at what happens when you live within this type of binary thinking, and then what happens when you open the aperture and look at more options. To see or feel a moral question sometimes requires you to step outside one's own point of view, to see that of other classes, eras, genders and ages. Human beings are often dissatisfied without "an" answer so we often yearn to limit options. Yet if age teaches us anything, it's that life is full of unsatisfying and incomplete stories.

The full implications of things considered are rarely as simple as pros and cons, but more about "What road does this put me on?" When we're in the middle of a situation, it is tougher to access options. The missing dimension in nearly all moral reflection is imagination. We need to reach beyond what we see, to what could happen when we follow a path. I could use Dunn's example today because it is easy to see that when she chose to enable pre-texting of the board, employees, and journalists, she gave a green light to violate privacy and show a distrust to all concerned. Did she think that through, I wonder? Because the decision (to me, at least) was not about whether to pretext--which on it's surface looked like a viable option. Rather, whether to go behind someone's back to spy on them. It might have been different if Dunn's decision process had examined the options and imagined what other choices were available to her. Perhaps there could have been a dramatic moment in the board room, or hiring an expert in challenging conversations, or perhaps calling in the police so the issue became public and the leaker found through public intervention. But the decision was to keep the issue "private" so many of those options weren't pursued. The decision was to not enable a direct conversation with the organization, to talk about things openly and publicly.

It seems to say that if one is lying, we'll do something of similar value to find out. If she did ask herself "who do you want to be," I'd like to believe that any of us who do ask ourselves those questions would slow down enough to consider and think of the moral choices as not "out there" but "in here." Did she want to be someone who enabled spying? Did she want to violate the privacy of her peers? Did she want to take a topic under the table rather than put it on the table? And did she choose that amongst ALL the choices that were available?

Filter mechanisms to sort options
I've often wondered if there is such a thing as a regret-free decision, where we could neither hurt nor displease anyone. I'm not convinced there is. Because all of life is choices. When I deeply hurt my friend, I was choosing to "win" on a business topic that I thought meant the efficiency and value of dollars spent. I was using my full mind, and so I wondered why it was not coming together. "Why the tension," I remember thinking. I'll never really understand all the ways I made mistakes in that situation. Yet now, I see that arguments represent an opportunity to see things anew. When we enter the world of the people we meet, we engage them not in arguments, but in conversation and stories. And if we listen enough and imagine a bigger picture, then we can usually create a universe that is inclusive. Not one that causes one to win and one to lose. But to create alternative possibilities to see beyond what sometimes appears to be an impasse.

Courage to act as we see right
If you look at history, you can see that Martin Luther King, while admired today, was vilified in his time as being unpopular to some of his race, opposed by many in politics of that date and even ridiculed for having a dream of racial equity. Such was the case with Gandhi or Lincoln or so many other leaders. They had the fortitude and courage to act on their beliefs. But none of them did it alone. They had friends. They had people who believed in their vision as much as them.

This only reinforces to me that living a moral life is not a solo life. Your friends help you handle and evaluate options and find the courage to act. I can remember early on when I was trying to "change my ways" after I had ruined my relationship with this friend, I had a new type of interaction. This time it was with someone I thought was treating me wrong. And I wanted to argue and make demands. But I decided that was not who I wanted to be.

A little group I was seeing regularly listened while I vented, teased me about going soft, but told me that I was doing the right thing. I felt both weak and walked upon. Yet, I was committed to trying and learning a new way of engaging that involved seeing the best in people and giving them room to act well towards me. Not because I demanded it, but because they wanted to. I was sure in my mind that I would "lose" and I was delighted to find I not only got what I wanted but more than what I wanted.

I'm not trying to say it will do that all the time, because really what I'm trying to say is the outcome isn't always the point. The outcome is to get clear about who you are, and who you want to be so you can live in the world--and live with yourself. I have come to define ethics as that which allows the broader interest of people and organizations to serve above their own needs. It takes great courage to do that.

I saw Carly Fiorina recently at the Churchill Club and I've been wondering ever since what would have happened if she had challenged the board to get honest with one another. Maybe she didn't because she thought they weren't ready, or she couldn't influence that kind of change. If she had, she might still have lost her job, who knows. But maybe she could have prevented another two years of board leadership dysfunction.

Some final thoughts
Morality and ethics in business are not often reinforced actively in our culture. And it's not as simple as a list to follow per se. It's a way of living and being--of staying in tune with our inner voice and what matters. Each of us can develop some muscles of perspective that will help us live out ethical values. For those of us that want more guidance, we can join a community that helps us define, learn and live out values.

Why should we care? I started this rather long epic on whether ethical and business people were the same? The underlying word is people. Because it is not organizations that make decisions, it is people and when each of us and all of us collectively make any of our decisions while being more morally centered, then we will in effect enable a better culture, organization and perhaps even, a better world.

I believe business can be transformed from a place where CEOs line their pockets, and lying is discovered in the boardroom based on how we work, how we engage with one another. We can move from being experts on facts to experts on treating each other with the humanity that we need. Starting with understanding what decisions are moral issues, to defining "what should I do," to filtering mechanisms and sorting differently and having the inner fiber to act as we see right.

I wish I could end this with some report or statistic that says, if we live morally, business performance will rise by some defined growth x%. But I have faith that when we feed the roots of our business tree with good ethics, the tree will yield good outcomes. I hope you have faith too.

Additional Resources

Spirit In Business [http://www.spiritinbusiness.org/new/content/home.php] Some things are more important than other things. This site focuses on ways to bring your true "self" into your world, and does it in a non-squishy way. Impressive.

Spirituality in Business [http://www.communityofjoseph.com/]
Andre Delbecq, Chair of Management Sciences at Santa Clara University, and former Dean of the Business Department, is a well-known speaker, author and teacher. He's an inspiration to me for many reasons but namely for using his learned wisdom and personal insight to enable the "spirituality" word to be okay in business today. He, along with others, leads a weekly session of contemplative prayer and reflection with CEOs and Silicon Valley business people. Their website contains a number of good inspiration readings.

This white paper is based on a presentation by Nilofer Merchant to the national Women in Technology conference on the topic of Spirit in Business.

Solving the Puzzle: Pricing, Licensing & Business Models

2006-11-08T18:55:40Z

This white paper is based on a "Birds of a Feather" presentation and discussion at SoftSummit 2006.
The right software licensing and pricing decision is frequently context-sensitive, so those in attendance were treated to an open-ended discussion of critical decisions rather than the usual lecture-style presentation.

Attendees were asked to think about:

How do business model, pricing and licensing come together in your company?

Will pricing and licensing changes like Software as a Service (SaaS) mean revising your company's business model?

Will one business model dominate or will many coexist? Is the perpetual license dead? Is SaaS a fad?

How fast can an ISV change their business model? What affects the speed of change?

How different is the SaaS model? What is its impact on customers? On operations?

Today, almost all software vendors are doing something in the SaaS arena. Salesforce.com, NetSuite, Yahoo! and Google are well-know SaaS developers, but IBM, Oracle, SAP, and Symantec are all moving that way too. Single-user desktop applications are under the least pressure, and are moving the slowest.

SaaS vs. Traditional Licensing
A basic truism for any software developer is that over time revenues and expenses have to match. One can only "borrow" against future revenues, for example by using capital inflows, for a limited time. The smaller revenue flows from SaaS applications mean that investments in Sales, Marketing and Development need to produce revenue impacts sooner rather than later.

Traditional licensing with its up-front payments more easily supports heavy investments because the revenue payoff is concentrated at the front-end of the customer relationship. On the other hand, SaaS applications require smaller initial outlays from the customer, removing a big hurdle to new customer acquisition. The vendor is provided with a smaller, but continuing, revenue stream and encourages a closer relationship between vendor and customer that may lead to better long-term retention.

Customer Considerations
Cost and Capabilities are key considerations for any software purchase. In some cases, the IT organization may have different goals from the operating units that want a specific software application.

SaaS offers a number of benefits on both the cost and capabilities fronts. These include:

Cost considerations

Initial versus lifetime cost of the license

Whether the software is considered a current or capital expense by the customer organization

The cost of maintaining the necessary IT infrastructure. Big, important software applications require robust servers and people to keep them running.

Switching costs in the event the customer later changes their mind.

Capability Considerations

The direct and indirect costs and hassles associated with maintaining and updating the application.

Hosted applications offer immediate access to future capabilities and upgrades.

SaaS-based vendors are often able to offer innovative and capability-rich applications?

Organizational Considerations

Is Corporate IT friend or obstacle? If you are trying to end-run Corporate IT, an application that requires lots of expensive, internal IT infrastructure is a non-starter.

Faster time-to-value

Ease and speed of deployment.

Vendor Considerations
Software vendors must consider development, support and sales considerations. SaaS offers important benefits in each area of consideration.

Development

A single code base can support many licensing, hosting and pricing options.

A single, hosted version reduces resources required for maintenance of older releases (bug fixes, etc.)

The architecture employed generally supports faster development innovation.

Support

Keeping all customers on a single release means there are no legacy users to support.

On-going, "rental" payments help to foster a stronger, long-term relationship with customers. This often pays dividends in both sales and product development.

Sales

Lower initial costs allow sales to reach smaller customers and customers willing to try, but not yet buy.

Rental and on-demand models are simply preferred by some customers.

Areas of Potential Conflict

It is not all peaches and cream, there are some areas of potential real conflict between users and vendors. While there are counter-arguments to each point, there are real issues for some organizations that are not always easy to reconcile. Key areas of potential conflict include:
- Commitment. In the long-term, despite the lower monthly cost, "renting" may not be cheaper than "buying" a perpetual license if you are planning on running the application for a long time.
- Depth of customization. The efficiency of a single code base inherently limits the depth of customization vendors are willing to support.
- Hosting. Some organizations are unwilling to run critical applications outside of their firewall. Whether this is a real or perceived issue is beyond the current discussion.
Setting the Price
Pricing should be a methodical exercise. If there are constraints such as lower cost competitors, then these need to get baked into the vendor's business model. Each component of the solution needs to carry a cost. For example, maintenance & support, license, hosting, and financial risk are all positive costs for which the vendor should charge the customer and establish a base price. Beyond this, the vendor also needs to consider elements such as: competitive parity, usage and reputation / brand. Added together, these will show the appropriate subscription price. If the vendor's marketing or sales people feel the price--when properly justified--is unsaleable, then the product offer needs to be adjusted to bring the value in line with the price. Both the price and the offer components are in fair play for adjustment.

The figure above shows a graphic comparison of perpetual versus SaaS fees. In this case, the vendor "breaks even" with SaaS after three years. Up until this point, the vendor generates more revenue with a perpetual license and maintenance fees. After three years, the vendor nets more revenue with SaaS. There is nothing fixed about this scenario; the vendor can adjust initial license, monthly license, maintenance, and hosting fees to make to change the slope of either or both lines. The real point here is that the vendor needs to proactively shape the pricing to deliver the appropriate value and revenue to each party.

This whitepaper is based on a "Birds of a Feather" discussion facilitated by Nilofer Merchant or Rubicon Consulting and Jim Geisman of Market Share.

In the Channel: VARs Put a Different Face on SaaS

2006-09-25T21:17:28Z

According to a 2005 AMR Research study of 500 respondents representing companies of all sizes, more than 78 percent said they are currently using or considering SaaS. As ISVs push SaaS applications into the mainstream, ISVs and VARs need to consider likely changes to the channel economic model. One of these changes is likely to be a shift in the balance of power toward full-service VARs. While ISVs will find some of these changes hard to swallow, they need to keep in mind that this is the cost of extending the reach of their applications into additional market segments.

There has been a lot of discussion about how SaaS changes the economics for ISVs. There has been much less discussion about the changes in store for the channel. The SaaS model turns the often complex and multi-headed software licensing model into a considerably more straightforward beast. User / seat licensing may still be mind-numbing in its complexity, but the array of maintenance, upgrade, installation and services fees are streamlined or integrated into the rental payment. ISVs and VARs are going to have to re-negotiate who gets what--and because the link between time of service and time of payment is less distinct--when.

Vendors like Salesforce.com, RightNow, IBM and SAP demonstrate that SaaS is for real and is here to stay... at least until the next big thing comes along. While SaaS applications can be easier to set up and integrate, the SaaS leaders have not shown that they are more able to directly penetrate the small & medium business (SMB) market with SaaS applications than with traditional software applications. In response, the press is filled with news of big software vendors like IBM announcing sales and marketing incentives to support SaaS efforts in the channel. IBM’s channel initiative for SaaS pays a 10 percent referral fee for partner-generated leads that IBM closes, and offers greater sales and marketing assistance to help partners close deals.

How SaaS Is Different

So what is the role of the channel with regards to SaaS offerings? Does SaaS require a new channel framework?

While it definitely calls for a new compensation model and in some cases may significantly alter the ISV / channel partner balance of power, the basic framework is probably adequate, especially when considering the SMB market. The SMB market is served today by a plethora of VARs that often focus on very specific niche markets such as foodservice distribution or equipment leasing companies. VARs bring expertise that ISVs cannot easily develop or maintain, so don't expect them to go away merely because ISVs would like more margin.

It's also important to consider how SaaS changes the economics for customers. The SaaS "rental" model means customers pay less up-front compared to traditional licenses. Meanwhile the ISV or VAR incur development, setup and configuration costs that must be amortized over the life of the deal. As a result, there is a natural bias for SaaS to appeal most strongly to: (a) customers that are cash-constrained, but (b) vendors that can afford annuity expenses rather than front-end license payments. Due to these factors, SaaS has a built-in appeal for smaller customers and larger vendors, although the appeal certainly is not limited to these groups. The role of the channel is very traditional. Specific customer segments are served that are frequently too small or too specialized for the ISV to economically service directly. The emerging economic model, however, is different in some important aspects.

Changing Economics of SaaS

While much has been written about the appropriate way to price SaaS applications, we are concerned here with the overall economics. On the revenue side, SaaS trades a large, one-time payment for a series of smaller, on-going payments. Figure 1 shows an example for Salesforce.com with a breakeven of three years. On the cost side, SaaS has far less impact. Development and selling costs still occur up-front. The big change is that the ISV's breakeven and profitability is determined not at the time of sale, but by how long the customer continues to use the application.

On the channel side, ISVs need to first consider the role they want the channel to play in the customer relationship, then structure the partner's compensation accordingly, recognizing that channel partners may place a different value on current versus future cash flows. While the ISV may be willing to take their money over time, the channel partner may be better motivated with less money now versus more money over time.

New VAR Opportunities

Very conservative VARs that think in terms of cash-based accounting will experience a rocky ride. For other VARs, SaaS offers a number of new or expanded opportunities:

VARs have always played a big role in integrating multiple solutions. SaaS should be no different. In some cases SaaS provides VARs with the opportunity to host the integrated solution and do the billing, thus taking ownership of the relationship. ISVs won't like this aspect, but their options are limited.
If SaaS applications are viewed by ISVs as annuity streams, why should the channel not view it the same way--and participate in the annuity stream? Think about how life insurance is sold and how the agents participate in the downstream renewals. Of course, the channel is more engaged in the downstream revenue than your typical life insurance agent, so the savvy ones will probably want to be compensated accordingly.

New ISV Opportunities

ISVs would do well to understand the additional benefits VARs can bring to their SaaS efforts. This will allow forward-looking ISVs to: (a) partner with the VARs offering the best leverage and (b) proactively drive the re-negotiation of the channel economic model. Long term customer relationships become very profitable with SaaS. VARs can be instrumental in developing and maintaining these relationships. The agent-insurance company example above is very apt. The insurance company does not resent the agent for earning commissions on each renewal, and neither should ISVs with regards to VARs and SaaS. The ISV, however, needs to work hard to make sure that the channel compensation model works to its long-term advantage and is appropriate for the value created by the channel. ISVs must also consider multiple channel programs, keeping in mind that--at least during the near-term--not all VARs want to be paid "for the long term."

Good News and Bad News for ISVs

Taken together, this suggests the possibility of a new generation of superVARs that integrate multiple applications into a common solution, hosting it and providing billing. They will also own a greater share of the customer relationship. Such ownership by the VAR relative to the ISV will also shift margin expectations in favor of the VAR. It is not all bad news for ISVs as the annuity aspect suggests that the margin restructure will be re-crafted to extend over the lifetime of the customer relationship. In exchange for participation in on-going downstream revenues, VARs are likely to accept a smaller payout up front, and would be wise to do so.

ISVs that cling to traditional channel models--or worse, see SaaS as a way to cut out the channel--are likely to see innovative VARs moving to isolate ISVs from the customer relationship. ISVs need to rethink the channel economics for their situation and understand how the channel can add value to their offering and extend its reach. ISVs also need to think about how they can manage the situation to maintain a relationship with the customer. This is important for the deal economics, but even more so for maintaining the insights and feedback resulting from direct customer interactions.

A version of this article was originally published in Soft-Letter.

Excerpts from Stop Flying Blind

2006-06-19T21:56:55Z

Mapping the Future

Nobody can predict the future of a market or business perfectly. If I could do it, I'd be retired someplace living off my stock income. If the authors of all those management books could do it, they wouldn't have to write books and give speeches for a living.

Part of the problem is that the world's very complex, and any absolute prediction is bound to break down as unexpected things happen. But the biggest challenge is that the future doesn't yet exist. It's no a single deterministic thing, it's a set of possibilities. We change the future every day with our own decisions. So what we need for the future isn't a prediction. We need a map, showing all the possibilities and consequences of various decisions: if you go here you'll end up in a valley, if you go there you'll end up in the mountains -- and if you go over there you'll run off a cliff.

The better you draw the map of possibilities, the better your company can choose a good future for itself and its customers.

Mapping the future of a market or industry requires input from three different perspectives. You need to know first what's going on with the customers. Not just what they're doing today, but how they think, what they want out of life, and how they'd react to changes that might happen in the future. You need to know the insides of their heads so well that you can speak for them reliably.

Second, you need to know how technology is going to change, since that determines what your company can create. I'm using "technology" in a very broad sense here, meaning not just physical hardware like computer chips and paint formulas, but also processes companies can use to deliver services. The internet, for example, is a technology change that's changing business processes in almost all companies, and creating a lot of new opportunities. The telephone did the same thing in the early 1900s.

And third, you need a good understanding of what your competitors will do. It's not enough just to know their products and org chats, you need to understand how they think and operate, and what their basic personalities are, so you can anticipate what they'll do in future situations.

Lots of other information can also be useful for predicting the future. For example, it's very helpful to factor in future changes in government regulations (if you know what they'll be). But I think customers, competition, and technology are the most important factors in mapping the future, and they need to be brought together very intimately because there's so much synergy between them.

To understand how a future map is used, picture yourself as a Roman general leading your army to a winter camp. To the north there's a sheltered valley that would be perfect for your needs. The fastest path to the valley leads across a river most people think is impassable, but your bridge-builders say they can do it, so you set them to work. You know the barbarians from the west are also searching for winter shelter in the same area. You don't want them to reach the valley before you. Your scouts have identified a hill that dominates the road from the west. You send your archers to fortify the hill immediately, to cut off any advance.

The valley's a potential market your customer research team found. The people building the bridge are your advanced technologists. The scouts who found the western road and the hill above it are your competitive analysts.

None of these people, working alone, could have drawn the map and told you where you could go on it. But once you had information from all three, you could see the likely future, plan out where you wanted to travel, and prevent the other guy from getting there first.

Unfortunately, this sort of map-making doesn't happen naturally in the business world. In most of the companies I know, the people doing competitive analysis, market research, and advanced technology mix together like oil, sand, and water. Good market researchers are practical and methodical, deeply grounded in data and in the processes by which they gather it. They're very uncomfortable with future speculation and unfounded predictions. Good competitive analysts are intuitive, they specialize making predictions based on small amounts of evidence. They hate being tied down by process. And true advanced technologists often have very fixed ideas about the world, ideas that are linked to the intellectual problems they want to research (ie, I want to work on speech recognition, therefore I believe that many important problems can be solved with speech recognition). They can be very impatient with anyone trying to impose customer or competitive realities on them.

On top of the basic differences in outlook, the people who gravitate to these teams come from different academic backgrounds, so they often have different vocabularies and different professional standards. The work also attracts different personality types, which often don't mix well naturally.

Because of the differences, these teams often have pretty low opinions of one-another, sometimes bordering on contempt.

To make a good map of the future, you have to figure out how to mix data with intuition, to blend science and art. To do this, you first have to understand and appreciate each of the groups separately. Then you have to teach them to work together...

Competitive Analysis Done Right

The fall of competitive intelligence
Once upon a time, back in the 1990s, competitive intelligence was a hot area at many companies. They invested heavily in creating competitive intelligence teams. A professional group called the Society of Competitive Intelligence Professionals claimed that CI was the fastest-growing corporate discipline. SCIP had more than 3,000 members in 1996, and was growing by more than 100 new people a month.⁴ Competitive intelligence consulting firms did big business, and if you visit any good research library you'll find whole shelves of books about Competitive Intelligence, most of them written in the 1990s.

But when the .com bubble burst and companies started cutting costs, many of those competitive intelligence groups were wiped out. "CI units are being eliminated... At least half of the CI functions in place today have suffered significant cutbacks, or will face them within the next six months." That was from the SCIP's own newsletter in 2003.⁵ One of the leading promoters of competitive intelligence in its heyday is now writing about how to apply the Talmud to business decisions.

Why the retreat? Conditions vary from company to company, but I think there are five main reasons:

1. The case for CI was grounded in fear. Much of the urgency behind creating the function was driven by fear of foreign companies, which were said to practice competitive intelligence aggressively. Japan in particular was described as a hotbed of competitive spying, and it was implied that this played a key role in Japan's economic rise. The rhetoric was frightening, and it seemed likely that any company failing to create a competitive intelligence unit was doomed to fall to foreign conquerors.

But then the perceived Japanese "threat" to American business receded, and so did interest in Japanese business practices (when's the last time you heard someone quote from the Book of Five Rings?).

2. The role was never completely defined. CI was a very new discipline, and there hadn't been time for a consensus to develop on exactly what the role was and how to organize it. As a result, different books and consultants gave conflicting advice. In the lack of clear expectations, I think many competitive intelligence groups were never given well-defined charters. When a company's under financial stress, a poorly defined function is an obvious thing to cut.

Inevitably, some of the advice was also damaging. For example, one prominent book said the CI role is like being a court jester for your company. The idea was that the CEO resembles Shakespeare's King Lear, surrounded by liars and flatterers. The jester is the guy with bells on his hat who tells the king the truth, mocking the egotists and exposing the liars.

It's true that someone in a competitive role must be unafraid to say exactly what the data indicates, even if it'll upset people. But beyond that I'm uncomfortable with the jester analogy because it implies a completely negative role, and one that focuses only on influencing the CEO. In most of the companies I've known, to make change work you need to influence the whole management team, and beyond. You can't do that if you speak only to the CEO, and besides you won't win much respect from the organization if all you do is point out the flaws in other people's work. When the CEO is replaced (which happens a lot more often than the death of a king), it's likely that the one agreement among all the remaining executives will be that they want to strangle the jester.

Which, I believe, is what happened at the end of King Lear.

If you need an analogy for the competitive role, it's better to think of the scout for a wagon train, forging ahead in the wilderness to identify dangers and find the easiest path for everyone. The scout's not the manager of the wagon train, but he's a leader with a unique and valued role. And he never wears bells.

3. The focus was on intelligence, not analysis. Much of the CI literature focused on how to gather and verify facts about the competition's activities. It's right there in the name -- the function collects intelligence on what the other guys are up to. You can find entire books just listing various intelligence-gathering techniques, down to obscure things like taking the competition's factory tour with two-sided tape on your shoes, so you can collect microscopic samples of the materials they're using. The problem is that basic intelligence collection is becoming less important as the Internet grows and people change jobs more often. The Web is awash with competitive rumors, and chances are that if you can't find the information you need online, one of your former coworkers is now working for the competitor and will sing like a canary if you buy them lunch. There's simply less need for full-time employees who ferret out tidbits of intelligence.

What companies do need is insight on what the flood of information means -- how it adds up, and what it says about the competition's thinking and future behavior. This is why I prefer the term "competitive analysis" rather than competitive intelligence. But that sort of predictive analysis is a very different discipline than collecting data, and you'll do it best when competitive analysis is teamed with market research and advanced technology research. So competitive analysis isn't really valuable as a standalone function.

4. The wrong people were hired for the function. This probably relates back to the lack of a clear charter for the CI role. When you're not sure what a function will do, it's easy to imagine that anyone can do it. Many of the people I've seen working in the field were marketing or sales people who had been dropped into the competitive role without much preparation, or much inclination for the work. They floundered around trying to figure out what to do, and produced very superficial reports.

Because of the flood of how-to books on competitive intelligence, I think some people formed the impression that anyone could do CI if they followed a few simple steps. That's a little odd; I don't know of any other field in business where the expectation is that anyone can be good at it. You don't try to turn randomly-selected employees into engineers, or PR specialists, or salespeople. You look for people who have talent in that area. The same is true for competitive analysts. It's a specialized field, and not everyone can do it well.

5. Competitive Intelligence is not mission-critical in the short term. A company has to have salespeople or no one eats. You have to have engineers or products just don't get built. But if you don't have a competitive team...well, the company keeps going just fine, thank you. For a while.

This means, in practice, that a competitive team has to be more than competent in order to survive. It has to be superb, delivering great value to the company in a visible way, so no one would think of living without it. In practice, that means just being a service group, delivering good information to clients in the company, is not enough. The group has to solve serious business problems and help close sales. Rather than being a source of competitive information, the group needs to be a source of competitive leadership.

Late one evening in 1989, I entered one of Apple Computer's office buildings in Silicon Valley. Although Apple called its headquarters a "campus," it was actually a series of buildings sandwiched between homes and stores over several square miles. The company had rented them haphazardly as it grew.

The building I went to was inconspicuous, two stories tall and tucked behind a screen of trees. It wasn't the usual place for executive meetings, but an important meeting had been held there earlier in the day.

It was after sunset when I entered the building, and the place was very quiet. The building didn't house a lot of engineers, so most of the employees had gone home. I went to a darkened conference room, where an IBM personal computer stood in one corner. It was a PS/2 Model 80, a hulking floor-based tower that was the leading edge of PCs at the time. After checking to make sure no one was nearby, I turned on the computer and watched it start up.

It launched a pre-release copy of Microsoft Windows version 3.0. I saw the software come up on the screen, played with it for a couple of minutes, and immediately knew Apple was in deep trouble.

To understand why, you had to know the history of Microsoft up to that time. This was back in the days when PC companies like Apple, Microsoft, Lotus, and Word Perfect viewed one another as peers. The dominant behemoth was IBM, and we were all dancing around them. Microsoft was the clever operating system company that had ridden the IBM standard to prominence, butno one really respected its ability to innovate in software. Its efforts in applications were a joke -- Microsoft Word was something like the #6 word processor on the PC, and even Microsoft's software for the Macintosh had numerous competitors, many of them viewed as technically superior to Microsoft's products.

Microsoft Windows was the biggest joke of all. Its first two versions had been crude, extremely hard to use, and didn't excite anyone. In some ways, they probably helped Apple by validating the idea of a graphical interface for a computer, without providing one that was good enough to steal away many customers.

Windows 3.0 changed that. It looked nice. The graphics were pleasant, the icons were reasonably well laid out on the screen, and it worked fairly well. There were still some rough edges, but it was good enough that I could picture a PC user installing it and not being embarrassed a week later. Windows was, for the first time, usable.

For reasons I still don't know, Microsoft had decided to come down and give a demo of the unreleased software to Apple's executives. I worked in the company's competitive analysis department at the time, and as the only people in the company who had IBM PCs, we were asked to provide one for the meeting.

I wasn't invited to the meeting, for obvious reasons, but I stayed late that night until I was sure it was over. As it turned out, when the Microsoft people left the meeting, they hadn't erased the software from the PC. Now it was mine. I somehow carried the very heavy PS/2 tower out of the building and put it the trunk of my car. The next morning we started testing the software, trying to learn as quickly as we could just in case Microsoft came back and asked us to wipe the hard drive.

They never did.

With a pre-release version of Microsoft's new product in hand, we were in a good position to prepare Apple for the upcoming competition. And in many ways we did -- we documented our competitive advantages, educated the engineers about the improving competition, created marketing collateral, and generally tried to prepare the company for a fight. But the preparation turned out to be harder than I expected, in part because of resistance from above.

Spreading bad news about a competitor can be very disruptive to a company. It distracts employees, causes people to question their current plans, and generally hurts efficiency. The news is especially hard to deliver when a competitor has a history of screwing up, and most of the people in the company don't use the competitor's products. It's seductively easy to rationalize that the competition is going to blow it one more time.

Sure enough, soon after we started raising a red flag about the software, my boss called me into his office. He said we were upsetting too many people, and told me to tone down the message. "After all," he said, "it's just another version of Windows."

Maybe Apple was destined to lose anyway. Apple's refusal to license its software to other companies meant it couldn't establish a competing software standard, and its failure to produce new innovations that would make Windows obsolete meant it couldn't hold onto many of the customers it had. But I think another cause of Apple's fate was its inability to picture how the world would change. Apple didn't really understand the minds of PC customers, and couldn't see how Microsoft's new software would act on them. And so despite a free preview from Microsoft, Apple never fully rose to the challenge of Windows 3.0, and Microsoft went on to cement its dominance of the PC industry.

By the traditional rules of competitive intelligence, I ought to feel at peace with my role in this. I did everything I could do legally to get advance information, our team turned out the best analysis we could, and we reported it as aggressively as we were allowed to. But I think that's a cop-out. My company screwed up on a competitive issue. Therefore I'm partly to blame.

My experience with Windows taught me the most important rule of competitive analysis -- your role is to make sure your company wins competitively. It's not enough to deliver a great report and then wash your hands of the situation. If the company doesn't act on your information, you failed.

You need to drive this principle into everything a competitive group does...

Are we there yet? Knowing when you've crossed the chasm

If your company's launching a product or building a new market, one of the most important questions you'll be asked is "where are we on the adoption curve?"

The adoption curve is a graph that shows how groups of people tend to adopt innovations. It was drawn by Everett Rogers in the book Diffusion of Innovation, and repopularized by Geoffrey Moore in his book Crossing the Chasm.

Rogers based his work on cases like the adoption of improved seed among farmers, and the diffusion of sanitation practices among rural villagers. He found that an innovation moves through a predictable pattern of adoption in a group of people. First, it's tried by a small percent of the population, which he called the Innovators, who are willing to try almost anything new just to be different from everyone else. It's easy to get them to adopt an innovation, but because they like being different from others, the Innovators are not the greatest champions to get others to adopt it. In fact, sometimes other people will avoid things the Innovators like because they don't want to be seen as weird.

(If you're having trouble picturing this type of person, think back to high school and substitute the word "geek" for "Innovator." Got it?)

If you want others to adopt an innovation, the Early Adopters are the ones to focus on. They're a little more numerous than the Innovators, and they're social leaders, the people that the rest of the population looks to for guidance. Unlike the Innovators, Early Adopters crave social status, and they get it by being the first to popularize new innovations. Think of that guy on your block who was the first to buy a flat-screen TV. Everyone else comes over to his house to look at the TV, ask questions, and so on. He gets social status, and the rest of the neighborhood gets to see what the TV's like before they buy one.

Rogers' work was very important because, for example, it told social workers that that rather than trying to teach new sanitation practices to everyone in the village at once, they should focus on the early adopter leaders in a village. Once they're on board, everything else would follow more or less automatically. Rogers also cautioned that it's not very useful to get the Innovators to adopt something new, because they're viewed as weirdos by the rest of the village. If they adopt something, it'll actually be less appealing to the rest of the population. (This explains the entire history of the game Dungeons and Dragons, by the way.)

This advice has been adopted aggressively by marketeers trying to sell new products. The idea's simple -- focus first on the early adopters, and use them to help sell an innovation to the rest of the population. In theory, marketing of an innovation should work like the flow of water through a multi-tier garden fountain: First you fill the small bowl at top, then water spills down to fill the second bowl, then water spills down to the third, etc.

What Geoffrey Moore added to the mix was the idea that in high tech, it's pretty hard to get the water to flow from the early adopters to the mainstream. You have to budget extra time and investment, and make sure your product has very practical benefits, in order to get across the "chasm" to mainstream adoption.

That means for tech companies selling to consumers, knowing where you are on the adoption curve is obsessively important. If you're still selling to early adopters, you need to keep investing patiently and refining the product. If you're across the chasm, you can scale back your investment and focus more on harvesting profit and defending market share.

I've tried very hard to use this methodology to manage and track adoption of my companies' products. Unfortunately, after spending a lot of time and research money on it, I've found that it's much easier to use the adoption curve to explain things after the fact than to use it as a guide when you're trying to make decisions. In practice there are several different adoption curves, and it can be very hard to determine which one you're on. It's disturbingly easy to convince yourself that you're selling to mainstream users when in fact you aren't, or that your market is close to saturated when in fact it's about to take off.

Misread the adoption curve and you can easily kill off a product long before it's destined to decline, or pour money into something that's doomed to fail. I've seen three main sources of problems: Determining the shape of the adoption curve, determining who's really an early adopter, and determining which of several adoption curves you're on.

What shape is the adoption curve?
The first and most important question you need to ask yourself is whether you're selling a consumer or enterprise product. I'm using the words "consumer" and "enterprise" a little differently from the way most people use them, so here's a quick definition:

By "consumer," I mean any product that's selected by the person who'll use it. That includes just about anything in your house (unless it was a gift, a situation I'll discuss below). By my definition, consumer products also include a lot of business-related items -- your suit, your cellphone, your briefcase. If your company lets you choose which car you rent on a business trip, or which airline you fly on, I'd call those consumer purchases as well.

An "enterprise" product isn't selected by the user. It's selected by an employer and assigned to a user, who has little or no say in the product choice. If there's a computer on your desk at work, chances are it was an enterprise purchase. So was the phone, and the desk itself for that matter. Most other things at work are enterprise purchases, including the corporate servers in a closet somewhere, the building your work in, and the corporate health care plan.

The main difference between these two worlds is who's doing the buying. In consumer products, the person who'll use the product picks it out. In enterprise products, the product is chosen by a corporate buyer, on behalf of the whole organization. For high tech products, that buyer is a member of the Information Technology (IT) staff.

Because of this difference in buyers, the adoption curves for consumer and enterprise products are vastly different, which means you need to design and sell the products completely differently. I can't over-emphasize how different these worlds are. A corporation's culture, language, brand image, and business practices all have to be tuned to one or the other. They're so different that it's very rare to find a high tech company competent to sell both consumer and enterprise products. For example, IBM and Sun are both enterprise companies. The old IBM PC was an exception, but as we saw IBM couldn't sustain the business. Apple is consumer. It tried for more than a decade to make itself into a corporate supplier, before Steve Jobs came back and told them to face reality (and focus on their strengths). Nokia too is a consumer company, although it's trying mightily to build up an enterprise business.

The only high tech companies I can think of that manage to be both consumer and enterprise have set up separate divisions to do it. HP is an example, as is Microsoft. But they're exceptions rather than the rule.

If you're selling a consumer product, even a high tech one, I've found that Rogers' classic adoption curve applies pretty well. Early adopters try out the products, share their findings with others, and if a product is good, adoption will move fairly smoothly to mainstream users. The challenge in consumer products seems to be more about understanding exactly why your product's being purchased, and therefore which market segments you're really operating in. More on that below.

For enterprise products, the smooth continuous adoption curve simply doesn't exist. This is primarily what Crossing the Chasm was about, and if anything I think it understates the differences between consumer and enterprise sales.

First, let's look at the motivations of the buyer. Someone buying a consumer product is usually motivated for the benefits it brings to himself -- usually a mix of increased productivity ("If I bought that circular saw, I could finish paneling the den a lot faster"), increased status ("I can't wait to se the look on Dad's face when he sees the new den"), and increased pleasure ("Man, what a cool saw.")

A corporate buyer cares about none of those things. In fact, they are trained to ignore them. Employees in the company are constantly lobbying for nicer corporate goodies -- plusher cubicles, better computers, nicer office chairs. The buyer's job is to defend the company against all those demands, and instead do something that's sensible. That doesn't mean user desires are completely ignored, but it's more important to stay within budget, and to avoid new support costs.

Support costs are a big issue for high tech products -- if a product is cheap to buy, but is so complex or flawed that it generates a lot of user questions, the cost of answering those questions can easily be greater than what you saved on the product. The tech consulting firm Gartner Group has for years argued that for PCs, the cost of training and support is higher than the total purchase cost of the hardware.

But the most important priority for a corporate buyer, exceeding all other requirements, is avoiding a mistake that could get you, the buyer, fired.

This means that corporate buyers as a group are extremely conservative, much more so than the average consumer. They'll tend to buy only from companies they know, and they're very leery of new products. Even a proven increase in productivity may not be enough to motivate them to buy. After all, most IT departments are not rewarded for increasing the productivity of the company. They're service groups, rewarded for controlling costs and not allowing any major technical disasters.

When I was at Palm, we surveyed corporations to determine their attitudes toward purchasing new technology, especially handhelds and smartphones. Instead of the usual bell-shaped curve, we found a two-humped curve:

How corporate technology buyers describe their companies' adoption of new technology

About 30% of the companies surveyed said they were aggressive technology buyers -- they viewed the use of advanced technology as part of their competitive advantage. As a deliberate corporate policy, they tried to stay on the leading edge of new products and services. These companies tended to decentralize technology purchasing, allowing individual departments to buy rather than forcing them to work through a central purchasing group.

The other 70% of companies were more conservative about technology. They didn't try to be at the leading edge, and in fact were fairly reluctant to integrate new technology. They were more likely to have centralized control over technology purchases. When we looked specifically at corporate-funded purchases of handhelds and other mobile devices, we found that the early adopter companies were moving ahead aggressively to broad deployments across the company, while the other 70% of corporations were still doing small trial deployments, if anything at all. The early adopter companies accounted for 68% of all corporate handheld purchases, even though they were only 30% of companies.⁶

(Incidentally, this split adoption pattern explains why you sometimes see schizophrenic press coverage of the market for mobile devices. One article will say the market is taking off fast, another will say it's dead in the water. Both are true; it just depends on which companies you're looking at.)

We also found some interesting differences in technology adoption by industry. Some industries were biased toward early tech adoption, while others tended to be more conservative. For example, engineering and research firms, communication, and wholesale all tended to be aggressive tech adopters. Meanwhile, companies in education, government, and health care were much more likely to be laggards. (In health care, remember that we were looking at adoption of new computing technology, not new medical technology.)

Corporate handheld purchases tended to mirror these adoption preferences, with one exception. Health care has a large installed base of handhelds even though it's slow to adopt new information technology. Apparently doctors find handhelds so useful for tracking drug and other information that they're forcing the devices into medical corporations whether IT wants them or not. This is an interesting case of a consumer (userled) adoption cycle driving corporate adoption. Something similar happened when the first PCs entered corporations in the late 1970s.

In most companies, we found that the actual purchasing decision was controlled by two parties -- the departmental manager (who's paying for the product) and the corporate IT manager (who enforces corporate standards, supports products, and often negotiates the actual purchase). The relative strength of these two groups varies from company to company, but in most cases both of them have some level of veto power.

Because of all this, you can't sell an enterprise technology product the way you do a consumer one. In an enterprise sale, you usually need to generate two different types of demand in two different places. First, you need demand from the managers of the department that will use your product. Usually they need to be convinced that they'll improve productivity or make their employees happier. Then you also need IT management to at least acquiesce to the purchase. They don't have to love it, but they must at least be willing to put up with the product, or they'll find a way to stop the sale.

I have vivid memories of watching a focus group with IT managers while I was at Apple. One of them said adamantly, "I have devoted my career to keeping Macintosh computers out of my company." No matter how many cool and creative ads Apple came up with, no matter how much the employees wanted Apple's computers, they were not going to be bought by that company.

As Geoffrey Moore has pointed out, this means companies need to use a two-step selling process for enterprise technology products. It's relatively straightforward to sell to the corporate early adopters, because they make it their business to try everything that's new. But to sell to the other 70% of corporations, you have to look closely at the adopter profile of the particular vertical you're selling to. You have to prove not just that your product is useful in that industry, but you also have to demonstrate that it's not going to cause trouble for the IT staff (a much higher hurdle, and one that takes time).

This means the deck is stacked against small startups selling new technology products to corporations. If a similar or even somewhat inferior product is offered by a large company that IT already knows, the IT buyers will try to steer purchases toward their trusted supplier.

For years IBM used this effect to lock out competitors, by pre-announcing copies of a competitor's innovation, so customers would hold off buying from the upstart. Microsoft uses similar tactics today.

Some markets mix consumer and enterprise. Not all markets can be cleanly sorted into either the corporate or consumer bucket. A very good example is mobile phones. Most mobile phones are bought by the people who will use them, and so I'd classify that as a consumer market. But if you're a mobile phone manufacturer, you don't sell directly to most of those users. Instead, you sell phones to a mobile phone carrier like Verizon or Tmobile, which in turn sells the phones to users. From my perspective, that starts to look more like an enterprise market.

If you're running a mobile phone company, do you focus on phone users, or on the buyers at mobile phone companies?

The answer is that you agonize about it a lot, and different companies come to very different conclusions. Some companies market focus mostly on users, counting on demand from them to force the carrier to offer their phones. Nokia is notorious for doing this in Europe. Other examples are Motorola's Razr slimline phone and Palm's Treo smartphone. But some other major mobile phone companies don't worry as much about appealing to users, instead trying to produce whatever the carrier wants, and counting on the carrier to push that to users. The Korean company LG, one of the fastest-growing mobile phone companies in the world, uses this approach.

What about gifts? These are a special case because they're not bought by the user or a corporate buyer, but instead by someone trying to express love or make an impression. Gifts don't follow the normal adoption curve. Instead, they're driven by fashion and herd thinking. The fashion cycle moves very quickly -- a hot gift one year is likely to be a doorstop a couple of years from now. For example, PDAs were a raging gift item in the late 1990s; gift giving accounted for about a quarter of Palm's sales. A few years later, the rage had moved on to digital cameras.

Gift sales grow explosively and decline just as fast. If you're selling a consumer product, it's important to track what percent of your sales are gifts. Restrain your expectations (and the expectations of your investors) if you see a lot of gift-giving. Think of the revenue as a onetime upside event rather than sustained demand. The hot gift period won't last.

Are your early adopters actually mainstream buyers?
In a stable rural town or village, it's pretty clear who the high-status people are, and if you're a leader in one aspect of village life, you'll tend to be a leader in most aspects. But in the modern world, most of us belong to a series of different villages -- a neighborhood, a job, interest groups around town or on the Internet. You might also be a member of a social club or school alumni association. It's pretty common to be an early adopter in one area but a laggard in another (for example I'm a geeked-out innovator when it comes to computers, but a late adopter in cars).⁷

This makes it much harder for a marketer to proactively identify who the early adopters are for a new product. There are some people who just have that early adopter personality type and tend to lead in everything they do, so you can try to focus on them. In high tech, we try to find technology early adopters, assuming that someone who's quick to buy a flat screen TV will also be quick to buy a new mobile phone. But in that case it's easy to end up accidentally marketing only to the technophile innovators, and they're a dead end in terms of driving sales to others.

When you're not sure who the early adopters are, it's also hard to track your position on the adoption curve. For example, say you have sold a product to 10% of the population. That might mean that you're just now finishing with the early adopters in a market that will eventually include 90% of the population (curve B in the chart below). Your sales are about to explode. Or it might mean that you've just saturated a market that's destined to top out at 12% of the population (curve A). Your sales are about to plummet.

It is surprisingly hard to tell the difference between these two cases when you're in the middle of them. Generally if a product has reached 10% of the population, a lot of other people will be thinking about buying it, just because it generates some buzz. It's very difficult to sort out the difference between this buzz and actual demand until after the fact, when you look back at what happened to real sales.

The better you know your market(s), the better your chance of avoiding this problem. This is why you have to be very serious in asking the question, what problem are you solving for your customers? Why are they buying from you? Often a company will have a lot of noble and interesting reasons why customers are supposed to buy its products, but when you look intensely at the customers, that's not why they're buying. Once you know the real reason why people are buying, the next question is, how many people have this problem? Or more to the point, how many people have this problem and care about it so deeply that they're willing to spend money to solve it?

Even if you determine that you really are solving world hunger or some other universal problem, you then need to use market research to map out your demand funnel -- how many people are aware of your products, what percent of those people think about buying, and what percent actually do buy. Where are you losing the most people? These two products both sell to 15% of the market, but they face very different challenges:

Most people have heard of product A, but they generally think it's not for them. Doing a lot more marketing for this product is not likely to produce a rise in sales, unless the product has some incredibly compelling secret feature that no one currently knows about.

Even then, you'll be fighting against the current impressions people have about your product, which can be very hard to change.

More marketing might help Product B; the biggest barrier to its sales is that people just haven't heard of it. When a company sees a chart like Product B's, it's pretty common to assume that if you increase awareness, consideration and purchase will also rise as well. That might happen, but you can't take it for granted. Probably the people who have already heard of your product are the most enthusiastic customers for it, and you can't count on everyone else reacting to it the same way.

The overall point here is that additional marketing won't necessarily create more demand, until you know why people aren't buying today.

Which demand curve are you on?
Many high tech products are flexible, and can be used for multiple purposes. The Internet's a great example -- its first mass-market use on PCs was for transferring e-mail. Then it was used for browsing information. As the new medium grew, companies created additional uses for it -- online auctions, sharing music, e-commerce, and so on. If you're a company selling Internet access or Internet hardware it's almost impossible to plot Internet demand on a single curve. Instead, your demand is a composite of a lot of different curves -- one for e-mail, one for music, one for auctions, etc. Some of those curves are probably close to saturation (e-mail, at least in the US). Others are still in the early adopter stage.

In the case of PCs, demand has gone through several curves as different uses for the PC emerged. PCs started mostly as appliances for word processing and spreadsheets. Desktop publishing came along in the late 1980s and created a new surge in demand. Games and the Intenet drove much higher penetration of PCs into homes in the 1990s. Other applications have created their own smaller surges in demand along the way.

Looking back at the development of the market, it's easy to see how these overlapping demand curves worked, but at the time it was very hard to predict them. For example, in the mid-1980s it was very easy to predict that PC sales would soon plateau, as usage of spreadsheets and word processing saturated. In reality, a new wave of growth was about to start.

Today we face some of the same questions. Although PCs have high penetration in the US, they are not as ubiquitous in Europe, and are downright rare in developing countries like China and India. As those countries' economies grow, will PC ownership approach US levels? Or will other products, like advanced mobile phones, take over some functions of the PC in other countries?

No one knows.

Although multiple usages are commonplace in high tech products, they're not unheard of elsewhere. For example, as low-carb diets took off, beef became a diet food.

Overlapping adoption curves of a hypothetical product with multiple usages. The first usage gets the product launched, and it also becomes a popular gift item in the fourth year. The second, more popular, usage doesn't get started until year seven.

Here's what those three adoption curves could do to the sales of our hypothetical product. At any point on the curve, it's extremely difficult to predict what will happen next. In this case, I have imagined a happy outcome for the company and its investors -- they are patient enough to get to the second wave of growth. In reality, most companies today make savage resource cuts at the point I've labeled "management team fired," and wouldn't have enough money to fund the second wave of growth. You must understand your market segments, and where you stand in them, or this sort of demand hiccup is likely to cripple your company.

This chart shows the real penetration of various products into American households over time (I assume the line for "airplane" indicates percent of families who have ridden on airplanes, not the percent of homes that have been penetrated by them). To me, the most striking thing about the chart is how many glitches and reversals there are in the curves. All the lines eventually go up and to the right, if you're willing to wait 100 years. But if you were actually living at a particular point on one of those curves, you couldn't reliably predict the size and timing of future growth. For example, imagine yourself as a telephone executive, 60 years after the invention of the phone. Telephone penetration has been dropping for the last five years, and is now back down to where it was twenty years ago. Would you predict that it was about to start going up again? What would shareholders do to an executive making a prediction like that today?

[Chart: Federal Reserve Bank of Dallas Annual Report 1996. http://www.dallasfed.org/fed/annual/1999p/ar96.pdf]

In the handheld market, we had a terrible time figuring out where we were on the demand curve. When we researched our customers, we found a situation that diffusion theory says shouldn't exist. Our penetration into technology early adopters was okay but not very high. A lot of early adopters were still thinking about buying our products. This should have meant we were still in the early stages of growth.

On the other hand, a lot of people in our installed base looked like mainstream and late adopters. You're supposed to get those people only after you saturate the early adopters. So what were they doing buying our products while most of the early adopters hadn't bought yet?

Looking back, I think two things were going on. The first is that there were two demand curves for handhelds. One demand curve was for the use of a handheld to track your calendar and address book. In that market, handhelds were well past the early adopter stage, and in fact were approaching saturation. There are only so many people in the world who are so obsessive about their calendars that they want an electronic tool to track them, and most of them have already bought, at least in the US. That's why there were so many technology late adopters in the installed base.

But the second use of handhelds is as a more generalized information management device. Add software, and a handheld can become a medical database for doctors, or a flight computer for a pilot. There are software programs for almost any vertical market or hobby. The growth in awareness of these programs is much slower than the growth in calendar and address book, because the add-in software is hard to find and isn't bundled with devices. So that demand curve is still in the early adopter stage. I think that's why there was still a lot of consideration among early adopters.

The second factor complicating the demand curve was that during the bubble years, handhelds became a popular gift item. They were the "in" thing to give Dad for father's day or Christmas, even if he didn't really need or want one. These gift sales made the market look bigger than it really was.

Looking back, after the fact, it's possible to tease apart all of these threads and see how they fit together. At the time, it was almost impossible to see. The analysts were exuberantly predicting sales would rise from 10 million units a year to more than 60, and it was very hard not to get caught up in that -- especially when some of the research seemed to support it.

Unfortunately, in the real world handheld demand plateaued at about 20 million units a year.

Lessons

What can you learn from all of this? I think the message isn't to abandon the demand curve, but you have to be very careful in how you use it.

Know if you're selling an enterprise or consumer product. Even if your product is designed for use in businesses, if he buyer is the user, you're going to see a consumer buying pattern, and you need to set up your sales, marketing, and product design for that. On the other hand, if the buyer is an IT manager or other corporate official, you need to organize to sell to both the departmental manager and the corporate buyer. That takes longer than winning over a consumer, because you're asking the corporate buyer to put his or her job on the line when buying from you. On the other hand, once you win over corporate buyers, their conservatism can make them very loyal customers.

Make sure your investors and management team understand the dynamics of the markets you're after, very early in the game. The better you set their expectations, the better the chance that you'll be given the time and money you need to develop the markets. Few things are more unpleasant, and more likely to destroy your credibility, than spending two years on product development, and then going back to the board of directors to ask for a huge marketing fund because you've switched target markets.

Know your segments. The better you understand the actual usages of your product, the better you can apply the demand curve. Understand who's buying your products, and what their motivations are. If there are multiple motivations, investigate whether those point to distinct segments, each of which will have its own demand curve.

It's easy to get tremendously confused when you lump multiple segments together. For example, the research that has been done on advanced phones implies strongly that there will be at least three different segments for such devices -- one for communicators, one for entertainment phones, and one for information phones. The market for communicators could easily saturate before the market for entertainment phones even takes off. I think it's very likely that these out of phase adoption curves will lead to big swings in enthusiasm for the advanced phone market in the next few years, with some people predicting it's about to explode and others predicting it's about to die. The reality is, there isn't a single market to forecast.

Avoid the self-fulfilling prophecy. You need to accept that you can't completely plot the demand curve until after the market has saturated. Your position on the curve depends a lot on how attractive your products are and how well you market them. Do a better job, and the market will grow. You can change the curve.

Many of the biggest mistakes I've seen companies make were misjudging where they were on the adoption curve.

For example, in the early 1990s many analysts concluded that the Apple Macintosh was a dead end, with a saturated market destined to die. They encouraged Apple to pour hundreds of millions of dollars into other new businesses -- servers, new devices, applications, new operating systems. Most of them didn't pay off. Meanwhile, investment in the Mac was constrained. When Steve Jobs returned to the company, he put the focus back on the Macintosh, and revived demand for it. You can still make a good argument that the Mac will eventually be a dead end, but it's impossible to say if "eventually" will be in five years or twenty. A lot depends on what Apple does. It's up to them. There were other problems at Apple, of course; I'm oversimplifying the situation. But one of the company's biggest burdens was a belief that the adoption curve was a prophecy rather than a problem to be fixed.

About Stop Flying Blind

Everyone agrees that companies should focus on competing in the future rather than just reacting to what's happening today. But how do you actually do that? How do you determine what a market's going to be like when the market doesn't yet exist? How do you predict what your competition's likely to do before they even know it themselves? How do you spot the turning points that your company can use to change the rules of its industry, before anyone else sees them?

Most companies fly blind on these issues, but they don't have to. By combining a variety of different perspectives -- competitive analysis, market research, and advanced technology research -- a company can map the possible futures, pick out the one most favorable to it, and help bring that future into being. Stop Flying Blind tells how to do that. For more information, visit www.mikemace.com.

Footnotes:
4 For a complete discussion, see the book Competitive Intelligence by Larry Kahaner. [back]

5 Written by Bill Fiora, principal of Outward Insights, a CI consulting firm. http://www.scip.org/news/v1i22article1.asp [back]

6 If you're interested in methodology, this was a survey of 440 randomly-selected technology buyers/approvers in US companies having 100 or more employees. The survey was conducted in 2003.[back]

7 Consultant Peter de Jager does a nice job of explaining this in an essay on his website: http://www.technobility.com/docs/article032.htm [back;]

Help! Microsoft Is Targeting Our Business

2006-03-21T16:00:00Z

Recently we've been hearing that more and more. The companies being targeted usually assume they've being singled out for special attention from Microsoft, but when you add up all the reports, a different picture emerges. Microsoft is targeting almost every major tech company, all at once. This is a fairly new behavior for Microsoft, and it means the rules of competing with Redmond have changed as well.

Not so many years ago, Microsoft was famous for its ability to focus on one unifying goal. The cry would go out: "Make Windows the dominant OS," or "Make Internet Explorer the dominant browser," and the company would rally around that cry.

Today, the threats to Microsoft are different. The famous "Internet Services Disruption" memo written last October by Microsoft CTO Ray Ozzie is notable because it attempted to focus the company against an entire sector of the tech industry, rather than against a single competitor or product.

But despite even that broad effort at focus, Microsoft is in reality pursuing even more opportunities. A quick online search for the phrase "Microsoft targets" yielded a blizzard of news articles written in the last six months, listing new and renewed initiatives Microsoft has launched to take business away from competitors. They include:

An initiative to displace Apache/Linux from leadership in web hosting.
Yet another effort to take over Intuit's small business accounting franchise.
Creation of a Microsoft-branded MP3 player to compete with Apple's iPod.
A renewed push in corporate databases against IBM and Oracle.
Launch of a new model of the Xbox game player, aimed at Sony's PlayStation.
A new initiative to move people off of Lotus Notes and Domino.
The creation of a new document standard to compete with PDF.
Sparkle, a replacement for Macromedia Flash.
The launch of a new computer security product targeting Symantec and McAfee.
A new push in high-performance computing.
The creation of a new suite of graphics tools targeting Photoshop.
A push into the VOIP market.
And of course, the ongoing effort to create web services in competition with Google and Yahoo.

We're pretty sure we missed a few, but you get the idea. Microsoft is pushing almost everywhere. To understand why, you need to look at the forces affecting Microsoft. It's simply not the same company it was ten years ago, when most of the tech industry formed its image of Microsoft. Microsoft is a $40 billion company that needs to grow 10% a year to hit its financial targets. The search for $4 billion in new revenue every year is leading it to target almost every successful software franchise in the tech industry.

Continued Growth Requires Ever Expanding Horizons

Microsoft is now so large that it's much more difficult to grow rapidly. To hit its goals, the company needs about $4 billion in new revenue every year. That's why Microsoft is targeting so many different competitors -- the logic of growth transforms Microsoft from a focused competitor into a machine that methodically tries to suck money out of any successful corner of high tech. If you have a successful franchise and haven't been targeted yet, just wait -- your turn will come.

Once you get this perspective on Microsoft, you can see a fairly predictable and logical pattern to its actions. First it probes markets, looking for areas of weakness. The company can run many of these experiments in parallel, which is one reason why there were so many new initiatives reported in the last six months. Then if Microsoft gets traction in a particular market, it pours in the reinforcements and tries to take over. In the markets where Microsoft doesn't have traction, the company generally changes out the management team and redraws its plans.

This means it's very important not to let Microsoft get that first toehold in your market. It's worth sacrificing short-term profits to give them a lousy launch experience. Your goal is to convince them that the reinforcements should be aimed at a softer target. It's reminiscent of the old joke about outrunning a bear -- you don't have to be faster than the bear, you just have to be faster than someone else who's running away.

Chances are you'll never completely force Microsoft out of your market. WiFi routers are about the only business we can think of that they completely exited. But it is possible to transform Microsoft into the business equivalent of a chronic disease: unpleasant, expensive to deal with, but not ultimately fatal.

Part of the mystique of Microsoft is that it eventually kills any company it targets. The folk-tale that Microsoft will get a product right by the third version feeds the belief that resistance is futile. But today that's more of a demoralizing myth than a reality. Some companies have found ways to force Microsoft through a lot more than three versions, or to dominate their markets so thoroughly that it's not clear if Microsoft will ever catch up. Some winning tactics include the use of alliances, changing the rules of the competition, building up a passionately loyal customer base, innovating faster than others can respond, and using aggressive marketing to lock up a market.

Alliances: IBM and the Linux World

Even for a company as large as IBM, it can be difficult to fight Microsoft on your own. IBM tried in the 1990s with OS/2, and lost. That failure helped drive IBM out of the PC business, but it turns out to have been a tactical retreat. IBM refocused on tech services, and is building an ecosystem of allies capable of standing against Microsoft as a group. The open source and Linux communities can move faster than any individual company, but in their natural state they aren't organized enough to coordinate their efforts. IBM works behind the scenes to provide that coordination, and contributes its own engineering talents to help Linux grow. And of course all that software needs someone to provide services built on top of it, which is where IBM makes its money. The result: IBM is still a major power in computing many years after competitors like DEC and faded away.

Change the Rules: Apple's iPod

Apple tried to use Macintosh to displace the IBM PC in the 1980s and 1990s. Most observers blame the failure on Apple's failure to license Mac clones early on, but actually even if Mac clones had been available, most DOS users would have refused to switch hardware because they didn't want to give up their applications. Apple managed to keep the Mac alive, but it never grew into the dominating force Apple wanted it to be.

Enter the iPod. Apple targeted an emerging market without strong competitors, and created a solution combining hardware and software in unique ways that are very hard for others to duplicate. Rather than competing in Microsoft's mode of licensing software to hardware cloners, Apple competed as a systems vendor. The results are remarkable. Apple's iTunes store has about 70%-80% of e-music sales in the US, and it's growing so fast that it's not clear whether anyone will be able to catch up. Meanwhile, Microsoft is still talking about making a hardware competitor to the iPod.

Build Passionate Bonds with Your Users: Intuit

The case of Intuit is unusual, because the company received the ultimate endorsement from Microsoft -- an attempted purchase. The government didn't allow that, leaving the message that even Microsoft itself said Intuit's products were better than its own. If you can arrange for Microsoft to attempt and fail to buy your company, that's fantastic, but probably the better lesson is to emulate what made Intuit so successful in the first place -- its fanatical focus on building close ties with its customers [needs one more sentence to flesh it out; an example of how they do it]. That bond was the thing Microsoft Money couldn't overcome, and it's what Microsoft was hoping to buy when it bid for the company.

Innovate in ways they can't easily copy: Google

Google is supporting a new model of software development and marketing that's very hard for Microsoft to emulate. Rather than creating packaged software sold at retail and supported by a large team, Google delivers its software online, and often assembles it out of bits and pieces from other companies. Google Maps is a great example -- the user interface is from Google, but the underlying mapping technology and databases come from several other companies. They're simply integrated over the Web. Although there has been a lot of focus on Google's advertising business model, it's actually the development process used by online software services that's most challenging to Microsoft. It undermines Microsoft's engineering cost structure, and enables Google to create and ship new products faster than Microsoft can copy them.

Use Marketing to Wrap up the Market: AOL

AOL is thought of as a troubled company today because its core dial-up business is declining. But it's good to remember that in the heyday of dialup, AOL successfully withstood a full-bore assault from MSN. AOL succeeded by blanketing the nation with offers for its services. All those AOL CDs people received in the mail became an industry joke, but they had the effect of saturating the market before Microsoft was ready to attack. AOL simply didn't leave any space in the market for MSN, and so it kept its franchise to this day.

None of this information means that it's easy to compete with Microsoft. Microsoft still excels at destroying companies that sit still and allow themselves to be targets. But if you're willing to change your business before the threat becomes critical, and if you use the right tactics, an assault from Microsoft doesn't have to be a death sentence.

Remember, if you have a successful tech business, Microsoft is coming. The question is not if, but when. It is important to remember, however, that Microsoft entering your market does not have to be a death sentence for your company. Other companies have fought back against Microsoft and won. However, success requires a deep understanding of the stakes, knowledge of how Microsoft operates, and the vision to change the playing field. If you would like to talk about how your company can build effective defenses against Microsoft, please give us a call.

Talk to us and we can share additional examples of companies that have gone toe-to-toe with the Beast from Redmond and lived to talk about it. It is important to remember that Microsoft's entry into your market does not mean the end of your company. Other companies have fought back against Microsoft and won. However, success requires a deep understanding of the stakes, knowledge of how Microsoft operates, and the vision to change the playing field. If you would like to talk about how your company can build effective defenses against Microsoft, please give us a call.

Exploiting the Mobile Market

2006-02-01T16:00:00Z

These days it seems that every third article in business and trade publications contains the word "Mobile." It might be about mobile devices, mobile content or mobile commerce, but definitely the "M" word shows up. For several years now, we have been hearing about "mobility" and how it is going to rock our world, like the Internet or fancy coffee drinks. So far, mobility has been more hype than reality for those of us based in the US. Strong momentum in Japan, Korea and Europe, plus growing interest in North America, prompted us to explore the mobile market and what it might mean for our software audience in 2006.

What is the mobile market?

Ask two people, "What is the mobile market?" and you are likely to get three definitions -- a sure sign this is still an early market.

Gartner and IDC track the "mobile market" in ways that serve their desire to sell research reports. Gartner defines the mobile market as everything from notebook PCs to cell phones, which is not very useful if you are a software executive, trying to determine what action is needed on your part to take advantage of this market.

Our clients are software solutions providers, so we define the opportunity here in that context. We propose that software executives think of the mobile market as consisting of two key segments:

Tools that support the creation of rich content for display on mobile devices. Think Adobe, Macromedia, Sonic, Discreet and Apple.
Electronic aggregation / publishing tools that enable mobile content distribution and interaction. This category ranges from Yahoo! and Google to Amazon.com, Electronic Arts, newspapers and entertainment companies such as Sony.

What is fueling the mobile market?

IDC points out that spending on mobile technology will far exceed general IT spending over the coming year and, with a projected annual growth rate of 20%, the gap will only widen. Even if you think the mobile market is over-hyped, you still have to admit that it is big, and will drive a sizable portion of both consumer and enterprise spending.

What will drive the market for mobile devices and services? New content and commerce applications! To date, applications have been limited mostly to data browsing, email and media viewing. We expect interactive applications will drive the next stage of growth, including content and commerce.

The benefits of being able to work anywhere, at any time is driving corporate IT to deploy and support Blackberry and Treo devices alongside traditional PCs.
Advertising, games and gambling will drive consumer usage to the next level. The more personal the content, the more value people associate with it.

How BIG is the mobile content market?

Because Gartner, IDC and Jupiter have a stake in hyping the market, we wanted to reality check their forecasts. We discussed the mobile content market with John Hagedorn, a CFO-turnedconsultant who spent a month building a model sizing the market by application and geography and estimating the potential share of it available to software vendors other than content developers. After examining the model's metrics and methodology, we concluded that its dollar sizing was conservative and that its transaction volume forecasts would be useful in developing pricing schemes. We obtained the use of this model for the benefit of Rubicon clients.

The model forecasts mobile content growing from $19 billion in 2006 to $64 billion in 2009. The North American share is expected to grow from 4% in 2006 to 13% in 2009.

These figures are for the overall market for content billed by network operators. How much of this market applies to you, depends on which segment you sell to.

If you sell to content authors or distributors, your market is developer desktops, and the value of your offering is constrained by the value your customers add to the content created.
If you sell a platform for all mobile devices (OS or UI), you likely have a big opportunity, and not just a theoretical opportunity given the disappointment or Java and other alternatives.

The other big question is: how much of the mobile market is incremental? Mobility might allow users to do something new, or it could allow them to do something they currently do in a new way or location. Thus, mobility offers the opportunity of attracting new customers, but at the risk of displacing existing customers. The important point is: understand which parts of the market are truly incremental to your company and which parts are not. As with any market sizing, make sure the one you use offers a detailed rationalization around usage.

Another critical analysis is to understand the value chain associated with the mobile market. For the purposes of this article and audience, we focus on the first two components of the value chain.

Select the image to view a larger verion in a new window

Key questions for software executives

Is the market for mobile content an opportunity, a threat or both to your company?
Don't operate out of fear, but don't assume that your loyal customers will remain loyal if something better comes along -- and remember, they are the judge of what is better, not your engineering staff. While you may see the mobile content market as a way to extend your applications and services, potential competitors may view mobility as a disruptive technology that allows them to displace your offer.

Driven by the fear of missing out, Adobe, Symantec, FileMaker, and other PC software companies rolled out mobile clients a few years back when PDAs were hot. Most of these clients cost too much and provided too little return. Against this backdrop, the companies are likely to demand a far better understanding of the market before they again commit significant resources. However, the fear of missing out is still there. The issue challenging our clients is figuring out the appropriate response. Doing nothing is always an option, but tuning out is not.

Furthermore, the segments driving the biggest share of mobile content growth are historically lopsidedly male. As these segments enter the mainstream, female usage will climb rapidly, with rates of growth far exceeding male usage. Focusing on not-yet established, but rapidly growing markets offers even upstart providers the potential to dominate specific market segments.
Will business sense honed in PC software serve you well in the mobile market?
The market analysts all agree: mobile devices, content and services are a bigger deal in Europe, Japan and Korea than in the US. The danger is that US-based executives overlook the market for mobile content because few of their friends and neighbors are big users. The US is used to exporting technology and trends, but the mobile market is operating in reverse, and likely to blindside executives that are used to watching for trends in Gen X or Gen Y at the mall. Infrastructure is the lifeblood of mobile content, and the market in the US is hobbled by the combination of a suffocating regulatory environment and an enormous existing, undepreciated investment in copper infrastructure. Consequently, non-US markets may represent more opportunity in the near term.

Two additional areas where a PC software mindset may not help are:
- The issue of piracy -- long the bane of software executives -- may be entirely different. China has been a bust for for software sales, but mobile services may change the fundamental economics of piracy.
- We believe that the user psychology and motivation for using a handheld device is going to be quite different than for a PC. There is a good chance of being led astray if one depends on instincts and business practices developed for the PC software market.
What will the successful business models for software providers in the mobile market?
While start-up CEOs like to say this market is unlike anything in the past, it is not really true. A review of history tells us a lot of what to look for in terms of business models.

"Internet-like" revenue share business models driven by usage are attractive to content owners, but the big players may not want to share. While the sale of content may leverage revenue sharing and the like, sales of tools to traditional software authors and content publishers are not likely to look that different. The same paymennt models as for web-based content and tools will hold, although the subscription model will be much stronger in the US due to the way its carriers control network access. Ultimately, that did not work well for AOL, and it probably will not be for US carriers over the long haul.

Today US carriers use control of their networks to limit competing services while imposing monopoly rents. The impact on innovation and adoption in the US is what you would expect in such an environment. In Europe and Japan, where options extend far beyond the carriers, consumers have a broader array of innovative service offerings, and adoption is much higher. This goes a long ways towards explaining geographic differences and outlook for the mobile content market.

While the questions above are specifically directed at software executives, the following questions apply to a broad set of companies looking at the mobile market.

What unique mobile problems do you have technology to solve?
First understand the problem and how it is like and how it is different from that of your web and PC based applications. Then determine which solutions address the largest markets and add the most value relative to the engineering and marketing required.
Should you make or buy the unique mobile technology that you do not have?
More than 100 private software companies have been funded in the last 5 years to address the mobile market with specific technology and there are about a fifth that many public companies in the market. In 2004 and 2005 there were over 40 M&A deals among these companies. Public companies with currency and marketing channels should avoid NIH in assessing the buy opportunity.
Who are the logical technology partners for developing the right solution?
If you are developing interactivity enhancers you may want to work with mobile chipset vendors. If you are developing security suites, you may want to work with fingerprint recognition systems vendors. If you want your software to work across many platforms you may need to collaborate with the OS developers. If you are creating authoring tools you may want to work with animation studios.
Who are the best channel partners to get your solutions to market?
Will you sell authoring tools direct to content developers and go through content publishers? Will the web portals that sell PC software represent good channels for mobile content? Will your tools be sold as download options or part of subscriptions by carriers and portals? Should your server software be bundled with hardware used to store, target, deliver, bill and service mobile content?

How Rubicon can help

Don't let 2006 go by without answering these questions about the mobile market. There is no one right answer for software companies regarding this market, so it will require some mental calisthenics. This is where Rubicon can help. We can facilitate a working session with key members of your team to explore these and other issues so that you have a plan. We add insights, a structure for a productive session, and real world data. Your team contributes their knowledge and expertise, with the result being a plan you can use... to win markets.

Channel Optimization

2006-01-01T16:00:00Z

Given the squeeze-play on end-user prices, increased channel competition, and investor demands for steady-if not increasing-earnings, it is hard to believe that many companies have an untapped source of additional profits on current business.

In a recent worldwide channel economics study, Rubicon analyzed industry giants like Microsoft, Symantec, Apple and Macromedia, as well as their top channel partners, and discovered that each, in their own way, was leaving money-profits-on the table. Neither the channel nor the vendor was using their channel investments optimally to bring products to market. The Rubicon study found that the investments many companies make in the channel fail to reverse loss of mindshare or improve returns. Most importantly, the study exposed that channel economics are changing in ways that challenge conventional wisdom.

What kind of impact, you say? We are talking about small changes that make a sizable impact. A dollar saved in the channel is a dollar that flows directly to your bottom line. A $1 billion+ software company client of Rubicon expects to see earnings jump by $10 million dollars from optimizing a single point in channel spending. Not bad you think, but follow through on the logic. If the company earns a five percent return, the channel optimization results in a 20% earnings increase, a result welcomed by any investor or analyst.

Here are some insights from our research that you can immediately apply at your company.

Think holistically

Most companies fail to optimize their channel spending because they fail to view it with enough of a macro perspective. The key is to look at all forms of payment to the channel-not just margin, but direct, indirect and "soft dollar" spending-making sure each component is being used effectively to achieve your goals and not being lost or thrown away.

A proper view of channel economics must, at the very least, include the following expenses and investments towards the channel:

Discounts (both the amount a vendor "provides" and the amount channel partners keep)
MDF / Marketing spending
Rebates / SPIFs
Headcount placed in the account
Sales and marketing headcount to manage the channel.

So, why don't companies do this already? The primary reason is that at most companies no single executive controls all these programs, there is no single "eye in the sky". Some programs may even be part of individual or department performance metrics, meaning that efforts to adjust one at the expense of another risks igniting an internal turf war between corporate Sales, Marketing and the field. A holistic view is needed to focus on benefits to the entire company.

Stop focusing on discounts

One issue vendors get hung up on is the channel discount-that is, the sales margin. If you can move past the rhetoric, however, channel partners care about aggregate profit, not the individual components that contribute to it. In this way, their interests are more aligned with your interests than you might think. Reseller sales reps increasingly are paid on profitability rather than product or vendor margin alone, so it is the overall contribution, not the form of contribution, that your product makes that is most important.

Contribution is the sum of all payments retained by the channel partner. It is important to consider total contribution because at the end of the day, that is what determines reseller profitability and the channel's on-going ability to create and support sales.

Purchase discount (intended margin)
-- Additional discount given to customers by channel
+ Additional payments and support (MDF, Rebates, etc.)
Contribution margin

→ Leave just enough margin on the table to hit your desired street price.
→ Use soft dollar programs to accomplish your goals.

Use back end payments wisely

Competitive sales environments drive resellers to give away margin in the form of additional customer discounts. For example, Symantec offers a 20% discount to the channel on one of its security products, but only 5% of that potential margin is retained by resellers due to the highly competitive nature of the market for that product. In contrast, Microsoft provides only a 10% margin upfront for many of its products, electing instead to invest its resources in back end payments and demand generation.

Research by Rubicon Consulting reveals that channel partners earning the same level of profit contribution can come to these funds in many different ways. The chart below shows normalized data for a single reseller selling four very different products that are representative of our research. From the perspective of the reseller, the profitability of all four products is the same.

Gaining and maintaining reseller mindshare for competitive and commodity products is a challenge when purchase discounts are the primary motivator. Competition drives margins down. Resellers will complain, but there is little you can do. Trying to increase channel margins by deepening their discount is folly because all or most of the increase will be passed along to customers due to the competitive nature of the reseller environment. The customer wins, but you and your channel do not. And, except for the effect-wholly unintended in this case-of price elasticity, customers buying at the lower price are the same ones previously buying it at the higher price.

Not making money selling a product is a problem for the channel, and one that you should care about as it results in less mindshare for your company. You need to find another way to compensate, motivate and reward the channel if the indirect channel is to contribute to your sales model.

Never offer rebates without tying them to specific metrics. Better yet, tie rebates to overachievement of your goals. If your company's growth target is 10%, tie rebate awards to 15% growth. The channel benefits and so do you.

Understand reseller capabilities

One of the surprises in our research was how quickly market efficiencies are leveling reseller profitability across all classes of trade and regions. This means that corporate resellers are not more profitable-as many people assume-than other classes of trade, and therefore they do not have the resources to drive the levels of demand generation that you may expect. While corporate resellers focus on selling products they know to their existing accounts, mail order / Internet resellers have evolved into very sophisticated marketing machines that aggressively pursue new customers.

Use MDF only with resellers capable of doing new customer development. Funding channel switching with your money is throwing money away.

Winning big

The big win is not from simply figuring out how to pay the channel more, but making sure the intended margins and payments reinforce desired behaviors in the channel. Increasing MDF payments for a product that will not benefit from additional advertising will only help to subsidize other products. Offering rebates without the appropriate strings turns them into handouts. The additional payments and support should be contingent upon achieving specific results such as increasing revenue or adding new customers.

What you can do

You need to strategically allocate funds based on a holistic view of the channel.

If the channel is passing along part of their discount, then you should capture a larger share of the customer price. This directly benefits your bottom line.
Improve reseller profitability-and mindshare-by providing them with a greater and more stable profit contribution
Maximize channel motivation and responsiveness by tightly linking rewards with specific and challenging goals. If rebates are needed, by all means offer them, but only to resellers that meet specific goals such as a 25% revenue increase for specific products. If rebates become a handout, they will simply be passed on the customers as additional discounts.
Use the right tools with the right type of reseller. MDF is most effective with mail order resellers; rebates are important for corporate resellers targeting large accounts.
Make the customer buying experience better by taking the focus off of price and discounting, and putting it more on service, support and addressing the customer's needs.

Your channel optimization program will need to be tuned to your situation based on market dynamics and your specific objectives. Just remember to do it with a macro lens and use all your tools effectively.

Value Innovation

2005-12-01T16:00:00Z

Does your company need to win new markets in order to keep up with, or more importantly, exceed investor expectations? Will you be able to get there by evolving your products or solutions, or will it require disruptive innovation? Do you want your company's next-generation strategy to give you a true competitive advantage? Does the challenge of your "day job" managing the existing business and investor expectations keep you from your "other job" of developing the strategy and plans that will allow you to leapfrog the competition? If you answered "yes" to any of these questions, you are not alone and have the company of many other executives, which very likely includes your competitors.

Many of our high-tech clients experience the same thing. And one thing is certain -- getting there will involve not doing what you have always done. While additional line extensions or pricing optimization may help you attain this year's goals, they are less likely to overcome next year's challenges.

Profits come from new markets

According to W. Chan Kim & Renee Mauborgne in their book Blue Ocean Strategies, while new territory represents one in seven business line launches, it is the dominant source of profits. These new business lines are, of course, driven by innovation. More proof for what most executives already know to be true.

Value Innovation is strategic innovation

To win a new market, you must look at your market terrain and address unmet needs. This sounds like textbook stuff, but in practice it is never as easy at it sounds.

What Rubicon does is help clients take on strategic moves. The kind of move when Apple created the iPod, NTT DoCoMo created innovative services on their telephony network, or Ted Turner when he created CNN, the first 24-hour cable news network.

Strategic moves of this type are driven by what Rubicon calls "Value Innovation." Value innovation unleashes new demand for your products or services based on innovation and renders competitive offers obsolete. This is not solely technology innovation as much as it is finding innovative ways to meet unmet needs of potential buyers. The role of value innovation is to create a new market space where you have a significant competitive advantage.

The Value Innovation Framework

The ability to frame a strategic market opportunity allows you to create true value innovation. It involves looking at the "whole product"-the combination of product, associated services and the value perceived by the customer (or potential customer).

The Value Innovation framework is both diagnostic and action oriented. To move in a new strategic direction, you need to first define where you want to go so that you can add the appropriate value.

Map YOUR business against competitors. Compare your business to competitors by drawing a strategy map for the market as it currently is. Make sure you understand what factors are involved, and how each vendor competes, better / worse, on that axis. Of important note is what the terms of differentiation are. A company like PayPal might evaluate its strategy based on: ease of use, ubiquitousness, ready acceptance, fraud management and then look to see which of these they should use to differentiate their offerings from those of competitors.
Ask NON-CUSTOMERS what matters. Go into the field to meet new customers, explore new segments and understand what they need. Observe the unique advantages of alternative products and services. The key is to look at how people are currently serving their needs and what could be improved. There are alternatives to every solution, even if it means doing nothing or using high-technology like pen and paper. NASA spent millions developing a pen that could write in zero gravity. The Soviets chose to use pencils. Intuit is an example of a company that studies its existing and potential markets to understand the opportunities.
Perform NEW thinking. Understand what new features should be created, and see which features can be eliminated or changed. Are current products over-designed for the market you want to address? When Jeff Hawkins designed the original PalmPilot, conventional wisdom held that one could not pack all the features of the then-current handheld PCs into the form factor-shirt pocket sized-that Mr. Hawkins considered critical, so he offered a simplified device that defined the new category of Personal Digital Assistants (PDAs). Mr. Hawkins recognized that portability was key to creating a successful PDA. People were not looking for a simpler portable computer per se, but they were looking for a device that allowed them to take their calendar, phone book, and notes wherever they went. While this process might not deliver you and your company the next PDA category, it is a great way to force cost out of the system, thus freeing resources for true innovation.
Develop NEW scenarios. Develop your future strategy map based on insights and field observations. See where your fundamental strategy needs to change based on your NEW thinking. After creating some alternative scenarios of what the future might look like, get feedback on those alternatives. This process will give you tremendous vision--and probably a lot richer and deeper than that of your competitors--into where your industry can and should go. Working on these scenarios with industry leaders and partners will help you refine your vision for the future while shaping directions of the overall market.

Fresh Views & Insights

Most importantly, this involves taking a fresh look at your business. We hope this inspires you to stop focusing on benchmarking best practices, and start gathering insights and perspective so you can move the big picture. If you would like to learn how Rubicon could help you in the area of market expansion and value innovation, call us. We have the expertise to audit your current industry value proposition, how to interpret how industry trends impact your technology, and we are interested in working with you to eliminate / change / create so you can capture the financial and market benefits of innovation-before someone else does.

Let us know your thoughts, and we look forward to talking through your insights.

Video Use In Education

2005-11-01T16:00:00Z

According to market research recently completed by Rubicon Consulting, video editing currently represents the fasting growing category of software sold into Education. More and more schools are producing videos, with even middle schools often broadcasting live announcement shows via in-school cable systems. Most new school construction now includes dedicated video studios for use by students and faculty. Despite all of these signs of impending breakout, Rubicon estimates that only five percent of K-12 teachers currently use video creation in their classes, so the market remains a very early one at this point.

This white paper analyzes the current situation, some best practices for adoption and offers projections for what is next.

The Current Situation

The market for video creation in Education is large by any measure. The surging popularity of consumer video means that ever greater numbers of teachers are familiar and at ease with video technology. At the same time, the initial noteworthy educational successes of video-based learning are already attracting the more innovative teachers. With over 4 million instructors in the US and a projected interest level of 20 percent, we expect 800,000 teachers to be using video in the classroom within the next few years.

Long hailed as the next "killer application," PC-based digital video has repeatedly disappointed its supporters. DV suffered historically from an inherent complexity in both the applications and the equipment and configuration requirements. Editing DV was both expensive and difficult for lay users.

As hardware and complexity barriers disappear and prices drop for the hardware and software needed, DV growth in the consumer market has accelerated rapidly. In a significant change from as recent as a couple of years ago, even moderately priced systems now include CPUs, memory and storage sufficient for DV editing. As DV editing spreads in the consumer market, more and more teachers and students are gaining a familiarity with DV editing.

Today in Higher Education, video creation and editing most often is part of a vocational or career-oriented curriculum, ranging from strictly vocational programs in video production or Radio/TV/Film programs to Cross-Media Communications majors at four-year universities. Outside of these programs, instructors rarely employ classroom use of video creation and editing.K-12 teachers use video to support several different objectives, but use is extremely dependant on the drive and initiative of individual teachers. These teachers have a strong affinity for video creation and will invest considerable amounts of personal effort into its use.

Video production courses are the most widespread and best established use of video. Courses range from truly vocational offerings, such as those in higher education and some high schools, to high school electives that teach basic shooting and editing techniques. There are many middle schools producing daily or weekly announcement shows that fall into this category as well. An emerging use of video in K-12, especially the elementary grades, is to support the core curriculum. Today, these types of uses are few and scattered, limited to the most innovative of teachers, but initial successes demonstrate tremendous potential in this area, and it is definitely a key area to watch.

Rapidly expanding use of video in the broader consumer market results in an increasing number of teachers and students who have video editing skills they acquired and use outside of the classroom. Video creation is fun and engaging for enthusiasts so there is some use of video as a vehicle for teaching and/or using technology in the classroom. This approach is most at risk from tightening budgets and increased focus on standardized curriculum and testing.

As with other types of technology, brand is much more important to the faculty in higher education than to traditional K-12 classroom teachers. For higher education, use of a particular application by potential employers of new graduates is the largest single factor in deciding what specific editing application to use.

Some Best Practices for Video Creation

Non-vocational use of video is in the early market phase and current use nearly always is driven by an individual champion. For an early market application, this type of individual champion is absolutely critical for success. While individual initiatives are necessary at this stage, they are not sufficient to drive longer term success. The video initiative must be tied directly to the curriculum so that it can demonstrate academic results relevant to state-mandated testing.

Instructional programs wanting to initiate or increase the use of video face two major hurdles to success: funding and training. Established vocational programs mainly face just the first challenge.

"An emerging use of video in K-12, especially the elementary grades, is to support the core curriculum."

Funding. Video programs are expensive programs relative to the number of students. This is true at all levels of education. In the elementary grades, many of those interviewed saw video (and other technology initiatives) in a losing battle for funding versus programs directly linked to statewide learning standards. However, this does not have to be the case, as a number of successful programs demonstrate. Successful programs address funding in one of the following ways:

Link the video-based curriculum to state standards such as reading or math skills or otherwise addressing lower-performing or educationally at-risk children. By linking to government standards, schools can tap the much more ample funding from initiatives for teaching basic skills such as No Child Left Behind available at both the state and federal levels.
Expand video's constituency. Cross-curricular video projects make video production a widely valued campus resource. Whether the project is taping football games for the Athletic Director, creating a video of the school theatrical production, or supporting a language arts teacher's projects forms alliances among departments that otherwise would be vying for the same funds. This approach also works in a non-curricular setting, especially in higher Education, if student videographers are able to support administrative goals such as public relations or advertising.
Grants are widely used to fund everything from small seed programs in elementary grades to vocational programs. While most grants range from a few hundred to a few thousand dollars, one high school teacher generated nearly $1 million in grants and vendor in-kind donations over the past seven years.
Paid work is used by some vocational programs as a way of generating supplemental funding.

Training. Video creation and editing is widely perceived as being very difficult and complex, especially for those without prior experience. Experience with some widely used prosumer-level applications only reinforces this perception. For highly advanced courses, sophisticated, professional-level applications are appropriate, but many Educators do not benefit from this level of capability.

Finding a way to quickly give teachers the required shooting and editing skills is critical if video is to expand beyond the current core of video enthusiasts. Successful programs adopt editing applications and projects that are appropriate for the students and learning objectives. Some districts or regions organize video peer groups for mutual support and dissemination of ideas.

To reach the curricular potential of video in K-12, teacher training needs to do more than simply teach the teacher to shoot and edit video, but must also communicate the educational value of using video in the classroom and guide the teacher in integrating video-based lessons and projects.

The Outlook for Video in Education

The outlook for video in Education is excellent in both the short- and longer-terms. Both Microsoft and Apple are devoting significant resources to visual learning in the Education market and seeing excellent returns on their efforts. Apple continues to push forward at all levels of Education, but is hampered by decreasing share in K-12. Microsoft bundles its second generation DV editing software with all copies of Windows XP.

In the short-term, video use will be driven by teacher enthusiasm for both innovation and technology. In the longer-term, the unique teaching benefits of video as well as the pervasiveness of video in our culture will push video into broad acceptance within Education. Video-capable computer hardware, once a great barrier to video adoption, is now widely available and will become prevalent in the next few years.

In Higher Education, the fastest growing programs we interviewed were cross-media communications programs that combine elements of print, web and video communications. This is a hot field that is likely to change the way that video production is taught at all levels. Film and video purists may scoff, but cross-media skills are well-tuned to the emerging needs of the market and graduates with these skills are in high demand. Even print journalism students are being trained to shoot and edit video to give them the skills flexibility demanded in today's market.

Video use in K-12 must overcome two major challenges to gain broader acceptance:

Time requirements in K-12. For all its benefits in reaching and teaching students, the promise of video creation and editing "In the short-term, video will be driven by teacher enthusiasm for both innovation and technology." is better and wider-reaching results, not more efficient teaching. Teachers using video will see more demands on their time, not less. In the near-term at least, this will tend to limit video use to the most innovative and dedicated teachers.
Learning curve. Some students learn video editing applications much quicker than their teachers, something some teachers find intimidating. The success and spread of easy-to-use video editing applications will whittle away at this issue by making teachers more confidence in their use. Better training and curriculum tools will also allow teachers to focus on the learning objectives rather than getting bogged down mastering a new technology.

As a more mature market, career-oriented uses of video in Higher Education face fewer challenges to adoption. However, the transition to High Definition TV raises significant investment issues, especially since the transition to High Definition TV scheduled for 2006 is likely to be pushed out. This creates uncertainty around long-term standards especially when the expected lifespan of new equipment and software may be only two to three years rather than the historical norm of 10 to 15 years. More frequent upgrades raise the investment cost to programs and necessitate larger budgets or cut-backs in other areas.

Looking Forward

While career-oriented video programs will be occupied in the near-term with investment and budgetary decisions surrounding migration to High Definition TV, K-12 teachers and technology specialists will see a wealth of new teaching opportunities.

High schools and middle schools will see a huge growth in the availability of video production equipment and facilities. Not only is wider awareness of video driving more schools to include video studios in new and renovated construction, but rapidly falling costs of equipment and software make it easier to set up very capable facilities. A setup that would have cost $100,000 five years ago can now be assembled for under $10,000. A basic setup on a cart that includes a DV camera, wireless microphones, computer, editing software and DVD burner now costs less than $3000, putting it within reach of almost any school.

In Elementary schools, video will emerge as an engine for innovation as initial successes become known and are replicated. Older, less technologically inclined teachers may resist, but younger, technologically savvy teachers will embrace video-based projects tied directly to the core curriculum such as those currently being developed in isolated pockets of innovation.

For a while, video creation will remain the domain of the enthusiast, but the ranks of enthusiasts will swell as video creation and editing becomes a mainstream technology in the consumer market. Continuing and expanding examples of educational success in the classroom will add fuel to the growth of video.

Examples of Best Practices at Work in K-12 Education

Goal: Develop Reading Strategies

Approach
A unified school district has a lot of success with video in the elementary grades. With an estimated ten percent of the teachers using video in the classroom, video use is as widespread as anywhere. A key to their success is using video in areas that are not easily addressed in other ways. Video is relatively expensive, so by focusing on the biggest educational problems, success generates the highest returns.

Example
A 1st grade teacher selected the six lowest performing readers as stars in a video about reading strategies. The lowest-performing students were chosen because it gave them a confidence building, high profile success in front of their classmates. Working on the video also made reading cool and fun. In the end, the students not only learned the important reading strategies that were the core objective, but via the video, their parents also learned how to support the reading development of their children. Surprises included seeing that students were able to recognize a much greater range of reading errors during the editing process than they were able to recognize when spoken. Lastly, by the end of the project, even kids that had trouble spelling "was" and "when" had no trouble spelling "cinematographer."

Goal: Build Support for Video Production Program

Approach
The video teacher at a large high school has expanded support for the video production class he teaches by encouraging real world, cross-curricular projects with other departments. The mainstream video production course has grown to six sessions totaling 180 students over the past two and a half years, and enjoys strong support from other departments in the school as well as the district administration. The key is to link projects to real ideas that tie into the curriculum rather than doing video for the sake of using video. Giving everyone at the school a stake in the success of video makes the program stronger.

Examples
Real world projects with other departments, such as the district administration or outside groups like the State Parks Department. Some recent projects include:

Tape science experiments
Create video of Spanish language soap operas written and performed by students
Tape Drama department productions
Create an instructional video about the school's counseling process
Tape football games and create a highlight film
Create a documentary on historic site for the State Parks Department
Create an informational video for local cable TV following passage of School Bond measure.

As a result, every time the teacher talks to someone new about his program, interest in video grows stronger and wider, and he is now a district-wide resource spreading news about how video can be successful.

Key Lessons for K-12

Video is not just for the top students. Even students with learning impediments or behavior problems often are attentive when given responsibility for creating a class video and handling expensive equipment.
Lower performing students offer greater potential upside for learning improvements and, thus, targeting these groups may offer more opportunities for project funding.
Children are culturally more attuned to moving images than static images and text. Video is a natural medium for them.
Video offers a great vehicle for cross-curricular collaboration between teachers, departments and students.
Be attentive to unexpected benefits. Video is still new in Education, so many benefits remain unknown

Questioning the Unquestionable

2005-10-01T15:00:00Z

From time to time in business, an idea emerges that sounds obviously good -- so good, in fact, that it becomes accepted wisdom almost immediately. Product managers quickly incorporate it into their assumptions, marketeers let it shape the way they approach the project, and executives quickly incorporate it into their presentation slides so that it ceases to be mere idea and becomes... (drum roll) fact.

The idea makes the leap from theory to principle without ever being subjected to rigorous testing. Often, the idea eventually gets proven out. But what if the so-called fact turns out to be false? Or what if an idea that once was true becomes false? What happens then? Has it happened to you?

The Cost of a Wrong Decision

In three recent engagements, Rubicon Consulting has been engaged to investigate troubled product strategies and found faulty assumptions to be the root cause in each case. Perhaps you can see your company in one of these stories:

Company A believed that a new set of product features would add great value for the buyer of the product, so they invested heavily in development. Right before launch, during the pricing analysis, they found out that their main customer set was not interested in paying for the added features. Did the customer already have a way to solve that problem? Did the problem shift? Had an alternative crept into the market?
Company B launched a significant price promotion in response to poor sales performance of a new software release. But they saw no resulting increase in unit growth. Did they fail to get the word out? Was the problem in the channel?
Company C believed that one segment of a complex value chain could adopt an innovative information management platform based on slick new technology, and service another industry with this platform. During the product development cycle, they discovered that the target industry already had an exclusive source for all of its information management purchases. Would the slick new technology fail to "cross the chasm" because there was no initial customer?

These situations are not unusual in Fortune 1000 high-tech firms. They've got smart people and good technologies, but they keep having this problem. How can this be fixed? How do we know what we think we know? Do we know how to check our assumptions?

As senior executives, we make decisions every day in the presence of incomplete information.
We make these decisions based on a wealth of experience that allows us to make quick decisions
that frequently feel almost like instinct. In other words, we feel in our gut which way to make the call.

But, what if our gut is wrong? What is the cost of a wrong decision? In the three situations described above, it could mean lost revenue for price discounting, or lost market position, or missed growth. Those can be big costs, especially in these times.

So what's an executive to do? How can we test our assumptions in a dynamic world? Some principles are so established that it seems that testing them is no different from testing that 2 + 2 = 4. Is it realistic to question everything?

"What if our gut is wrong? What is the cost of a wrong decision to your company?"

Question the Key Decisions

Questioning basic assumptions can be realistic. Rubicon uses a process to confirm that the problem is truly "the" problem. We routinely investigate the details of our clients' problem statements (this can sometimes be easier for consultants to do than for internal folks), and we find that sometimes the root issue is not the issue that was initially described. This "problem misstatement" happens for large firms just as often as it does for start-ups. Whether product management, sales management, or marketing management is making the statement, often they are simply too close to see the all angles of the situation, or perhaps other options have been viewed as off limits.

However, not every situation warrants a deep "soul searching" effort, for a variety of reasons. The product launch or decision may be clearly incremental and low risk, leveraging off of earlier successes. Or the marketing budget for a particular product or region may be of a size that does not justify a reevaluation. And yet there clearly are cases when business conditions signal that it is time to approach the problem thoroughly. Business decisions that impact the future direction of a product line, or problems that could have a $30M+ impact, or affect more than 10% of the company's future direction, are examples of strategic challenges that deserve the extra attention. In addition, when a series of tactical solutions fail to meet their mark, it may be worthwhile to take a hard look at the underlying assumptions.

Ways Your Organization Can Approach This Problem

Despite the growing realization that identifying the assumptions for marketing decisions is important for business, companies are far from mastering how to do it, especially at the strategic level, where the data is usually fuzzier and harder to come by. Here is an approach you could take if you want to have a framework for looking at your market differently.

Outline the known assumptions. First, identify the key points of a case you are making. By this we mean take out all the cool whizbang components of the new product set, and look at fundamental elements. In one recent Rubicon engagement, product success was dependent on an unspoken assumption of customer loyalty to brand. There were two components to the assumption. First, the channel wanted to build and maintain customer loyalty as a core part of their strategy, and, second, end-user customers wanted to multi-vendor loyalty programs. Many innovative technologies were envisioned to enable loyalty management, but the fundamental product decisions were made based on unverified assumptions about what retailers and customers were expected to want.

Confirm key assumptions. Take a look to confirm whether these key assumptions are the complete list. You might determine whether the core people involved could agree that these are the core assumptions. Every point in the supporting argument behind a decision is either a concrete and verifiable data point ("our unit volume is X"), a prediction ("next year's industry ASP will be $X"), a (supposedly) logical step ("if this, then that"), a statistic ("X% of our revenue comes from the 18-24 segment"), or an outright assumption ("assuming that customers want XYZ"). The outright assumption and the concrete data points are easy to categorize. What about the rest? What are the implicit assumptions in a prediction (or a trend, which is simply a particular kind of prediction)? Or a statistic? Are we assuming any correlation between groups? Are we assuming no correlation? What about "logical steps?" Are they truly built on "bulletproof" logic (2 x 3 = 6)? Or is there an implicit assumption, such as "if we lower costs over the next six months we will increase profit," which, as stated, assumes that price will be stable and that any impact on product quality (cheaper material?) or customer experience (slower fulfillment?) will not affect volumes, or that no significant competitive action will occur.

Determine assumptions to test. When all the assumptions have been fully identified, ask what needs to be looked at closely. Could we narrow down what needs testing or further evaluation? Relying on the strength of the team or existing supporting secondary data, can we identify which are "safe" assumptions? Then, ask what assumptions are truly central to making a good decision. For example, is it making sure the buyer's problem matches this technology set, or that the customer is driven by price to adopt a product? Usually five or fewer issues are central to any complex business problem. Last, are there any assumptions that are regarded as unverifiable? Assumptions about competitive behavior typically fall into this category, but they are not the only candidates. Unverifiable assumptions are not showstoppers; they represent informed risk or articles of faith.

At this point, you have identified the key areas for validation. The process of framing the core set of validating questions is analytic, insightful, and deductive. It often looks easy, but it is actually dependent on a wealth of experience and practice. An approach Rubicon uses is to try to fit these observations into a few sets of hypotheses to start to test them.

"Work at being what Intel's Andy Grove referred to as 'prudently paranoid' "

Build a hypothesis. It is important to gather data diligently. Making sure you have all the facts and, especially, not just the facts you want to hear or those that are handed to you. It's common knowledge that paranoid people suffer from what psychologists call "confirmation bias" -- they search for evidence to confirm their most sinister thesis or feared expectations, and filter out contradictory data. Check yourself. Are you discarding information inappropriately? Work at being what Intel's Andy Grove referred to as "prudently paranoid" -- try to learn and keep a sweep going for new data that shapes thinking for new directions.

Leave room to question your interpretations. Collecting data is important, but the way you filter that information will determine how "prudent" you are. Prudent people leave a margin for error in their interpretations. If anything, be a little suspicious of facts or theories that explain away every question. Nothing is ever that easy. And, if something were, why hasn't your competition already done it? Chances are there's a reason.

Avoid jumping to conclusions. Stay in data gathering for a predetermined period of time. If you say that you want to benchmark ten related ISVs during the next three weeks, stick to this plan and stay open to all the data; do not stop after two ISVs because you "already got the data you need." One common temptation we have found is that executives starting forming an opinion after two points of data even when they really know they need to look at ten. If you initially believe that the problem is big enough to justify three months of data gathering, do it. I have found clients who start asking for the answer two weeks into the project; of course it's a real temptation to jump to conclusions then, especially on an exciting project. But in the end, this is really just a way to cheat ourselves.

Make a second pass to look for things that refute the suggested direction. Many good product managers I know read things like market research reports selectively. They gather the part of the sentence from an IDC or Gartner study that says "go for it" and then stop right before the "only if..." part of the sentence.

Make the call. Then you're done. That's it. One of the toughest challenges is knowing when you have looked at enough information to make a reliable judgment. At what point can you be certain that the direction or trend you have identified is real? It's easy when 90% of the research points one way and only a few data points conflict. But more often the data is cloudier, and it will come down to judgment. But if you do the complete job, then at least you know what you are judging.

Rubicon Methodology

At Rubicon Consulting, we begin large or strategic projects by conducting an internal audit. We talk to all of the core members of the effort, and, as needed, pull from reliable secondary research. We work to frame the problem accurately and ensure that the scope of the work is on target with the problem. We do it quickly and inexpensively because we want to help our clients fix the right problem without adding expense or delay.

The internal audit serves several important purposes, and we do it prior to any custom qualitative research. The internal audit provides these results:

Independent assessment of the problem as presented
Important background and environmental data
Buy-in within the decentralized client community of the need for the project (which usually turns out to be valuable later for successful implementation)
An understanding of the key dynamics, key players and, more important, the key assumptions that are being made

Experience demonstrates that the internal audit is the analytic cornerstone for understanding the broader business environment and being able to help clients identify the root causes of the issues they are facing.

In some cases the internal audit simply validates the problem as presented. In other situations, the audit leads Rubicon and the client to revise the definition of the problem prior to beginning the bulk of the research and interviews. The internal audit ensures that the engagement is both efficient and effective.

After Rubicon learns what assumptions need testing, we can identify appropriate areas for research. When interviews are needed, we develop a custom diagnostic that targets the areas for primary research.

The internal audit produces a high return even when the original problem statement is fully validated. Benefits include the following:

Superior customer and channel interviews because Rubicon is able to work with the client to build clearly targeted research diagnostics for each class of interview. Making sure you are focused on the right set of questions means you will get what you need from research.
Better use of data because the internal audit helps guide the organization and presentation of what we learn. More clarity upfront leads to crisper recommendations, action, and impact.
Asharper focus on the real issues early on allows effective time allocation during primary research interviews to probe into areas that would not otherwise be explored. Key insights learned then will help you stay ahead of the competition.

A Sample Case

Rubicon recently worked with a large software publisher on a new server-based application. They hired us to do a standard price-elasticity study to determine the value price point for new software, and whether it should be priced per use or per processor.

The context was the launch of Version 2 of an existing product. After several months on the market, Version 1 had gained but a handful of customers despite thousands of leads. Much had been invested in adding more capability to Version 2, so the company could not afford another flop. Since the product automated a process that potential users currently did manually, there was no question in the company's mind about the need for the offering. Sales pressed for the lowest-possible price for Version 2, citing a long list of competitive offerings, though there was no hard evidence that competitors were winning against Version 1.

The problem seemed straightforward: understand customer price sensitivity and overlay it with competitive research to construct an appropriate pricing and margin model.

The internal audit findings revealed that the issues were far more extensive, and ran deeper than determining the right price:

The internal interviews and some preliminary customer input both suggested that existing customers had already solved the problem economically, or did not see it needing a technology fix.
Version 1 and the technology overlaid in Version 2 represented features that could be naturally divided into two distinct products that appealed to very different customers
Most customers viewed the features as two separate products and were confused by the vendor using a single product name
The leads revealed little about the market potential since the leads were associated with the current customer profile, rather than with buyers who had needs for the new product technology.

Rubicon's internal audit allowed the client to redefine the problem at the beginning, and to consider two products. As it turned out, one represented a more mature technology than the other, and consequently, the go-to-market strategy for each was very different in four key targeted ways:

Pricing strategy
Channel strategy
Marketing mix
Buying process and target audience identification within the customer organization

The client said without applying Rubicon's methodology, the company might have struggled to create a single strategy to sell a hybrid product to a conceptual hybrid customer segment that did not really exist. Instead, Rubicon's value was to direct the effort, and identify a new market segment -- one that was relatively price insensitive and greatly needed the new product offering. The benefits went beyond sales revenue, and included market momentum and sales force enthusiasm for the product line.

Conclusion

Any outside consultancy will usually add value to your team's efforts by bringing an independent perspective to your project. Superior methodology brings more value, but good methodology does not overcome lack of experience. When a project warrants bringing in a consultancy, be sure you engage with one that offers a combination of strong methodology and extensive experience. The reward will be better, higher-impact outcomes.

Richness of Relationships

2005-09-01T15:00:00Z

If you believe, as Rubicon does, that excellent sales and marketing revolves around meeting customers' needs, then this article will develop how that belief can guide the work of you and your team. "Knowing your customer" is not, of course, a new idea in marketing. Today's market landscape is characterized by pressure for high-volume, reduced transaction costs and e-commerce, ever-increasing specialization in products and needs, and shortened product life cycles. In this context, we are pressured to rely on impressions or memories or articles in the Sunday paper -- anything that saves time -- to provide a portrait of the customer. Following our beliefs, however, reminds us that it is more necessary to invest the time and energy in meeting, learning and understanding our customers. We want to get so close that the team can explain who the customer is, as a name, a place, and a voice -- and know what the customer needs, and think about connecting points to help finish the route-to-market puzzle.

Past Product Positioning

When some marketing people talk about their products or technologies, they say, "we're building XYZ to meet the needs of business enterprises." This is a Wall Street product positioning sentence meant to suggest that all businesses will want your product, and it can help orient a direction. But, as you know, it is not the customer solution.

Instead, it's important to determine which kind of enterprises we aim to help, and what issues they struggle to address. We want to:

Understand their business drivers and pressures.
Take the time to understand how they currently solve their problems.
Learn what is broken in their workflow process.
See how the different parts of their organization partner to provide solutions, and
Feel the kludged way they hold things together now.

We want to eliminate the approach that is focused on some cool technology made in some sleek office tower that we are certain (after a fanfare launch full of pomp and marketing glitz) some other company will buy.

Rubicon seeks to consider how to move from the place of faceless market segmentation to a deeper relationship with our customers. Let our relationships guide who we become, and how we serve fellow people. We propose a way to develop richer marketing as a result.

Hand It Over to the Experts

Recently, an executive of a Fortune 500 company described a sales and marketing program involving channel development for an existing product line. The noteworthy point was that a channel had recently been recruited for the product line, and thus the connection point between the company's offer and the customer opportunity was now addressed. The belief was that revenues would surely follow now that some hundreds of resellers had been signed up.

"It was one of those "uh-oh" moments: if this was the entire channel strategy, then someone was likely to be deeply troubled within the quarter."

For us at Rubicon it was one of those "uh-oh" moments: if this was the entire channel strategy, then someone was likely to be deeply troubled within the quarter. And yet, we can understand what's behind this thinking: channels do connect customers to products -- it is the pipeline of connections. After all, without this pipeline, surely the product cannot flow to the customer. And by signing up resellers, hasn't the connection been made? Hasn't the company done its channel development? And isn't more better? Maybe. Maybe not.

So, what are the circumstances in which it makes sense for you to depend entirely on your channel? Ask yourself the following questions:

Does your customer have good knowledge of the product or of the product category? If so, it may be quite possible that they just needed a good avenue -- your channel partner -- to buy more.
If your product is part of a larger solution, does your customer already understand the solution that your product provides? If not, can your channel deliver that understanding? If so, then the fitting your product into a solution will not be a barrier.
Does your customer recognize the usage benefit (i.e.,the value) of your product, perhaps from an industry colleague. If so, then just getting ready access might be enough to open up a new pipeline to sales.

When the aforementioned vendor made an effort to recruit those channel partners who are best able to reach the customers, the vendor succeeded in making its product available. If the customer already understands the product (or product category), the solution that includes the product, and the product's value, then there will be the "pull" to drive new sales. (A senior marketing professional familiar to Rubicon has described "pull" as "the suck at the end of the hose," a great way of graphically describing the force behind market demand.) This pull will lead the customer to initiate a connection with the channel partner, or respond to the channel's overtures. This situation is usually associated with a widely known product or product category that has reached or is approaching "commodity" status. If, however, you don't have a "generic" product, then perhaps you don't want to ask an unprepared channel to fill a gap between your company and the customer.

Is it Magic?

Frequently companies buy in to the notion that if a channel is hired, then some "magic" happens to bring the buyer or user to the product. What's wrong with this approach? It's like hooking up your end of the hose and assuming that the channel or your customer will handle the other end. There was a time when a channel could complete the product offer to the customer. The channel knew so much, and was both technically and market capable of providing the whole solution. But times have changed, and a vendor would be remiss to rely on some "magic" in the channel without doing its homework. As suggested above, a vendor can, of course, sometimes rely on its channel partners. For example, the retail channel can often handle the connection between us as consumers and many products that are within our understanding. We may not know exactly which calendaring software we want but, what the heck, head on down to the Palm software section at the local Fry's and grab a product based on the features described on the box. Here, we customers already know the user benefit and are ready to make the buy decision, needing only a little information to choose between brands. That software vendor is relying on the channel's presence and its platform's (Palm's) familiarity to provide the pull. In much of today's high-technology offers, the connection is not so easy. In the more sophisticated, B2B market, for instance, if a vendor depends entirely on its channel, it runs the risk of being leapfrogged by competitors who take the time to understand more about the customer -- who they are and what they need.

Getting past the "magic"

Following a "magic" strategy reflects a certain confidence that the channel can address what the vendor does not choose to -- or does not know how to -- handle. In some cases the channel can carry the day, and not in others. The key is knowing when more than channel partnerships is needed. We in high-tech marketing can clarify the channel-customer connection so that the magic is something we can manage. In fact, that's a big part of our role. Where do we begin? Here are some things to consider.

Know the real-world solutions. Rubicon recently finished doing 40 customer interviews worldwide in the XML Authoring/Publishing space. Though the users all appeared quite similar, a little investigation allowed four distinct groups of users to be identified. They used very similar words to describe their usage, but when asked their business environment, we could learn something very different. Some were using database repositories, and some were focused on different output vehicles. Some were focused on print documents while others were focused on content sharing. This apparently homogeneous market segment was actually several distinct subsegments when the business context and usage was understood. So consider the application, and specific context of the work. Learn all you can about how your high-technology product or service could be used and is being used. If possible, create a solutions guide that documents your product and the environment into which it is going. "We in high-tech marketing can clarify the channel-customer connection so that the magic is something we can manage." Understand what other products have to be purchased at the same time. And under- stand if your product is replacing existing technology or processes because this customer or institution may need some help to give up its existing ways. This richness of understanding also helps bring fulfillment to the work of marketing. In the process of developing the solutions guide, you just might be able to see the world from the angle of your customer.

Know all the players wanting the solution. Sometimes marketing people can get really hung up looking at IDC or Gartner reports that boldly carve out a variety of market segments. Such studies can be useful in looking at broad trends, but such a simplistic approach to defining your market assumes that the report was considerate enough to align its (somewhat arbitrary) segment boundaries in accordance with your product. More likely, some supposed customers within the segment will be a poor fit, and many overlooked opportunities will exist outside of the segment. Start by connecting with folks at firms that "should" be in your segment. Look at their corporate culture, and their work conditions, but go beyond this as well. If you were interested in reaching consumer markets, you would probably consider age, gender, education, affiliations, race, income, lifestyle, magazine subscriptions, etc. Essentially the same categories can be applied to the commercial markets, because, yes, corporate customers are people, too. You can understand titles, department sizes, and the role that department and team plays in the corporation's value chain.

Buyer and buying situation. Understanding who the buyer is can be important, but also understand their role within the purchasing organization. Specifically, what is the buyer's position in the organization of purchasing and in the user community where the solution will be used. Understand the attitudes of the members of the users toward vendors and brands. Ask about yours but also ask about others. You can get a real sense of attitudes and perspectives. The range can be broad -- one organization we recently studied had an IS-driven process, yet one year prior it had a decentralized process where people could purchase what they deemed appropriate. Do the organizations have set buying processes or do they employ contracts of any kind? If so, this might limit your channel strategy, and you'll want to make sure you optimize for it. Perhaps a new kind of licensing program would allow greater adoption, or some kind of volume discounts when dealing with corporate purchasing houses.

And, finally, does your team know the User? The user in the commercial circle often has characteristics different from the buyer. So seek to understand the same things -- attitudes, age, professional affiliations, et al. You'll want to know the desired product features, service requirements, price sensitivity, and performance needs. In addition, you'll want to know what is expected of them as they face this difficult economic condition, and what their bosses are asking of them. Understand that, and you can see more ways where you and your technology can help. By considering these different elements of the picture, you take away the mystery of the magic.

When should you get to know your customers?

When during the life of a product should I get to know the customers? A simple answer might be "always," but we recognize that is impractical. A more realistic approach is, whenever relevant change is evident. If you are bringing about the change, through a new product launch or marketing campaign or pricing change, then you can make pre-emptive contact with your customers. If the change comes from elsewhere, such as a competitive product launch or perhaps a significant merger or industry partnership announcement, you may be forced to do follow-up interviews. But there can be other opportunities as well. When doing a pre-launch customer interview for one product, you are often in an excellent position to "check in" on attitudes or patterns for sibling products. That can be particularly convenient when you want to avoid giving too much away with your questions. Other natural opportunities are, of course, trade shows or other industry events.

Who on your team should get to know your customers?

Ideally, everyone in marketing should, over time, get acquainted with real customers. For various reasons, however, many marketing organizations will resist this approach, at least in the short term. Budget and time are often used as the reasons, but this reflects a lack of priority for this process. Some who do it may delegate the assignment to the most junior people in the organization because others are too busy handling "strategic" issues, or perhaps a questionnaire is developed and passed to an outside service firm to poll the customers. Rubicon urges caution in these approaches.

As suggested earlier in this article, market segments that appear to be homogeneous and monolithic can often turn out to have subtle but important differences that can be mother lodes of opportunity for you to add value. These subtle differences are not likely to be found via a multiple-choice questionnaire administered by a summer intern who would rather be surfing. Rather, a seasoned industry expert who cares about customer needs should be enlisted. A prepared questionnaire can be used as a guide, but don't do a poll; instead, develop a respectful relationship. For each marketing executive, plan on spending one week of your year with customers in the field.

"We in high-tech marketing can clarify the channel-customer connection so that the magic is something we can manage."

After all, the customer can probably do without your product if need be, but can you do without your customer? In the end, your customer will appreciate being valued, and you will learn more about what value you can bring to the customer.

What do we need to give up?

If we are going to pursue a customercentric approach, then we need to give up the abstract approach of turn-the-crank marketing. It is not a "build it and they will come" or even the more advanced "if we recruit a channel, then customers will get what they need." The new economy of Internet commerce is changing the nature of marketing. Getting intimate, getting real, and understanding the depth of customers is part of who we can become in this new age of marketing.

We can deepen each aspect of what we do, and then targeting our efforts will foster a series of connections we can only imagine today. For many of your teams, connecting to your customer will be a new (or perhaps long-forgotten) process. Unfamiliar tasks always appear more challenging than the ones we're used to doing. And, getting connected is not something that happens overnight. Being connected gives our relationships more meaning, and makes work more fulfilling. It is also no longer a "mystery" but a "richness of understanding." It can transform who we are.

What is Rubicon's vision for the future?

We leave you with these thoughts. If you in Product Marketing can take the time to know your customers as people, you can better anticipate their needs. If you in Sales can broaden your listening, you will not only do well today, but in addition you will improve your customer rapport and provide feedback into your organization for tomorrow. If you are in marketing, you will find a way to associate people with segments and look for ways to make your deliverables powerfully connect. You will likely learn something new, and you will surely add richness to your work . Take the time. It works like...well...magic.

Springtime Pruning for Growth

2005-08-01T15:00:00Z

As FY02 is well on its way, many are speculating on whether the current recession is over, or when it will end. Rather than focus on the external dynamics of the macroeconomy--which you can't control anyway--let's consider something that you as a leader of your company or division can control. Have you evaluated your sales and marketing operations today and made those decisions necessary to enable growth?

Before a company can be ready for growth, it must take stock of the current business situation--and make those decisions that will prompt sales expansion in the future. Making the decisions for what to cut, what to keep and what needs further investment is a key part of strategy development. This approach can be applied to your product lines, market segments, and resource allocation.

Many companies that are making money today don't want to prune product lines, marketing efforts, or structures because they have revenues coming from certain product lines or divisions. It is hard to prune a rose bush when there are flowers blooming. The very act of cutting can appear to be destructive rather than constructive. And yet experience proves the need for effective pruning at the right time.

Seven Reasons Why Pruning Is Needed

Playing to your strengths allows the company to do what it does best. Whenever a company is working opposite its strengths, it has internal friction and resulting challenges.
Completing 100% of the customer requirements for a few sets of customers is better than meeting 50% of many customer requirements. In one case, all your customers love you; in another, no one is fully satisfied. Your strategy: focus on cultivating one set of prize-winning plants rather than on four struggling plants that may not bloom.
Doing four disparate things is harder than doing five coordinated things. There is an overhead to managing disparate work and disparate efforts. If you have multiple business units that all require a different infrastructure, your company is not leveraging its assets well.
Clarifies your brand. Your brand equity grows when customers connect to the value of what your company offers. Focus on your core products, services, or solutions. By cutting those things that are add-ons, you are making it easier for your customers to value your core strength and understand better what you stand for. Your customers will value the clarity, and it will be easier for them to refer you as a business partner to others.
You can partner rather than build it all. Partnerships and strategic alliances generally improve your whole product marketing and delivery systems. It gives you the opportunity to identify valuable thirdparty relationships needed to provide a complete service solution to the customers. In the case of a new market segment, this can mean multiple companies growing the category.
Isolated product lines or divisions take time to manage. Streamlining the company deliverables and aligning its go-to market plan means leaders can focus their creativity to grow the company outward rather than managing inward. And, having diversity of efforts can mean management challenges. Streamlining the company deliverables and aligning its go-to-market (GTM) plan means leaders can focus their creativity to grow the company outward rather than managing inward.
And, finally, pruning allows for innovation. Innovation happens in an organization when the workload is managed well. When synergy and creativity are sparked, people will find the smart idea that will lead your company to create a leap forward in the market. If everyone is performing full out across disparate efforts, they are likely working hard to coordinate the different pieces and pull it together. If you eliminate the 5% of revenues that cause the 30% of unproductive activity, you might just find a new market opportunity to grow the revenues by 50%.

There are some methodical tools and ways to approach this opportunity:

First, perform an audit of your strengths. By identifying your leadership in technology and other assets, you can evaluate your offer to the market in specific ways. Some questions you can ask are, how do your current and pipeline technologies stack up in the category space? How attractive is the category in size today and how fast is it growing? And, where is the category space in the stage of adoption? Does the category have what it needs in the whole system to cause your product line to be considered by the buyer?
Evaluate how well you can get your product to market. Do you know who are the buyer, user, influencer and decision-maker so you can make them aware of your product? Has this information been clearly articulated and understood by your entire team? Do you have the channel -- direct or indirect -- to sell to your select customer base? Do you have a compelling offer -- like leadership in price, technology innovation, or buying process ease -- to get them to choose you vs. your competitors?
And, finally, do you have the infrastructure in place to support the customer long-term? Do you know what your customer requires from systems integration, consulting, 24/7 service, installation or training, and do you have a qualified infrastructure investment to meet their needs? An often over-looked perspective is that you want to support the customer over time. To do so, evaluate how well your internal infrastructure, purchase process, policies, and culture are aligned to manage long-term care and not short-term sales.

Aligning your technological strengths with market requirements is by itself a success. Aligning your investments to capitalize on the market opportunity is the grand finale. When you can line up these things: your core assets and strengths -- to the market segments'growth, and how well your company can complete the GTM (go-to-market) connection, you can evaluate what to keep and what to prune. If this is a current issue for you, we can recommend effective, appropriate analytic tools and processes for you to use.

With a deeper understanding of strengths and aligning your organization to focus, your company can grow faster, and be stronger long-term. And that's what good strategy is all about.