Our previous blog post had shown that as a general rule “partnering” is not a very sound sales strategy for early-stage start-ups. Investors demand a quick proof of concept (PoC) and product-market fit (PMF). Partnerships in sales are, by contrast, excessively slow.
We had also claimed though, that partnering might be an effective, perhaps even the only promissing sales avenue for start-ups operating in new, nascent markets, i.e. in W. Chan Kim's and Renée Mauborgne's "Blue Oceans". Let's take a closer look at these assertions.
Strictly speaking, Blue Oceans in their perfect shape, do not exist.
For one thing, the fish swimming in such Blue Oceans would have to create their own oceans, i.e. the demand for their innovative products. That would be a "zero to one" operation. For a radically new product to succeed, there must be a not-so-entirely new already existing demand. The new product should be able to meet this need better than previous products, which are, strictly speaking, mere substitutes of a lesser quality for my new product. The term "disruption" aptly describes this quality: Such a product disrupts the horizon of expectations present in today’s markets. Disruptive products are disruptive in relation to present day’s expectations. By simple logic,they cannot be entirely new, because if they were, we would not be able to perceive them as such. They can only be better than previous products in terms of what is already there.
Secondly, for this very reason no oceans are completely blue, i.e. free of competition. Yes,there are monopolies and there are patents and other property rights. But there are almost always substitutes out there in the markets as well. And if there are substitutes, then there is also competition.
A side note that will become important in the further course of this post: In Blue Oceans, even if there were not even substitutes available, you might nevertheless drown pretty fast, namely when the cost of your growth eats up your revenues. So, competition is not necessarily a precondition of failure in sales. That's why venture capital and private equity professionals are always wary about one thing: "Growth is a big risk. Perhaps it is the biggest risk of all."
So, according to the prevailing opinion, what are the generic requirements for a good start-up sales strategy in Blue Oceans?
1. It should be fast, i.e. it should allow for short sales cycles, so that investors do not lose their patience. This is an overarching requirement, not one that is specific to Blue Oceans. We had shown this in our last blog post.
2. It should avoid to attract immediate competitors. In mature markets, this requirement would be utopian. In more or less brand new markets, it is not.
3. It should create a broadly distributed demand. A few customers, even if they pay well, do not make a market; one early random swallow does not make a sales buzzer. Pilot orders, especially large ones that tie up all the resources, all too often lead to cluster risks for early stage start-ups, where the customer snatches up the start-up and its innovative technology for little cash. Of course, cluster risks are never desirable. But in a new market, they can also be deceptive. The new market may not be a market at all.
4. The strategy must also be affordable. Creating sustained demand should not consume more cash than this strategy will in the long run earn that company. Equally, the strategy should not lead to the small fish drowning in the demand it created. Overselling is a very tempting, but deceiving dead-end in Blue Oceans, for neither the customers nor the start-ups gathered sufficient experience to assess the adequacy of an offer as far as price or cost go.
Each of these four basic requirements is either inherently contradictory or in latent contradiction or conflict with at least one other requirement:
In a market that has barely begun to develop many closings seem to be a somewhat unlikely happening: How is that supposed to work? If my potential customers barely know about me and my product, how are they supposed to buy it? Sure, you can distribute low-cost or even free MVPs, you may organize word-of-mouth-strategies or launch a social media campaign to somehow generate awareness. But none of those things is fast. Sales can only be fast where potential customers already recognized their need to an extent where they tell themselves: "I absolutely need to have this". Unfortunately, that will only happen in fairly red oceans.
The more successful sales and marketing are, the faster competitors will be called on the scene. This is a law of nature. It can only be remedied by a product design that is extremely difficult to replicate, by patents and the like. Whoever throws his hat into the ring as a first mover is by no means automatically the one who will reap the benefits. Windfall profits of second, third and fourth movers are a constant peril among innovators. On the other hand: a Blue Ocean will hardly be able to grow in size without there being any competitors. How can potential customers be made aware of new markets they need to be addresse, if the only provider is me, the start-up founder unbeknownst by most potential market players? Also, customers are always on the look for alternatives, benchmarks. Only then they might opt for a a purchase. Why give a small start-up a chance and potentially or even likely regret the courage when there are many established players on the supply side? They may not come across as particularly innovative, but they offer a high profile, experience, established processes, good services and splendid references.The "incumbents" may not be real competitors. But their well-established substitutes are at least as dangerous to me.
Demand for my product should be spread as widely as possible? To achieve that I need time. I must have already got hold of heterogeneous customer groups and/or market segments. For newcomers, this is hardly possible. Indeed, it is also very expensive and therefore not what common sense would suggest to founders as a viable strategy. One woulkd raather recommend a strategy that is driven to the opposite: focus on a tiny target group that will benefit most from your solution and that will therefore be willing to pay a reasonable price.Let word-of-mouth then do the rest of the job. Sounds more plausible, doesn’t it?
But sadly, that's not possible in Blue Oceans: There is no sounding board at hand for such a word-of-mouth strategy.
In the digital age, horrendous marketing costs are no longer a necessary prerequisite for successful sales. Platform, cloud and SaaS business models can quickly catch on with customers even at moderate inbound and outbound costs. However, such strategies only work if a need is sufficiently large and sufficiently felt by future customers. "From Zero to One" with minimal input is not possible. "Create maximum output with minimum input" is logical nonsense. With a given input one can produce a maximum output in relation to this input and with a predefined target outputyour input might be reduced to a minimum. But all this is only possible provided you know what "maximum" and "minimum" mean in numbers. Nobody knows that, when it comes to new markets. In such markets, risk takers will be eager to achieve as much output and revenue as quickly as possible, and that will be expensive. Conversely, risk-averse investors and founders will wait and strategically lie in wait, only throwing their money into the fire once the contours of demand have become apparent. That can be clever. But it can also be too slow. You never know in advance. Most founders and investors fall somewhere between these extremes. And the legacy producers with a lot of money are also lying in wait to graciously buy out for small money the start-ups that have totally spent themselves trying to find a way into the market.
It would seem that the requirements for a good sales strategy in new markets are impossible to redeem. But that might be a trifle too pessimistic. After all, somehow someone always succeeds.
"If I had asked people what they were looking for, they would have answered >Faster horses<." Henry Ford, a farmer's son, didn't breed faster horses. He invented the mass-market automobile, thus creating an almost perfect Blue Ocean. Incidentally, it took Ford four attempts, before he finally succeeded with his factory. Fast he was not. The engineer’s second, equally famous marketing wisdom re Blue Oceans went like this: ”Offer your customers solutions to problems they don't even know about as yet”.
At first glance, many pitch decks of today's founders appear to be taking Henry Ford very literal indeed. Ford was a good teacher there. But many founders very often make the mistake to believe that Ford’s strategy ended there. No, Ford anticipated real, actually emerging need as a result of the invention of the motor engine. Ford then helped to magnify this need, that was literally created by his mass market automobile. He then filled that need into the specific mold he cast and thus managed to make the world understand that only a Ford could satisfy that need: He standardized the factory, introduced the assembly line, reduced the technically possible variety of his T-models to an absolute minimum, and thus depressed manufacturing costs to such an extent that even the Ford workers could afford a Ford, whilst Ford managed to still make a decent margin on his future mass product. If the Ford is affordable enough for everyone, then everyone will want it so as not to be left behind (in the truest sense of the word). And if even more people and workers buy it, it will become even cheaper as it is already. A virtuous circle.
By all accounts, Ford was not a pleasant man by any ethical standard. But he was brilliant both as an engineer and as a marketer.
To sum it up: the general sales and marketing strategy for Blue Oceans goes like this:
Identify a future need and build an initial solution to satisfy it. Then produce and market this solution in such a way that future solution seekers will consider your solution to be the only conceivable one for a long period of time or at least perceive it as the best of all conceivable alternatives. It is not essential for your product to have prompted that need as long as you can manage to mold the need as a negative of your solution.
Let us now return to the above requirements for a good Bue Ocean sales strategy. Above, we already noted that all of those four general requirements: speed, no competitors, broad-based demand, low costs, appear to be either intrinsically contradictory or at least in latent in conflict with each other. Therefore, they are not suitable as a recipe for a coherent sales approach in Blue Oceans, even though they seem perfectly plausible when taken individually. Let us now reflect on these requirements in the light of Henry Ford's approach.
Sure, Ford was indeed concerned about the speed of his Model T roll-out. He did not wantt o be overtaken by contemporary or future competitors from Europe or America. Nonetheless, the roll-out did take pretty ong. It was not until his fourth attempt, that Ford was finally able to successfully implement his plan of a surviving motor carriage manufacturing company of his own. Before he managed that, he had already brought competitors onto the scene, Cadillac for example. But none of those competitors followed his ingenious strategic path of planning and rolling out the production, sales and marketing strategy with full intention as one integrated strategy. In (more or less) entirely new markets, “speed” doesn’t tell you very much in terms of measurable quantities. You don`t really know what benchmarks to look at. Being faster than others is an empty directive for Blue Oceans as there are hardly any"others" except legacy providers. In Ford’s case, those legacy providers were offering horse carriages.
If competitors try to hijack our product idea and are in the short term possibly even faster than we are, then this need not worry us, provided our competitors are going down a path that won’t lead to sustainable success. Rather, we should be grateful to these competitors. They help us prepare the market. They strengthen demand without being a threat to us. To be sure: Ford was not pleased to see his previous The Ford Company, which he had left after a serious quarrel with his investors, spawn the luxury carriage Cadillac. But he could and should have shrugged his shoulders. And later on he did exactly that. Thinking and acting that way requires courage, perseverance, a good portion of stubbornness. - in short: resilience. The Bezos and Musks of this world display these qualities all along with stunning confidence and at times even even brutality. Many well-known amazon investors despaired of amazon year after year, because Bezos immediately reinvested all proceeds in his business model instead of distributing them. Tesla was written off by many investors in part for similar reasons. Tesla actually danced over the abyss for quite a sustained period of time. A product market fit requires a functioning, liquid market. In the early 20thcentury, it took at least twenty years for a functioning liquid automobile market to come into existence. This should be borne in mind by VCs, who more or less blindly ask their start-ups to rapidly show the PMF. All too often, VCs think in terms of bell curves when they declare the mediocrity of their own investments to be the standard. They then expect their new investments to deviate only slightly northward from there.
Wherever you do (as yet) not find demand, a forteriori you cannot expect diversified demand. So, on closer inspection, a sales strategy proposing that is nonsensical, is it not?
No, it isn`t. We talk about sales goals, i.e. whether a start-up with its new product will quickly settle for a few, perhaps large and well-paying customers, or whether it will take the hard road and aim to steer, channel, develop and shape the market towards its product. If this product is meant to be a real game changer, then in the vast majority of cases a broad and large target market is a far better idea than a small one, even if that small market might be more lucrative in the short term. It's Cadillac vs. Ford. So, we can put a check mark behind this requirement. Henry Ford did not even consider the option to merely servicing a tiny, lucrative elite. That was never his vision. It would have been too small for him, although it was certainly close at hand. But yes. You must be prepared to fight your investors who almost certainly prefer the safe and comparatively large short- and medium-term benefits to much less predictable, though even larger future ones.
How low do costs have to be to be considered low? This requirement is meant to be understood as a regulative advice: Is it perhaps possible to achieve this or that in a more cost-effective, less expensive way? There will always be the question as to what one should sacrifice to make a goal attainable. Spending a lot of cash is not by necessity always stupid. But the regulative principle still holds: How can I avoid costs while developing a market that hardly exists so far? The same line of reasoning could also be used to ask the inverse question: Where do I have to really have to splash money to adequately advance sales, product development, personnel and so forth to achieve my goals? The demand for low costs should therefore be reformulated as a demand for the most appropriate spending policy. Unfortunately, this sounds so extremely general that you might as well do without it. But there is one problem: For a new product, building a market is absolutely essential. It’s clearly more important than anything else. You cannot do without customers. I need to do both things: create awareness for that need and customize that need to the specifics of my offering. That is a tall order which will cost a lot anyway. Saving money wherever it is possible sounds like a good advice. But saving money and avoiding costs are too entirely different issues.
If I model my strategy at Henry Ford, to create a Blue Ocean, I need to
- entertain a vision of the type andsize of future demand created or enhanced and customized by my very ownspecific product
- develop a general strategy that ideally integrates sales, marketing as well as the type and shape of production, where the latter should function as a driver for market demand
- strive for a demand that is broad rather than narrow
- encourage market players to help stimulating the need for my product without them presenting a threat to me.
All this should cost as little as possible and the afore-mentioned challenges should be mastered as quickly as possible.
A piece of cake for a small start-up, right?
We had put this blog series under the central question of whether partnering is an appropriate strategy for companies that want to develop new markets in order to become the leading players in those market for as long a period of time as possible. In our last post, we said "partnering" would not mean cooperating with distributors and resellers. Rather it would mean working together with other companies that want to sell their own products on their own account just as we do ourselves. We had shown that partnering is an unpromising strategy for most start-ups, because it is very time consuming and i t only works provided my partners prioritize their own sales goals as prominently as their own, which is clearly a very unlikely event. It is hard to imagine that this could ever be the case anywhere. But indeed, it is a possible and plausible strategic option in Blue Oceans.This is what our next blog post is about, where we want to turn our attention to the new market of artificial intelligence on industrial shopfloors, our own Blue Ocean.