Jay Haynes

The Facebook Segmentation Problem

2012-05-17T06:41:04-07:00

Facebook is about to go public, so obviously the company is getting a lot of attention and focus on its business and long-term prospects. I am not a frequent Facebook user, but I have enormous respect for fellow entrepreneurs and Mark Zuckerberg has done an outstanding job of building a product that people love to use and a very successful company. So congrats on the upcoming IPO.

The big question, of course, is what is Facebook worth? It is an interesting discussion not only because so many people use Facebook, but because it is going public at an extraordinary valuation. Since Facebook provides a service that is free to users, it has to make money from its customers, advertisers.

This is the interesting long-term question: can Facebook create more value for its customers (advertisers) than competitive solutions. If it can, it will continue to thrive, if not, it is a serious risk for any investor. Its users might be happy, but its customers won't be.

Today, there is a story in the NY Times that points out this potential problem:

On Tuesday, General Motors, the third-largest advertiser in the country, shut down its Facebook budget, about $10 million, saying that those ads were simply not doing enough to sell automobiles.

In our language, the job that Facebook is helping its customers execute is to acquire customers. All advertising is about customer acquisition. You might argue that advertising also provides "branding", but this is just a step in the customer acquisition process. No company needs branding without customers, but all companies need to acquire customers, whether or not they decide to build a brand.

Of course, Google has been extremely successful because they got the customer acquisition job done much, much better than alternatives, and they made it measurable and quantifiable. Google satisfied the unmet customer acquisition needs of all companies, big and small, and they have been rewarded with a very defensible model that is exceptionally profitable.

So will this be the case for Facebook? Perhaps, but another part of the same NY Times story is very revealing:

Facebook currently allows marketers to buy audiences, say women between the ages of 18 and 35 who live in a specific neighborhood. But Facebook is essentially a walled garden, so what users may do on the Web beyond Facebook — where they shop, what they read — isn’t available for advertisers who want to home [sic] in on people’s behavior. [Emphasis added]

Facebook's product - how it generates revenue - is very traditional. It allows advertisers to target users based on demographic segmentation, for example, women between the ages of 18 to 35 who live in San Francisco.

So why is this a problem? Because demographic segmentation has failed companies for decades. We have seen this in every type of market from consumer markets, to business markets, to medical devices, to software, and services. Over the long-term demographic segmentation will be viewed as an ancient relic for customer acquisition because demographics create phantom segments. They aren't real.

This makes perfect sense if you define markets based on the customer's job-to-be-done and not a product. Let's look at an example.

Suppose you wanted to acquire customers for a new music service. The underlying job your service satisfies is to listen to music. The job is stable and will never change, but the products and services will continue to evolve as they have in the past from records, to CDs, to iPod, to Pandora.

So how should you target customers to acquire? The obvious answer is to target customers who are unsatisfied with their ability to listen to music successfully. And let's say the part of listening to music they are unsatisfied with relates to discovering new music. Your potential customers are tired of their music collection and they really want to discover new music better.

So you launch a new ad campaign on Facebook. And you select 18 to 35 year-old women in San Francisco. Will this get you the new customers you want? Probably not. So why is this?

Because the people who are unsatisfied with their ability to execute the job of discovering music don't segment themselves by demographics (e.g. age, gender, income, zip code). They segment themselves by how well they can execute the job.

Could an 18 year-old woman in San Francisco, a 60 year-old man in Detroit, a low-income mom in New York, and a wealthy man in Seattle all be similarly dissatisfied with their ability to execute the same job, e.g. discover new music?

They answer, of course, is yes. But these people would absolutely never fall into the same traditional segmentation. And this is the risk for Facebook - its segmentation is inefficient. Chris Dixon points out that Google's revenue per pageview is estimated to be 100x to 200x Facebook's.

This is because a company can acquire customers on Google based on the job the customer is trying to execute, not based on phantom demographic targeting. In other words, it doesn't matter if I am male, female, high income, low income, or anything else when I type a search term into Google. All that matters is that I search for "music discovery" and when I find your new service, I will be a satisfied customer, regardless of my demographics.

Finally, I found it amusing that the NY Times article points to a possible improvement for advertisers on Facebook: that they could in the future use Facebook's user behavior data to segment. This type of behavoir segmentation or "psychographics" is just as flawed as demographic segmentation. It just came into vogue as computers got more advanced and companies could access and analyze consumer credit card transactions.

But what I purchased in the past tells you nothing about how satisfied I am with my ability to execute an important job. So the only accurate segmentation is based on a customer's job-to-be-done (and specifically on the outcomes in the job). This is how customers segment themselves.

If Facebook only offers companies traditional segmentation, their advertising model will be at serious long-term risk. If it can figure out how to get the customer acquisition job done better than Google and others, it could continue to thrive.

Pivot Away from Pivot

2012-03-24T10:36:01-07:00

Pivoting is all the rage in startup land. But it is a concept that I believe is extremely harmful to entrepreneurs. Pivoting (and "failing fast") is exactly the wrong approach to launching a new company.

The problems with "pivoting" don't get enough attention. Venture investors and successful entrepreneurs love to tell the stories of the early days of their startups.

And this is understandable. I have been there, and the early days are exciting. You start with what seems to be a great idea, you raise venture capital, you start hiring a team willing to take enormous risk to build something new.

Fred Wilson recently posted about startup creation stories. And there are lots of lessons to be learn from these stories.

But there are many, many more lessons - and better lessons - to be learned from startup failures.

And my conclusion from seeing many startup failures is that the entire innovation process for startups (and larger companies) is fundamentally broken.

So the answer to the innovation problem is absolutely NOT to pivot. Here's why. In the mind of the enterpreneur, this leads to launching before he/she really understands the market opportunity and the customer needs.

The lean startup movement would seem to be a solution to this and Steve Blank's customer development model is an improvement over traditional product development.

But both lean startup and "customer development" are based on the idea that customers don't know what they want, i.e. they have latent needs.

So if customers don't know what they want, it would make sense to launch quickly, fail fast, pivot, and hope for the best.

Seesmic is the latest example of the pivot method. And Seesmic shows that pivoting doesn't work.

I was amazed at the number and types of pivots Seesmic has taken. From All Things Digital:

Since it launched in 2007, Seesmic has been a video platform, then made Twitter clients and other social tools, and last year tried to make a go with Salesforce CRM products... In February, the company announced it would be changing and expanding the free Ping.fm social media cross-posting tools it bought in 2010 into a paid service called “Seesmic Ping.”

This is absurd in the extreme. But it is also very common with startups. In fact, this type of behavior is encouraged by venture investors.

Ultimately it is harmful to entreprenuers who are dedicating their lives and souls to their startups, often at the expense of their personal lives and their families.

A much better approach is to spend the necessary time to understand the market, the customer needs, the opportunities and to innvotate only when you know all of the unmet needs in a market.

It can be done.

earthscreen

2012-03-18T15:23:27-07:00

Today was the last day of earthscreen, a project I started with good intentions, like most startups. earthscreen for me was different for two reasons: first, I used a different, extremely lean model without venture investors, and second, it had a social mission.

earthscreen was also important for me because it is the last company I will launch using traditional methods. By traditional, I mean the traditional "innovation method" of starting with an idea, launch, and iterate.

In current terminology, earthscreen was launched using a "lean startup" method, a "fail fast" development process, and a "pivot" strategy. We were lean, we failed fast, and we pivoted. And that was the problem, not the solution.

All three of these techniques are fundamentally broken because they are based on the traditional, ill-defined definition of a market. And these techniques are flawed because they are built on the belief that customers have "latent needs."

Thankfully, it was because of earthscreen that I came discover Tony Ulwick, Strategyn, and Outcome-Driven Innovation. And I can honestly say that my professional life was changed forever.

Tony and Strategyn pioneered a new way to define markets, needs, opportunities, strategy and innovation based on the idea that customers hire products to get a job done, and that all the customer needs in a market can be identified. Customer needs can be identified because customers use metrics (called outcomes) to judge if they can execute the job quickly, predictably, and successfully.

I am extremely lucky to now be part of the Strategyn team and to have Tony as both a colleague and a close friend.

So, while today is the end of earthscreen, it is the start of a new future of innovation and venturing for me. And my goal is still the same, to use innovation to help make people's lives better and the world a better place.

Hello iCloud, Welcome Future

2011-10-03T21:49:05-07:00

On eve of the iCloud launch, I am reflecting on the past to predict the future.

Apple is currently the most valuable company in the world, the most valuable to have ever existed, with a cash balance larger than most industries, $0 debt, and an invincible combination of differentiation and low cost.

And yet, its market share is tiny.

The future has never been brighter for Apple. Go long, very long, Apple.

And if Apple's future is bright. So is the world's.

For the past three decades, Apple has been focused on one goal: to make our lives better.

In our terminology, Apple's mission is to help people get jobs done better.

Jobs are the tasks and goals we need to accomplish to make our lives better.

Learn a new skill, teach a child, cure a disease, build communities, collaborate, inspire...

Make our lives better.

It is a simple goal with enormous complexity. And complexity creates opportunity to simplify.

I have been simplifying complexity with Apple since my Dad first bought an Apple II+.

In honor of my Dad, on the launch of iOS 5 and iCloud 1.0, here is a list of every Apple product I have owned since 1979:

Apple II+

Macintosh Plus

Macintosh IIfx

Macintosh QuadraAV

PowerMac G4 Quicksilver

iBook Dual USB

Newton 100

Newton 110

Newton 2000

PowerBook G4 17 inch

iMac G5 20 inch

MacBook 13 inch

iMac G5 20 inch

iMac 24 inch

MacPro

MacBook Air

iPhone

iPhone 3GS

iPhone 4 ATT

iPhone 4 Verizon

iPad

iPad 2

and now, iCloud.

Apple's Success and Ours

What is the secret to Apple's success? And how will it make the world a better place?

The secret is simple: two platforms, an almost infinite number of jobs satisfied.

And now, a third platform, iCloud.

The result is low cost differentiation.

Add in a direct-to-customer business model, negative working capital and you have an infinite sustainable growth rate that generates enormous amounts of cash with $0 debt and zero need for growth equity.

Compare this with Dell (and every Windows and almost every Android manufacturer).

Dell's only competitive advantage was price. It combined a direct model and negative working capital with low price. It could generate cash with 0% margins, which it did exceptionally well.

Apple, however, is growing using differentiation, not low price.

Apple combines a direct model and negative working capital with premium price and low costs. The combination is almost unstoppable.

To competitors, it is lethal.

Apple vs. X is very instructive. X = entire traditionally-defined industries (e.g., "mobile phones").

So why will this make our lives better?

The reason is not hope, it is math.

Why can our lives get better? We live better than 2000, 1000, 500, 200, 100 and 50 years ago.

This is the solution: make companies compete to make our lives better.

Apple makes products that make our lives better.

Our lives will get better.

And iCloud will be a enormous part of the reason why.

Ending Free Money

2011-10-03T21:32:32-07:00

How can we make our lives better?

First, let’s look at how we got here. Our economy is in trouble and your life is probably not better off than it was 10 years ago. It is probably not getting any better soon.

So why is this? Did you stop working hard? Probably not. Did our country stop innovating? No - just look at the innovation here in California: Apple, Google, Facebook, Twitter...

So what happened? What caused your life to be worse? In short, what has happened is very simple: a very bad idea has infected Washington and politicians. This bad idea has caused enormous damage to our economy and it even caused the total collapse of our economic system in September 2008.

In September 2008, our entire financial system stopped working - no financial institution would lend even one penny to anyone. And this matters because without a functioning financial system, we can’t grow, we can’t invest, we can’t create jobs, and your life won’t get any better.

In Sept 2008, for the first time in our country’s history, the entire system ceased to work. Think about this. The Nazi’s couldn’t stop our economic system, the Soviet Union couldn’t stop it, and even Al Qaeda couldn’t stop it. So what did stop it?

The cause is simple. It was a very bad idea:

Free Money.

Politicians have been giving away free money it is has broken our system. And remember this is your money they are giving away.

Let me explain (i) what happened, (ii) why it is still happening today, and (iii) why it is making your life worse. No matter what politicians say, until we end the era of free money, your life is not going to get any better.

So how did we get here?

Let’s look at why your life can get better in America. Why can your standard of living improve? This is an amazing fact. Your life can get better. And the reason why is actually very simple.

For over 200 years our country had a rising standard of living with good jobs, increasing prosperity. The real result was that as you worked hard, your life did actually get better.

The reason for this 200 years of prosperity and the reason why the years from 1940 to 1980 were the best the world has ever seen is well known.

In the United States, we established a set of market rules that were the envy of the world. Banks and companies had to follow a very efficient set of rules that made the U.S. the envy of the world. We were the best the world had ever seen in creating jobs, wealth, and peace.

Markets work best with an efficient set of rules. With rules, companies can compete, jobs get created and people - including you - make more money.

As a result, there is little reason to go to war.

But in 1980 that all started to change.

A bad idea had taken root in the minds of politicians and it spread like a virus.

The Era of Free Money

The bad idea was that market’s should have no rules at all. In other words, banks, Wall Street, and companies, should be able to create free money without any rules or oversight.

And free money - a market without rules - is an incredibly bad idea, as history has shown us again, and again, and again - in 1908, 1929, 1988 and again in 2008.

We don’t have to guess if free money is a bad idea, we have historical examples that show just how bad it really is.

Let’s look at the two most recent examples.

In the late 1980s, in the first part of the era of Free Money, it was a disaster. S&Ls no longer had to play by the rules, and it cost you - the American taxpayer - a half trillion dollars of your money. The bankers and Wall Street made tons of money during the so called real estate “boom” of the 1980s by charging fees.

But they took very little real capital risk, thus they got “free money”.

This free money was financed by you. After all, money doesn’t grow on trees. Free money is always paid for by you because once a market collapses - as it did in September 2008 - and as it always does without market rules - the only way to save the economy and your job from catastrophic and irreversible collapse, is to have you, the American taxpayer, save the system.

Heads Wall Street wins, tails you lose.

Free money - markets without rules - is a rigged system. Wall Street walks away with billions and you pay the bill.

So let’s look at the second part of the era of Free Money, starting in 1999.

There was a little known bill that went into effect about 11 year ago that, yes, once again, got rid of all the market rules. This time the impact was even worse.

So what happened?

Politicians passed a bill that eliminated 50 years of market rules, so that Wall Street could get tons of free money. So how did Wall Street get free money?

By selling contracts to insure your house.

That’s right, you didn’t even know it, but Wall Street was insuring your house.

But this wasn’t normal insurance. Normal insurance is what you have on your home. So if you have a $350k home, and a fire destroys your home, you get $350k and a new home. And the company that you buy insurance from has to invest your premiums wisely (after all it is your money) and follow a set of rules.

This make sense and it worked extremely well.

That is until the virus of free money - a market without rules - took hold in the minds of politicians. So how, without any rules, could Wall Street get free money that eventually you wold have to pay for. How does this work?

Well, its simple really.

It is a simple bad idea.

Without any rules, any Wall Street firm could sell insurance on your house. But not just $350k worth of insurance. They could sell $3.5 million or even $35 million of insurance on your $350k house. When there is no fire, the Wall Street firm collects money - likely from other Wall Street firms managing your money from your bank or your pension plan, your retirement - in the form of premiums.

It is almost pure profit, i.e. free money, because the Wall Street firm isn't required (remember with free money there are no rules) to have any capital at all!

So now let’s say there is a fire. Instead of paying $350k, the Wall Street firm has to pay out, potentially $35 million, to the other Wall Street firms (but not to you). But the Wall Street firm that sold insurance on your house doesn’t have any money because it has taken out all the profits in fees.

Remember: with free money there are no rules.

Heads Wall Street wins, tails you lose.

When the fire happened - the financial crisis - in September 2008, this free money system infected every company and every financial transaction in the entire United States. And because there were no rules - no one, no financial institution, no person, no government agency had any idea how big the risk to the system actually was. Our economy is $14 trillion, and some estimates put the risk at $600 trillion because Wall Street was selling free money insurance worth more - lots more - than the value of your house.

When the free money house of cards collapsed in September 2008, there was no one to save the financial system but you, the American taxpayer. So Wall Street walked away with free money and you paid the bill.

Heads Wall Street wins, tails you lose.

Let’s look at a real example: AIG. AIG created a free money machine. They made billions of profits until September 2008. And the head of AIG financial products, the center of their free money machine, Joe Capistrano personally made $245 million. Think about this for a minute.

For you, the average American to make that much money, you would have to work over 4,000 years!

And what did Joe do?

Did he find a cure for cancer? Invent a new technology? Launch a new company?

Nope - he used “free money” that cost you - the American taxpayer, $80 billion (remember, "free money" is your money). And he didn’t have to pay back one cent of his $245 million. Why?

Because free money - a market with no rules - was made legal by politicians.

We need to elect representatives to Congress who will never let this happen again.

If you want a better life where you work hard, your standard of living goes up and you make more money, this era of Free Money and markets with no rules has to come to an end.

Forever.

My plan to end the era of free money is simple. And it will make your life better and our country stronger.

You work hard for your money, and the plan will make sure your government works hard for you - and just you, not Wall Street.

Before I get to the details of my plan, let’s talk about politicians and why they unleashed the era of free money and why it is still holding back our economy today.

Because if we don’t understand the root cause, we can’t fix the problem.

The Corruption Cycle

The cause is very simple. I call it the corruption cycle. And I will show you how it works and how we can fix it.

So how does our political system work today? What is its lifeblood?

Speech? Debate? New ideas? Nope.

The lifeblood of our system today is money.

To run for office, as we all know, takes a ton of money. And to have power in Washington takes a ton of money.

And what does Wall Street want? Money, of course.

But not just money - everyone wants money.

Wall Street wants free money. They don't want any market rules, so they can get their free money and be saved Washington, paid for by We the People.

And the more free money they get, the more they will fund politicians.

This is why free money starts the corruption cycle, where politicians work for Wall Street and not you.

And big companies also want free money, i.e. they don’t want to pay their fair share to fund our country’s operations, like infrastructure, roads, the military, etc. They want free money. So they fund the corruption cycle as well.

Why do politicians do this?

First, because they need to fund their campaigns with money of course, but second because when they get out of office, what do they do?

Yep, they go work for a Wall Street firm that gets free money from Washington.

Here are just two examples:

Phil Graham, the architect of the most recent Free Money legislation, left office and made millions in free money from UBS, a huge Wall Street bank.

Robert Rubin, another architect of the recent free money era, went to Citibank, and made millions in free money.

And believe it or not, this was all legal - made legal by the corruption cycle and Washington politicians, and the bad idea of free money -- a market with no rules.

So why do Wall street firms and big companies want free money?

Because it is a lot harder to work hard, compete and innovate. Getting free money, as we will see, is much easier - but it is what is making your life worse, because ultimately you have to fund the free money that politicians are giving to Wall Street.

A few decades ago, Wall Street and big companies realized that they could get free money by funding politicians. They could give a lot of money to campaigns, to political groups and to politicians.

So they started piling money into campaigns.

And worse, they started spreading the very bad and very wrong idea that money is free speech, so that like their market with no rules, there should be no rules on giving money to politicians to get free money.

And the supreme court, infected as well by this bad idea, recently agreed.

Even after the idea of free money and markets without rules brought down our entire financial system, even after it cost you hundreds of billions of dollars, even after it destroyed millions of jobs and ruined peoples lives.

Even now, when the free money era is still killing jobs and making your life worse, the supreme court allowed Wall Street to spend as much as it wants in secret to get more free money from politicians.

The speaker of the United States House of Representative was even caught handing out cash - literally piles of cash - to other members of congress on the floor of your house.

The house that is supposed to represent your interests, the House of Representatives. He was handing out cash from companies that want free money.

Ending free money is the only way to make your life better.

The Plan

My plan will stop politicians from giving away your money for free to Wall Street and it will end the corruption cycle.

So how do we do it?

There is a solution to the free money and corruption cycle problem. And it is very simple. It will take just three things: first, we need to stop free money and end the corruption cycle with a simple constitutional amendment.

Second, we need what I call Markets 2.0 - a set of rules that govern the market, and makes sure Wall Street gets no free money.

And third, we need to invest in America through what I call the American Funds. This is how we can accelerate our growth, compete with other countries, create millions of new jobs, increase your standard of living and ultimately make your life better.

Let’s look at each of the solutions. They are why you should support my plan - because they will make your life better.

First, the No Free Money constitutional amendment.

So why do we need to amend the constitution?

When the Supreme Court of the United States makes a mistake - as it does on occasion - the only recourse we have is to turn the the supreme power in our country - not the Supreme Court, not Congress, not the President.

The supreme power in our country is you, the People of the United States of America.

The Supreme court has made some awful mistakes in its history - for example, the Dred Scott case legalized slavery, led to the Civil War, and was finally overturned by Abraham Lincoln’s Emancipation Proclamation.

And the Supreme Court made another awful mistake in 2010 when it once and for all legalized the era of Free Money.

So, the only place we can turn for a solution is to you, the People of the United States of America.

A simple constitutional amendment will end the era of Free Money by ending the corruption cycle and making sure that no politician ever again hands out cash to representatives on the floor of your House of Representatives.

I will end the era of Free Money by proposing an Amendment to the Constitution of the United States:

“All elections in the United States will be financed by and only by we the people of the United States.”

Once this Amendment is law, no politician will ever be able to get funded from a Wall Street firm looking for your money.

And not even the Supreme Court will be able to stop us from ending the era of free money and terminating the cycle of corruption that is making your life worse today. We will take money out of politics once and for all.

This is the only way to ensure that politicians are representing you and not the Wall Street firms that want free money.

Second, I will introduce new market rules that will will accelerate our country’s growth, create new jobs, and force Wall Street and companies to invest in growth instead of investing in politicians to get free money.

So what are these rules?

We will re-establish what is known as the Glass-Steegal Act. These were a set of rules that governed the financial markets for 50 years and created the system that made your life better. Why? because when Wall Street and companies had to follow these rules, they couldn’t get free money and they had to invest in real jobs, real innovation, and real products and services that grew the economy and created jobs.

We will enhance these rules in order to make sure Wall Street can never again walk away with piles of free money - your money - while increasing the risk to our financial system. We will limit the debt financial firms can use, so they can never again put our country’s prosperity - and your money - at risk again.

We will introduced legislation to start the American Funds.

What are these funds? These are funds to invest in our country, make you more money and make your lives better. So who will own these funds and who will benefit from them?

You will, the taxpayers, We the People of the United States.

So how will these fund work? And what is an American Fund?

It is like the China fund. China's funds have about $1 trillion in assets - investments in stock and bonds, many in American companies.

They literally own American companies. These investments benefit not you, but the people of China.

So how much have American politicians invested to benefit you? $0.

So right now, we are $1 trillion behind China. And it is even worse. Not only is the total value of American Funds $0 right now, but you actually owe the Chinese about $600 billion.

As a result of the era of free money, politicians have financed our debt with your money, i.e. the national debt.

Our debt is a tax on you payable to the Chinese.

Put simply, you owe the Chinese $600 billion because politicians gave away free money to Wall Street.

If you think this is making your life better, you are wrong. It is the reason your life if worse. Because the corruption cycle funds free money and makes your life worse.

This plan will end the corruption cycle and end the era of free money.

Ending free money and investing in the American Funds will make your life better.

Market Sizing: Numerical Narratives

2010-04-27T15:57:01-07:00

Chris Dixon posted about market sizing using narratives as opposed to numbers, and Fred Wilson agreed - even demonstrating market sizing with a cartoon illustration.

It is easy to see why Chris' and Fred's "narratives over numbers" market sizing might be appealing. After all, as Brad Feld writes, "Almost every market sizing presentation is incorrect - by a lot. Enough to make it irrelevant." Chris writes, "you should never rely on quantitative analysis to estimate market size. Venture-style startups are bets on broad, secular trends."

This seems to make sense: tell a story because your numbers are going to be wrong anyway. But let's analyze the traditional market definitions to see why traditional quantitative methods are incorrect. Non-quantitative analysis (a story) is not enough. Market sizing has to be quantitative because it is a tool to make an investment (i.e. a quantitative) decision.

What is a market? The traditional definition of an "addressable market" is the problem. VCs and entrepreneurs use either technologies (e.g. search or semiconductors), products (e.g. insurance or printers), or users (e.g. app developers or gamers) to define markets. But these definitions are flawed because this is not they way customers think about markets. This flaw was recognized back in the 1960s by Theodore Levitt who famously noted that industries define themselves by the solutions (railroads, movies, oil), but they should be defined by customer needs (transportation, entertainment, energy).

In contemporary language, markets should be defined by the jobs customers are trying to get done (e.g. store music), not by the solution (CDs, MP3 players). This makes telling a market size "story" much easier because jobs have a beginning, a middle, and an end, just like a narrative. And jobs are independent of any solution idea you may have. With the job as the unit of analysis, the market can be quantified with precision. We call the resulting number the "securable market" to distinguish it from traditional definitions. The inputs into the market size calculation are critical, and, surprisingly, they have nothing to do with the product or solution.

So, yes, market sizing should be based on a narrative, but it should be a numerical narrative. Otherwise, like traditional market sizing techniques, it is just a guess.

Fail Fast vs. Zero Burn

2010-03-17T16:00:05-07:00

Mark Suster has a nice post about the "fail fast" method. He rails against fail fast, and rightly so. He writes:

I have met so many young entrepreneurs who tell me, “we don’t need business plans anymore, there a waste! We’re going to put our product out there and fail fast!”... or they tell me, “we’ll launch a bunch of products and see what works.” That is the old “throw spaghetti against the wall and see what sticks” approach. It’s intellectually lazy and I doubt many great companies are born this way.

We definitely agree with Mark's view. In fact our plans are extensive and they take time and money to create for one reason: the goal is to never fail. Of course most of the venture community (and the broader innovation community) thinks this is impossible, but as we have shown with over two-decades of successful product launches, it is possible by using scientific methods to understand markets and customer needs. The problem is not with the idea of creating a business plan, it is with the inputs to the plan. The inputs (i.e. the definition of a market and a customer need) have to change, otherwise creating the plan will not result in a higher chance of success.

In our model, we use what we call a "zero burn" model. In the traditional model capital is invested in overhead and development ("burn") to build and launch a product idea. The fail fast model just tries to accelerate this by launching multiple products with less capital, but the process is fundamentally the same. As Peter Drucker said, "There is nothing so useless as doing efficiently that which should not be done at all."

In our zero burn model, we do the work of selecting and sizing markets, uncovering all the customer needs (which is possible contrary to the mistaken "latent needs" school of thought), prioritizing all the opportunities, picking the right strategy and generating and validating a solution idea (i.e. a platform, business model and feature set). All of this work is one before development and before any investment in recurring burn.

Why does this work? Because we use a different unit of analysis (jobs and outcomes) and rigorous quantitative techniques that can predict if there is product-market fit before the product is launched. It takes a lot of time, hard work, and capital to get it right. But it is essentially a business planning process designed to significantly reduce the failure rate. And it works.

Top 12 Mistakes (3,4, 5)

2009-05-13T14:56:27-07:00

I wanted to continue my analysis of Marty Cagan's Top 12 Product Management Mistakes. I already analyzed the first two mistakes here, and I included an introduction to our ODI terms. I think it is helpful to look at the rest of the mistakes and offer ODI-based solutions.

Mistake 3. Confusing Yourself With Your Customer

Marty identifies the third mistake as thinking "of yourself as more like the target customer than you are." This is a good mistake to avoid, but there are two dimensions to this mistake. The first is the functional job that the customers are trying to get done. Without a detailed understanding of the job, all the process steps in the job map, and all of the outcomes, it is almost impossible to make sure that your solution will meet the customer needs. The second is the consumption chain jobs (install, interface, learn-to-use, maintain, etc.). In this mistake, Marty is really talking about the consumption chain jobs (the "usability" in Marty's terms).

Confusing yourself with your customer is only part of the reason usability testing fails to uncover flaws in the product. The real reason is because the product does not satisfy the functional job and it outcomes. Customers don't buy product to interface with them or to learn to use them. They buy products to get a functional job done. So it is no surprise that usability testing, no matter how much of it you do, fails to prevent a flawed product launch. What is needed is testing of the features against the outcomes in order to validate that the feature satisfies the functional job's outcomes. And because outcomes are metrics, satisfaction levels can be measured accurately.

4. Confusing the Customer with the User

Marty correctly identifies that "The person who buys the product to address a business requirement may have very different concerns from the people that sit down and use the product every day." In ODI terms, this problem can be structured as different people in the value chain with different jobs to get done. The reason this is a better way to frame the problem is that each of the jobs for each of the different people can be known and quantified. In other words, a "business requirement" is a job to get done.

In any value chain, there is a core functional job that needs to be accomplished. And that job has directly related jobs and indirectly related jobs. So the jobs of the purchase decision maker need to be analyzed as well as the jobs of the core job executor (who is performing the functional job). Only with a full understanding of all of these needs (all of the jobs and outcomes) can a company be sure that a customer will make a purchase and be satisfied with the solution.

5. Confusing Features with Benefits

Marty writes, "Your product simply must have a crystal clear, simple and compelling value proposition." And "There are several possible reasons for poor value propositions. The most common is that the product is not solving a significant enough problem."

I would be surprise if any serious entrepreneur didn't know that their product had to have a compelling value proposition. VCs and entrepreneurs say this all the time. But what does it mean? What is a value proposition? The problem is not that entrepreneurs don't know they need to have a value proposition - it is defining what a value proposition is.

And from the customer's point of view, there is only one value proposition: helping them get a job done better. The only reason a customer will buy your product is if it helps them get an important and unsatisfied job done better.

The good news is that using the job and its outcomes (the 50-150 metrics) as the unit of analysis, entrepreneurs don't have to guess if they have a "compelling" value proposition. They can measure the value their solution creates for customers. A "compelling value proposition" is an almost useless term. But satisfying an outcome is value that can be calculated between 0-100%. In other words, using the job and outcomes to analyze value is much, much more accurate because this is how customers think: does your solution help me get the job done better.

And a feature has only one purpose: to satisfy an outcome. And that satisfaction level can be validated with customers. This is why outcomes are so powerful. Unlike other customer requirements that are vague and variable (e.g. "easy-to-use", "reliable", "convenient"), outcomes are measurable (minimize the time it takes to..., minimize the likelihood of..., increase the amount of...). So with outcomes, value add is knowable and measurable.

More to come...

Venturesome Consumers: The v1.0 Mistake

2009-05-11T10:40:42-07:00

I'm reading Amar Bhide's The Venturesome Economy and he mentions Apple's iPod as an example of "the venturesome spirit of U.S. consumers". He quotes a WSJ article about Apple:

"Steve Jobs can introduce 'clumsy, overpriced, 1.0 versions[s] and trust that the army of several million Apple true believers will rush out and buy. That is the crucial, often overlooked, key to Apple's continuing success."

I could not disagree more. Apple's success is not based on clumsy 1.0 versions at all. This is a simplified explanation of why their products often define new categories, and this type of thinking is why entrepreneurs and venture investors think the "fail fast" strategy will work. Focus on the early adopters and iterate the product until it is ready for the mainstream.

The problem with this analysis is it does not focus on the job that Apple helps consumers get done. Consumer jobs are complicated and each one has potentially 50-150 different metrics related to performing the job with speed, efficiency, and predictability.

So why does Apple succeed? Because it focuses on the job the customer is trying to get done, and it is exceptionally good at identifying underserved jobs and satisfying the metrics (the outcomes) related to getting the job done. Think about the jobs they addressed with the iPod: storing music, listening to music, finding music, organizing music. The reason iPod v1.0 was successful was not because "true believers" bought it. It was because it got those music related jobs done better.

I still use my v1.0 iPod as a music storage system for my car. And in 2009 it still works as well as it did when I bought it because Apple helps me get the job done better.

Why Apple Wins: It's the Job

2009-05-07T11:17:35-07:00

Apple's winning streak over the past decade (OS X, iPod + iTunes, iPhone) is based on helping customers get jobs done better. Of course, their user interfaces are legendary, but customers don't buy products to interface. They buy products to get functional jobs done.

This iPhone ad is a great example. The focus is on the jobs you can get done.