CMO Mondays: Marketing as a Capital Expense

We’ve entered annual planning season for many companies. As with any other corporate function, marketing teams are developing their plans for the next fiscal year, including lobbying for budget. All too often, the budgets that marketers request are simply based off of the current year’s budget allocations. Occasionally, marketers are more proactive in seeking new budget to test new channels or programs. Perhaps they even piloted a program this year that had some measurable success and are lobbying for expanded investment for next year. But, most of the time, marketers are simply taking the budget that their CFO allocated to the CMO and being told to do what they can within what they’re given.

Why does this happen? Because marketing gets stuck being perceived as an operating expense instead of a capital expense.

Below is a definition of operating expenses from Investopedia:

“An operating expense is an expense a business incurs through its normal business operations. Often abbreviated as OPEX, operating expenses include rent, equipment, inventory costs, marketing, payroll, insurance and funds allocated toward research and development.”

Below is a definition of capital expenses from Investopedia:

“Capital expenditure, or CapEx, are funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment. It is often used to undertake new projects or investments by the firm. This type of outlay is also made by companies to maintain or increase the scope of their operations. These expenditures can include everything from repairing a roof to building, to purchasing a piece of equipment, or building a brand new factory.”

The issue with these definitions is that they fail to recognize that sound investments in marketing are investments in growth – in profitable revenues, in asset value and in scope of operations. So, should some marketing expenses be considered CAPEX?

Consider that each marketing discipline has a payback period on investment. Some are longer and some are shorter, depending on where they land in the buyer’s journey / sales funnel. For example, SEO and paid search are going to have a shorter payback period because these are primarily bottom of the funnel disciplines. Good SEO and paid search captures potential customers when they’re looking for a specific solution and have high intent and immediacy to acquire that solution. On the other hand, social media and display advertising tends to focus earlier in the buyer’s journey – driving brand/product awareness. Thus, social media and display tend to have a longer payback period. A marketing department should have a handle on three key metrics:

  • Customer acquisition cost (“CAC”): the cost to acquire a customer
  • Customer acquisition time (“CAT”): the time it takes to acquire a customer (i.e. the average duration of the buyer’s journey)
  • Customer lifetime value (“CLV”): the amount of revenue that each individual customer generates during the entire duration that the customer uses the company’s product

A strong marketing department will also have an understanding of how each marketing discipline / channel contributes to these metrics. This context then gives marketers a foundation to lobby for investment.

How much does your company want to grow next year?

Let’s look at a very basic example: assume we have a $50M revenue business, and we want to grow 20% year over year. That gives us target revenues of $60M for the next fiscal year, which means we need to acquire $10M in new revenues. If our product sales price is $200, then we know that we need to acquire 50,000 new customers ($10M / $200 = 50,000). And, if our CAC is $100, then we know we need to invest an additional $5M (50,000 * $100 = $5M) in order to achieve our revenue goals. (*Note for startups that are still figuring out their business models: your CAC should be less than your unit sales price in order for you to have a sustainable, profitable business.).

Running a basic calculation like this enables you to come into budget talks informed and prepared to make your case for budget based on business imperatives. Equally important is understanding how each marketing discipline – search, CRM, social, paid media, PR, etc. – contributes to your CAC and on what payback period, so that you can allocate your budget appropriately.

Think with Google is just one tool that helps us understand this. The below image shows us the general buyer’s journey to online purchase.

general-online-customer-journey

As you can see, each marketing discipline / channel plays its part in driving a buyer (i.e. customer) to make a purchase. Organic search, brand  paid search, email and referral are at the bottom of the sales funnel (i.e. closer to the point of purchase). Thus, these channels have a shorter payback period. As these channels are directly driving revenues, they may fit well in the OPEX budget. But, how about those activities with longer payback periods?

Consider social media. This discipline / channel typically plays two key roles in the buyer’s journey / sales funnel. See the sales funnel below:

customer-purchase-funnel-01-1

First, social media builds awareness for your brand. This is earlier in the buyer’s journey. But, social media also enables and amplifies advocacy on the tail end of the funnel / buyer’s journey. Advocacy is where customers share their enthusiasm and support for the brand/product. This advocacy helps in the consideration and preference stages of the funnel, as potential customers value the opinions of people in their social networks and other customers that have experienced a brand. Thus, when done well, social media can increase the value of your brand by lowering your CAC and increasing your CLV. Your brand is an asset to the company. So, while it may take longer to achieve the ROI on social media (i.e. there is a longer payback period), this should not preclude the business from investing in the channel. Also, since social media helps to build the value of an important business asset – the brand – over a longer period, should we consider social media a capital expenditure?

We could think of CRM in a similar fashion. A robust email list of customers and potential customers is a business asset. As you can see from the buyer’s journey image above, email sits at the bottom of the funnel – close to the purchase decision. So, how valuable is customer data that will enable the company to market more effectively and efficiently to drive revenue?

While moving organizations – and, in particular, finance teams – to think about marketing expenses as both OPEX and CAPEX (vs. just OPEX), depending on the marketing activity, may take some time, it’s a worthwhile exercise to consider. First, it will ensure that marketing teams are accountable for their primary objective – driving revenue- and that they are putting the right KPIs and analytics infrastructure in place to measure impact. Second, it safeguards the marketing organization from mid-year budget cuts all too typical in large organizations. It’s never made sense to me why companies cut marketing budgets when they don’t hit their numbers; this is when they should be investing more in marketing. See the Virgin Atlantic vs. British Airways case study that I reference in this blog post.

Another way to think about making this shift is considering the marketing P&L. Paul D’Arcy, CMO of Indeed.com, wrote about this in his blog post “It’s Time to Kill the Marketing Budget and Think About a Marketing P&L.”

Regardless of what approach you take, come to your planning meetings informed with data and couching your budget requests in the context of the business impact to expect to make. Your CFO speaks numbers; be prepared to speak her language.

Marketing Mondays: Your Innovation Roadmap, Part 5 – Innovation Approaches

Growth Matrix

In Your Innovation Roadmap, Part 1, I introduced the innovation matrix (featured above) and covered Quadrant 1: gaining market share. In Part 2, I covered Quadrant 2: bringing your current offerings to new customers. In Part 3, I covered Quadrant 3: bringing new offerings to existing customers. And, in Part 4, I covered what context to keep in mind in deciding whether or not to pursue Quadrant 4: bringing new products/services to new customers.

In this post, I’ll share two well-known innovation processes and similarities between them, so that you can begin to craft an innovation process that is right for your organization and culture. I’ll also point you to several other innovation approaches that you can dive into deeper.

INNOVATION PROCESSES
Over the last decade, since startups entered the zeitgeist of our aspirational culture, there has been a lot of hype around new approaches and processes that can drive innovation for your startup or enterprise corporation alike. “Just follow this one approach and your innovation initiative will be a huge success!” they spout, persuading eager innovators-to-be to take up their movement. Many of these innovation approaches have been tried and tested by entrepreneurs and executives that now wish to share their wisdom, while others are crafted by consultants and intellectuals who are selling that approach as part of their services. Regardless, I believe that no single approach is right for every organization. But, I do believe that each can serve as a tool in the proverbial ‘innovation toolbox’, so that an organization can test and learn their way into an approach that fits with their culture. Below, I’ll cover two well-known innovation approaches that I have found useful.

Also, important to note is the fact that attempting to teach these techniques via a blog post would not do them (or you) justice. Thus, my goal here is to give you a high-level understanding of the approach and point you in the direction of material that explains these approaches, and others, in much more depth.

The Lean Startup
The Lean Startup, written by entrepreneur and consultant, Eric Ries, introduces the concept of validated learning, which Ries describes as follows:

“Validated learning is the process of demonstrating empirically that a team has discovered valuable truths about a startup’s present and future business prospects. It is more concrete, more accurate, and faster than market forecasting or classical business planning.”

The Lean Startup method applies the lean manufacturing management philosophy that was made famous by the Toyota Production System to startups. The philosophy aims at discovering and eliminating all wasteful activities, and, thus, leaving and focusing only on value-creating activities. Value is defined from the customer’s perspective. Value provides a benefit to the customer; the customer must be willing to pay money for it. Anything else is waste. In the context of a new venture (or ‘startup’), any activities that do not contribute to learning what a customer sees as value are wasteful. As an organization learns more about what its customers recognize as value, it can develop and sell a product that can sustain a business through those customers. Thus, Ries argues that validated learning is the core unit of progress for new ventures; validated learning always achieves positive improvements in the new venture’s key metrics. So, how do we pursue validated learning? Through the scientific method.

For those that don’t remember the scientific method from grade school, it is a process of experimentation that is used to explore observations and answer questions. The process goes as follows:

2013-updated_scientific-method-steps_v6_noheader

The Lean Startup borrows from this, arguing that the two most valuable assumptions that an entrepreneur can make are:

  1. The value hypothesis, which tests whether or not the product/service really delivers value to customers once they are using it.
  2. The growth hypothesis, which tests how new customers will discover a product/service

Once the entrepreneur makes these assumptions/hypotheses, she can craft an experiment to test them. Ries argues that in the Lean Startup, an experiment is the first product. This is a departure from typical, wasteful corporate approaches to innovation, where they invest in long periods of R&D or product development to build a new product, release it to the market and find that customers aren’t willing to pay for it. Instead, in the Lean Startup, product/service development becomes an iterative process of testing and learning your way into a product that is valuable to your customers. This method is captured in the Lean Startup process of: Build –> Measure –> Learn.

In the Lean Startup, the first product (read ‘experiment’) you build is called the minimum viable product (or ‘MVP’). This product is merely an experiment to validate the idea behind the venture: is there demand for the product/service offering, and are customers willing to pay for that offering? Ries gives the example of how Drew Houston, the founder of Dropbox, used a video as their MVP. The video gave a 3-minute faux demo of the Dropbox product before the product was even built. This video grew Dropbox’s beta waiting list from 5,000 people to 75,000 “literally overnight.” It was a simple way to validate whether or not there was demand for the product before investing the time and money to build it. Ries gives several other examples of MVPs, but the key thing to keep in mind when building your MVP is to: “remove any feature, process, or effort that does not contribute directly to the learning you seek.” Then, measure and learn from that experiment, and craft your next hypothesis and experiment to continue the validated learning process.

Lean Startup techniques can be applied to a variety of companies, industries and projects. For example, I used Lean Startup methods while at W2O Group to grow a new and relatively small account (Verizon, which started as a $245K project) to $2M revenues in 2012 and to $5.5M in revenues in 2013, turning Verizon into W2O’s largest account at the time.

We were hired to build a custom social media analytics platform for Verizon, but didn’t have the technological acumen yet. We had one developer and one project manager that still worked off of waterfall development techniques (the PM’s original timeline to deliver an alpha product to Verizon was along the lines of six to nine months!) and no designers, UI or UX practitioners that could create meaningful data visualizations. But, we did have analysts – over sixty of them. So, we quickly pivoted from focusing on the dashboard timeline to focusing on delivering PowerPoint reports from the analytics that we would eventually visualize automatically through the dashboard. The PowerPoint reports were our MVP. And, they sold like hotcakes.

Below are two snapshots of our hockey stick growth. The first chart shows the number of reports that we delivered per month across Verizon in the first twelve months, while building the analytics platform in parallel, as well as our low, medium and high projections for future demand of reports. The second chart reflects revenue growth in the first twelve months.

Verizon hockey stick-reports

Verizon hockey stick-revenues

The analytics product that we built for Verizon then served as our MVP for a new SaaS version that W2O could offer across clients. A newly hired developer, John Steinmetz, and I saw that W2O was building these custom dashboards for other clients, and W2O was losing its shirt because of its consulting/hourly fees-based business model. So, we worked on the side to build a SaaS version. The product launched under the name Footprint and achieved over $1.3M in revenues in its first year. Steinmetz did an amazing job bringing this idea and product to reality.

In his book, The Lean Startup, Ries provides much more in depth techniques and case studies for how to achieve validated learning, including those that apply to large organizations. For example, Ries references how Intuit holds itself accountable for innovation through two KPIs (key performance indicators):

  1. The number of customers using products that didn’t exist three years ago, and
  2. The percentage of revenue coming from offerings that didn’t exist three years ago

I highly recommend reading The Lean Startup, so you can see how to apply its approach to your business.

Design Thinking
Design Thinking has been getting a lot of buzz over the last five years or so, as large companies are now looking to establish their innovation engines to compete with the startups that are ripe to disrupt them. Having seen Apple‘s success in becoming the most valuable company in the world primarily through launching wonderfully designed products, CEOs are hungry for their own design forward innovation. IDEO and frog are perhaps the two most well-known players in this space, consulting organizations on assimilating Design Thinking into their daily activities. Both have worked with Apple since the early years. And, IDEO more recently counseled IBM in creating their Design Thinking approach, which you can find here.

Design Thinking is a method for innovating routinely. It puts customers at the forefront through empathy. The goal is to empathize with the customer, which often starts with behavioral observation. What are they doing? How are they doing it? Why are they doing it? But, ultimately needs to move to understanding people’s motivations and core beliefs.

IDEO_3 factors in an innovation program

Each innovation program must align across three factors:

  1. PEOPLE: is the offering desirable by the target audience (customer)?
  2. TECHNICAL: is the offering technically feasible with today’s technologies?
  3. BUSINESS: is the offering economically viable within a business model?

Finding the sweet spot between desirability, feasibility and viability is what IDEO and the Stanford d.school define as Design Thinking.

This method follows a four-step process: Inspiration –> Synthesis –> Ideation/Experimentation –> Implementation. IDEO partner, Chris Flink, wrote an excerpt explaining their Design Thinking approach in the book Creative Confidence, written by IDEO co-founders, Tom Kelley and David Kelley. That excerpt is highlighted below:

“INSPIRATION
Don’t wait for the proverbial apple to fall on your head. Go out in the world and proactively seek experiences that will spark creative thinking. Interact with experts, immerse yourself in unfamiliar environments, and role-play customer scenarios. Inspiration is fueled by a deliberate, planned course of action.

To inspire human-centered innovation, empathy is our reliable, go- to resource. We find that connecting with the needs, desires, and motivations of real people helps to inspire and provoke fresh ideas. Observing people’s behavior in their natural context can help us better understand the factors at play and trigger new insights to fuel our innovation efforts. We shadow and do interviews with a variety of people out in the field. We speak to ‘extreme users,’ for example, discovering how early adopters make clever use of technology. Or, if we are redesigning a kitchen tool like a can opener, we may observe how elderly people use it to look for points of frustration or opportunities for improvement. We look to other industries to see how relevant challenges are addressed. For instance, we may draw parallels between customer service at a restaurant and the patient experience at a hospital in order to improve patient satisfaction.

SYNTHESIS
After your time in the field, the next step is to begin the complex challenge of “sense-making.” You need to recognize patterns, identify themes, and find meaning in all that you’ve seen, gathered, and observed. We move from concrete observations and individual stories to more abstract truths that span across groups of people. We often organize our observations on an ’empathy map’ or create a matrix to categorize types of solutions. During synthesis, we strive to see where the fertile ground is. We translate what we’ve uncovered in our research into actionable frameworks and principles. We reframe the problem and choose where to focus our energy. For example, in retail environments, we’ve discovered that if you change the question from ‘how might we reduce customer waiting time?’ to ‘how might we reduce perceived waiting time?’ it opens up whole new avenues of possibility, like using a video display wall to provide an entertaining distraction.

IDEATION AND EXPERIMENTATION
Next, we set off on an exploration of new possibilities. We generate countless ideas and consider many divergent options. The most promising ones are advanced in iterative rounds of rapid prototypes— early, rough representations of ideas that are concrete enough for people to react to. The key is to be quick and dirty— exploring a range of ideas without becoming too invested in only one. These experiential learning loops help to develop existing concepts and spur new ones. Based on feedback from end users and other stakeholders, we adapt, iterate, and pivot our way to human-centered, compelling, workable solutions. Experimentation can include everything from crafting hundreds of physical models for delivering transdermal vaccines to using driving simulators for testing new vehicle systems to acting out the check-in experience at a hotel lobby.

IMPLEMENTATION
Before a new idea is rolled out, we refine the design and prepare a road map to the marketplace. Of course, rollouts can vary wildly depending on which elements of an experience or product are involved. Going live with a new online learning platform is very different from offering a new banking service. The implementation phase can have many rounds. More and more companies in every industry are beginning to launch new products, services, or businesses in order to learn. They live in beta, and quickly iterate through new in-market loops that further refine their offering. For example, some retailers launch pop-up stores as a way to test demand in new cities. And Boston-based startup Clover Food Lab began with a single food truck at MIT to gauge the market for its sustainable vegetarian food before the company committed to opening brick-and-mortar restaurant locations.”

Like Lean Startup, Design Thinking believes in an iterative approach to innovation. Its Three Rs of Prototyping – (1) Rough, (2) Rapid and (3) Right (referring to building several models/prototypes focused on getting specific aspects of a product right) – are not unlike Lean Startup’s concept of the MVP. At first glance, Design Thinking may seem more qualitative in its approach, where as Lean Startup seems more quantitative. But, if you dive deeper, they are quite similar.

For more information on Design Thinking, I recommend reading Creative Confidence, as well as perusing the d.school’s methods.

Other Innovation Processes
There are countless other innovation processes out there. The virtual aisles of Amazon’s Kindle library are filled with them. But, below are some that are worth a read:

Once you’ve read your way through these, I invite to you reference the Reading List page on this site, where I highlight other books, papers and articles that have impacted my thinking.

To read about Quadrant 1 – grow market share – click here.

To read about Quadrant 2 – new markets – click here.

To read about Quadrant 3 – new offerings – click here.

To read about Quadrant 4 – macro and micro context in bringing new offerings to new markets – click here.

Marketing Mondays: Instagram Stories

On August 2nd, Instagram introduced its new Instagram Stories feature. For brands that have been using SnapChat Stories, this product is almost a carbon copy with some differentiators. For those that have not yet explored SnapChat, I’ll explain a bit of the context behind both of these products.

Instagram Stories is a new feature in which users can share multiple photos and videos in a slideshow format (your “story”) without having to worry about over posting. Each story disappears after 24 hours and is not posted to your Instagram feed or profile grid. For Millennials and, even more so, for Gen Z, this feature provides the ephemeral nature of sharing that drew these younger audiences away from Facebook and toward SnapChat. And, for Instagram (and Facebook), this provides a feature that can (potentially) lock in its own users, preventing them from testing and moving over to SnapChat.

Why did Instagram copy SnapChat?
There are a limited, albeit large, number of potential users available in the world. The world’s population is ~7.4 billion people. China is the largest market with ~1.4 billion people, followed by India at ~1.3 billion people and then the U.S. with a mere ~324 million people. Meanwhile, there are ~3.6 billion internet users today, globally. Every social network, chat app and content publisher is vying for those users’ eyeballs and time, so they can sell ads to brands. The larger companies, such as Google and Facebook are investing heavily in bringing internet to the other ~4 billion people that don’t yet have access to the internet, so they can grow their reach and ability to sell ads.

As seen in the chart below, Facebook alone dominates in the number of users that it has captured with ~1.6 billion users globally, as of April 2016. But, when you add in its other properties – WhatsApp at 1 billion users, Facebook Messenger at 900 million users and Instagram at 400 million users – Facebook’s reach becomes even more astounding.

statistic_id272014_global-social-networks-ranked-by-number-of-users-2016

So, with this much reach, why would Facebook/Instagram copy the Stories feature from Snapchat? Because each platform captures a different audience segment. And, Facebook knows it needs to both guard its existing audience, and capture the next generation of young audiences that brands so aggressively covet. In fact, that’s why Facebook acquired Instagram for $1 billion in 2012 – to reach younger audiences. While Facebook started in 2004 as a closed network for college students to connect with “friends”, it quickly expanded as a platform for anyone to connect with close friends and family. Today, it is a catch all network to connect with anyone that you’ve ever met.

Younger audiences that recognized this trend, and wanted to capture and share their lives on a platform where their parents weren’t watching their every move, jumped over to Instagram. Instagram offered a simple, visual platform to publish selfies and other photos with beautiful filters, presenting an ideal – or even aspirational – image of users’ lives. And, the user’s profile settings could easily be set to private, so that only people whom the user accepts can follow the user and see her photos.

Facebook saw their young user base making this jump to Instagram, so they bought the platform – for a sum that only four years ago was considered mind-boggling, but, today, is considered a steal. As Ben Thompson writes in his post, The Audacity of Copying Well, Facebook and Instagram offer complementary use cases. Thus, instead of simply absorbing Instagram and its features into Facebook, Facebook had the foresight to understand that the best thing it could do with Instagram was let it live on as its own entity so not to alienate Instagram users, while integrating Facebook’s ad technology into the Instagram platform, offering brands the ability to target Instagram’s younger audiences.

The Snapchat generation (Gen Z), which came after the Millennials that grew up with Facebook, Twitter and Instagram, grew up with warnings from parents and broader society to be careful about what they post online. Photos, videos and statements can live on forever on these open platforms and be discovered with a simple Google or Facebook search. Enter Snapchat.

Founded in 2011, Snapchat offered an alternative to social networks as well as mobile text messaging, both of which kids’ parents had access to. Snapchat, after all, is a photo messaging app first and a social network second. Snapchat offered a private place in which to share photos that would disappear within 24 hours. The very nature of the platform, the value proposition, was to be ephemeral – to provide a refuge where young audiences could be their youthful selves without fearing future repercussions for actions and statements made today. Like Instagram before it, Snapchat saw droves of young users adopting the platform. And, in 2013, Facebook offered Snapchat $3 billion in cash to acquire the platform. But, in an amazing show of confidence, Snapchat founder, Evan Spiegel, turned down the offer with a long-term view of growing the business. Today, Snapchat has over 200 million users and growing and is valued at over $22 billion. No wonder people consider the $1 billion acquisition of Instagram a steal, given its user base of over 400 million people today.

In fall of 2013, Snapchat introduced Snapchat Stories, which has since become Snapchat’s power feature – the ability to create slideshows of your life through photos and videos. The experience is almost rough and clunky, giving the appearance and feel of being more “authentic” and real. It was around this time that Facebook, after its failed attempt at copying Snapchat features through a new app called Poke, decided to offer $3 billion to acquire the growing photo chat app. Ever since Snapchat turned down Facebook, Snapchat and Facebook/Instagram have increasingly competed over features to captivate their users’ attention. For example, in August 2014, Snapchat launched Live – a feature that allowed users to follow (and contribute to) live events. In January 2015, Snapchat launched Discover – a feature that enabled users to discover new Snapchat Stories and content from publishers and influencers. Later, in June 2015, Instagram launched a new Explore page enabling users to discover trending content and places based on its users engagement (similar to Snapchat Live). In September 2015, Snapchat acquired Looksery to power its new animated lenses feature, dubbed “Lenses”. And, in March 2016, Facebook acquired MSQRD, which offers similar imaging features. So, it was only a matter of time before Facebook attempted to copy Snapchat’s power feature. This time, though, it may work.

Should your brand use Instagram Stories or Snapchat Stories?
Instagram Stories already seem to be getting plenty of engagement. The stories appear on the top of your Instagram app and seamlessly integrate into the Instagram experience. I’ve been seeing a range of brands, influencers and regular users (friends that I follow) testing out Stories, and it’s a fun addition to my content feed. Given the head start that Facebook/Instagram have on Snapchat in developing their ad tech and revenue model, I can see Instagram Stories hitting a positive nerve with brands as a great way to elevate the content that they share on Instagram and, eventually, targeting new audiences with promoted Instagram Stories.

But, as usual with social media, there is no clear cut answer as to whether or not a brand should participate in Instagram Stories or Snapchat Stories.

A good place to start is comparing the core users for each of the platforms with the audiences your brand hopes to reach. Snapchat’s core users are 13 to 24-year-olds, falling squarely in the Gen Z bucket. Furthermore, 77% of college students use Snapchat. And, the platform touts ~100 million daily active users amongst its ~200 million total users. Meanwhile, Instagram’s core users capture both Gen Z and Millennials: 41% of its users are ages 16 to 24, and 35% of its users are ages 24 to 34. Instagram touts ~75 million daily active users amongst its ~400 million total users. Some fast math will tell you that Snapchat and Instagram likely capture a similar number of Gen Z users, while Instagram also gives a brand access to the Millennial audience that is growing in buying power.

So, if your brand’s target audience falls within these core user bases, then it’s time to experiment and test which platform proves to support your business goals.

How to use Instagram Stories
This video from 9TO5Mac provides an excellent tutorial on how to use Instagram Stories.

*BONUS: How to use SnapChat
Many people over the age of thirty find Snapchat daunting and intimidating. If you haven’t explored Snapchat yet, below are two must read blog posts from Mark Suster explaining the platform: how to use it and why it’s important.

Now get out there and experiment.

Marketing Mondays: Your Innovation Roadmap, Part 4 – Macro & Micro Context

Growth Matrix

In Your Innovation Roadmap, Part 1, I introduced the innovation matrix (featured above) and covered Quadrant 1: gaining market share. In Part 2, I covered Quadrant 2: bringing your current offerings to new customers. In Part 3, I covered Quadrant 3: bringing new offerings to existing customers.

I’m going to split our Quadrant 4 (bringing new offerings to new markets) discussion into two parts. In this first post, I’ll cover Macro & Micro Context, which discusses when to look to Quadrant 4 innovation (instead of Quadrants 1-3), and why it’s so hard for established companies to pursue this route. In the next post, I’ll cover a process and case studies for pursuing Quadrant 4 strategy.

QUADRANT 4: NEW OFFERINGS IN NEW MARKETS
At some point, a company’s growth stagnates. The industry that the company plays in grows stale, and/or the company’s offerings reach a market share that simply is not likely to grow further. And, so the company must look to new areas for innovation and growth. Why is this? There can be a variety of reasons related to the niche market dynamics of an industry, which I won’t go into in this post given the range of industries that I’ve been covering in this series. But, usually, if you dig deep enough, you’ll find that the reason for stagnation stems from a macro and a micro trend:

  1. Macro. The stage in which we find ourselves in our current technological revolution, and
  2. Micro. The Law of Diffusion of Innovation related to the company’s current offering(s)

Macro: Technological Revolutions
In The Purpose Economy: Part 3 – Technological Revolutions, I describe the lifecycle of a technological revolution, and how we are currently at the tail end of our current revolution. This is based on research from economist, Carlota Perez captured in her book, Technological Revolutions and Financial Capital.

Lifecycle of a Technological Revolution_today

As you can see from the image above, each revolution has a big bang moment where a discontinuous innovation comes to market, inspiring new products and industries, and driving fast innovation and growth. This period can be messy and chaotic, as society looks for economic models for this new technology. Later, come the systems and infrastructure that support the eventual full expansion of the new technology’s potential – an array of innovation with validated economic models. Finally, the last new products come to market, and the new technology that was introduced in the big bang moment reaches a mature market saturation point before the next big bang moment and new, discontinuous technology is introduced.

6th Technological Revolution Around the Corner

Today, we find ourselves at the end of our current revolution: the Age of Information and Telecommunications, whose big bang moment was the Intel microprocessor that was introduced in 1971. Over the course of approximately half a century, each revolution follows the same sequence: big bang moment –> financial bubble –> collapse –> golden age –> political unrest –> next big bang moment. Clearly, we had our big bubble and collapse with the Great Recession that hit in 2008. We’re now well into a golden age where microprocessors have achieved a global market saturation point, enabling the use of mobile devices worldwide, along with an array of software applications that our modern society now relies on, and, dare I say, takes for granted. And, given the current state of affairs across the globe, with frequent shootings and mass killings, divisiveness and political debate of the lowest common denominator, who can argue with the idea that we are experiencing political unrest? Finally, we are 45 years into our current revolution. The next big bang moment is right around the corner.

Understanding the technological revolution you’re operating in, at what stage of that revolution’s lifecycle your company finds itself, and what role your company’s offerings play in this landscape can give you some indication of the potential innovation opportunities available and growth runway left for your company’s offerings.

Micro: The Law of Diffusion of Innovation
Popularized in Geoffrey Moore‘s book Crossing the Chasm, the Law of Diffusion of Innovation, described as the Technology Adoption Life Cycle, follows that

  • 2.5% of our population are “innovators”,
  • 13.5% are “early adopters”,
  • 34% are the “early majority”,
  • 34% are the “late majority”, and
  • 16% are the “laggards”

Fig_-1_-Technology-Innovation-Adoption-Lifecycle_12Dec20_v1

Critical to launching a new offering in a new market, is identifying who are the innovators that actively pursue new offerings in that product segment. For a tech product, you might find these people on Product Hunt, Techmeme or lurking in subreddits. For a CPG company, these early adopters might be brand advocates for existing, related products that are already in market, or folks that are constantly testing out new products. They might be found writing volumes of reviews on Amazon or actively blogging, and can be as broad as the mommy blogger, or as niche as a foodie or beauty blogger.

Next to adopt a new product are the early adopters. Like the innovators, this consumer segment buys into new product concepts early, as they find it easy to conceive the potential of the product without that product being fully validated or perfect.

As Geoffrey Moore argued, the real difficulty for a technology (or any new product) to reach mass market appeal and achieve enough momentum to maximize its revenue and profitability potential is crossing the chasm from early adopters to early majority. Unlike the innovators and early adopters that preceded them, whose decisions are driven more by emotional and social factors, the early majority segment of consumer makes their decisions based on more rational factors and prefers to purchase products once they have been more fully validated by other consumers. But, once a company gains momentum with the early majority, it can expect a healthy business for some time to come. The early majority represents 1/3 of the adoption lifecycle, followed by the late majority, which also represents 1/3 of the adoption lifecycle. This late majority segment does not feel comfortable adopting a new product until it has become a standard. Finally, the laggards segment does not want anything to do with new products. They are very set in their ways, and do not adopt a product until they are forced to (which usually means that the product they like to use is no longer available).

Why Quadrant 4 is hard for established companies
Typically, established organizations struggle with Quadrant 4 because of the very fact that they gained traction with that early majority. As we learned from Steve Blank, a company is a permanent organization designed to execute a repeatable and scalable business model. On the other hand, a startup is a temporary organization designed to search for a repeatable and scalable business model. In other words, the business of a startup is to bring a new offering to a new market, test whether or not the market (i.e. the target customer) will adopt that new product, and validate a business model that will (eventually) generate profits. Whereas the business of a company is to scale that business model.

Once the company gains momentum with the early majority, focus shifts away from innovation and towards offering the company’s product more effectively and efficiently. In other words, infrastructure such as people, processes and technologies are brought into the company to enable the organization to meet consumer demand and offer more of its products at a reduced cost, increasing margin (profits). The initial focus is Quadrant 1: gaining market share. Later it shifts to Quadrants 2 and 3: offering current products to new markets, and offering new products to existing customers, respectively. Quadrants 2 and 3 only require incremental innovation and can leverage the company’s existing infrastructure. Quadrant 4, on the other hand, requires discontinuous innovation, and may need an entirely different infrastructure to succeed.

Understanding where your company’s offerings are on the adoption curve is critical to deciding on which quadrant to focus your innovation efforts.

Pursuing Quadrant 4 innovation
In the next post, I’ll cover a process for pursuing Quadrant 4 innovation and provide some examples of companies that have successfully done so.

To read about Quadrant 1 – grow market share – click here.

To read about Quadrant 2 – new markets – click here.

To read about Quadrant 3 – new offerings – click here.

Marketing Mondays: Your Innovation Roadmap, Part 3 – New Offerings

Growth Matrix

In Your Innovation Roadmap, Part 1, I introduced the innovation matrix (featured above) and covered Quadrant 1: gaining market share. In Your Innovation Roadmap, Part 2, I covered Quadrant 2: bringing your current offerings to new customers. In this post, I’ll cover Quadrant 3: bringing new offerings to existing customers.

QUADRANT 3: NEW OFFERINGS
As mentioned in part 2, companies are often started with a specific problem or customer in mind. In a product-oriented company like technology or CPG (consumer packaged goods), the problem the founder set out to solve may be something that she or he personally experienced. In a services-oriented company, such as a management consultancy, marketing communications agency or law firm, the customer that the founder set out to support may be based on his or her expertise. Eventually, though, the firm reaches a market share with its original target audiences (Quadrant 1), that it needs to look into other areas for growth and innovation opportunities. Identifying new products/services to offer your existing customers is one key opportunity for innovation. Let’s look at a few approaches.

Adjacent Offerings. Adjacent offerings are wholly new products/services that relate to the core offering your customers are already purchasing from you. For our first example, I’ll turn to Nike again. As we saw in part 2, once Nike grabs a foothold with a new customer segment (for example: golfers) by adapting its core product (the athletic shoe) for that segment, Nike looks to expand in that customer segment by offering adjacent products. Once customers see Nike as a maker of quality golf shoes, it’s not a stretch for customers to think that Nike can also provide other quality golf apparel such as pants, shorts, shirts and hats. Later, if customers are already purchasing their golf apparel from Nike, why wouldn’t they also purchase utility gear like golf gloves, balls and clubs from Nike as well? In this case the core customer is the golfer, and the core offering is the golf shoe. Nike expands by offering the golfer adjacent golf products, such as apparel and gear.

The beer, wine and spirits industry also gives us an example of how this works. Let’s consider the well-known wine brand Jacob’s Creek. While the Gramp family has been making wine in the area known as Jacob’s Creek in Australia since 1847, it didn’t launch its first Jacob’s Creek brand wine until 1976. It’s first offering was a vintage blend of Shiraz, Cabernet Sauvignon and Malbec. But, today, Jacob’s Creek offers a wide range of varietals, including bottles of Shiraz, Cabernet Sauvignon, Malbec, Pinot Noir, Riesling and more. Most winemakers follow this same pattern: launch with a specific varietal at a specific price point that targets a specific segment of wine-drinker. Then, the brand expands into other varietals at similar price points for that same wine-drinking segment. These other wine varietals are adjacent products to the original varietal.

Consider the Austin, TX spirits brand, Deep Eddy Vodka. Its original product was a flavored vodka called Deep Eddy Sweet Tea. Once Deep Eddy got traction in the vodka market with its sweet tea flavored vodka, it wasn’t a stretch to expand into other flavors. Today, Deep Eddy offers a variety of flavors, including straight vodka, grapefruit, lemon, cranberry and peach. Founded in 2009, Deep Eddy Vodka was acquired for nearly $400 million in 2015, according to a report in Fortune, growing revenues by following a Quadrant 3 innovation strategy.

Finally, consider the Amazon Kindle. Instead of purchasing physical books and paying to ship each to customer’s homes, Amazon developed the Kindle e-reader – an innovative, hand-held device on which customers can download digital versions of books, newspapers, magazines, etc. Amazon developed this product for its core, existing customer (readers) and provided these customers a wholly new way to consume its core product (books) and other print products.

Value-Added Offerings. Unlike adjacent offerings, which require bringing wholly new products to your customers, value-added offerings are new features or services that you introduce on top of the core offering. This is common in the tech industry. Let’s take social media software as an example. The core offering for platforms like Sysomos, Radian6 and Crimson Hexagon is aggregating publicly available social media data and enabling customers (i.e. brands and the agencies that serve them) to analyze that data to gain insights about the brand’s audiences. While the core offering is the software platform itself, which customers pay an annual fee for, not all customers have the expertise or bandwidth to analyze the data that the platform offers. Thus, these software companies offer the value-added service of providing analyst support for a certain number of hours per month. A brand can use this analyst’s time to provide ad hoc analyses or even a regular cadence of reporting. This service is a fairly minimal additional cost on top of the annual software license. Similarly, companies like Spredfast and Sprinklr, whose core product is managing the publishing process for brands’ social media channels, offer value added services of having analysts that can review data and provide reporting, as well as social media strategists that can advise clients.

Perhaps my favorite example of value-added offerings comes from Amazon and its Prime membership. While Amazon began by selling books online, the company quickly grew to offer an expansive array of products that could be delivered to customers’ homes, giving customers a legitimate alternative to trekking to Walmart, Target, CostCo, or any number of other big-box and niche retailers. For power users that were frequently purchasing items from its website, Amazon launched Prime – a $99 per year (or $10.99 per month) membership that provides perks like free two-day shipping for eligible purchases, unlimited streaming of TV shows and movies on Prime Video, and the ability to borrow books from the Kindle Owners’ Lending Library. Customers that frequently purchase products from Amazon understand the rush that one gets from knowing that your purchase will be delivered in just two days. Customers paying $9.99 or more per Kindle book realize that all it takes is reading two or more books per month to capture the savings from borrowing books from the Kindle Owner’s Lending Library through Prime vs. buying individual books. Prime has been a phenomenal way for Amazon to hook its customers into using its offerings even more.

QUADRANT 4: NEW OFFERINGS IN NEW MARKETS
In the next post in this series, I’ll cover Quadrant 4 strategy. This is arguably the toughest innovation strategy, as it requires the greatest leap in imagination and courage in financial investment.

To read about Quadrant 1 – grow market share – click here.

To read about Quadrant 2 – new markets – click here.

To read about Quadrant 4 – new offerings to new markets – click here.

 

Marketing Mondays: Your Innovation Roadmap, Part 2 – New Markets

Growth Matrix

In Your Innovation Roadmap, Part 1, I introduced the innovation matrix (featured above) and covered Quadrant 1: gaining market share. In this post, I’ll cover Quadrant 2: bringing your current offerings to new customers.

Critical to exploring both, Quadrant 2 and Quadrant 3 (bringing new offerings to existing customers), is to identify adjacencies to your core business and exploit those adjacencies by developing a proven, repeatable process. Let’s take a look.

QUADRANT 2: NEW MARKETS
This quadrant is particularly important for startups that have achieved traction with their initial target customer segment and are now looking for new growth opportunities. The natural progression is to identify other customer segments that would find value in your company’s offering. This requires minimal changes to your product/service, while presenting an opportunity to grow revenues. Let’s review a few examples.

Expand Geographies.  Uber started with the simple idea of “cracking the horrible taxi problem in San Francisco – getting stranded on the streets of San Francisco is familiar territory for any San Franciscan.” The thing is, getting stranded without easy access to a ride is familiar territory for most people, especially in metropolitan cities like New York, Chicago, London and other cities that rely heavily on taxis and black cars for transportation. So, while Uber launched in San Francisco to solve the taxi problem there, a natural progression for the company was to expand to other markets with similar transportation needs. Eventually, the idea became so prolific that it makes sense to have a presence in any dense, metropolitan area.

So, how does Uber approach geographic expansion? This article on Growth Hackers gives a good in-depth look, but I’ve summarized the key points below, adding in some of my own commentary:

  • Accelerants (Common Pain Points). Uber has identified “accelerants” to adoption, which they define as a “concentrated, temporary need for Uber Services” such as restaurants and nightlife, holidays and events, weather and sports. Uber focused expansion on cities where these pain points were consistently high.
  • Intense City-by-City Launches. Uber customizes a new city launch based on the city’s unique topography, suppliers, special interest groups and culture. This includes hiring a local, entrepreneurial person to lead the city’s launch.
  • Free Rides. Is there an easier way to get people to try your product than offering a free trial? A significant share of Uber’s funding has gone towards subsidizing free rides in new markets or discounted rates on rides.
  • Wow Experience. Getting started as a rider on Uber is dead simple. The product works seamlessly. And, it’s comparably simple to join as a new driver. One key metric to success has been reaching a driver saturation point where Uber can get a car to you within 3 minutes. Anyone that has tried hailing a cab during a shift change knows how valuable this is.
  • Experiential Word-of-Mouth. The above points all contribute to a word-of-mouth machine. Uber is a two-sided marketplace that, for all intents and purposes, is the Facebook of the physical world – achieving viral growth through word-of-mouth. I’d bet that most people first learn about Uber through a referral or, as I did, traveling to cities like San Francisco and NY and experiencing Uber before it reached my city of Austin. By the time Uber decides to enter a city there is pent up demand. Uber uses this demand, and its high public profile, as leverage against local lobbyists and legislators to drive changes in laws to allow TNCs (transportation network companies) to operate within the city. Most of the time, this works. But, as we saw recently in Austin, this isn’t always the case. In Austin, both the City Council and Uber mismanaged the situation, and local citizens paid the price in seeing Uber and Lyft leave the city limits.

Expanding geographic markets is a natural way to grow a business that offers products/services of broad appeal.

Expand Up/Down the Buyer Value Chain. Great companies are built by solving a very particular problem for a specific customer in mind. This is particularly true in tech. Often times, the problem is a pain point that the founder has personally experienced and decided to tackle him/herself. And, thus, the company targets a specific audience (customer) with its first product, builds traction and word-of-mouth, while gathering customer feedback, from that audience, before expanding to other audiences.

The idea of the buyer value chain is that different customer segments have different adoption rates and appetites for paying for a product/service. A company may create a product with an customer in mind. But, the company should then look up the buyer value chain to identify audiences that may be willing to pay more for the product with minor enhancements (a higher margin/lower volume play), and down the buyer value chain to identify customers that may be willing to pay less for a product with less features (a lower margin/higher volume play).

SaaS (software as a service) businesses do this well – particularly around the freemium business model. Freemium is a business model where the company offers a low-cost version of its product/service for free, then offers enhanced versions with additional features or services at a premium (i.e. for a price). The pricing model is tiered, such that the more features/services the higher the price. Conceptually, the idea is that 80% of your customers may use the free version, but 20% will pay for the premium versions. And, that revenue will more than make up for the cost of offering the free version. Valuable businesses have been built off of this model.

One example is New Relic, which started by providing its analytics platform to Ruby on Rails developers because that was a growing, underserved community of developers that were innovative and vocal about products they liked (and disliked). After gaining traction with this community through a freemium model, they expanded to developers using other programming languages. Founded in 2008, New Relic’s market cap is now hovering around $1.64B (as of this writing). Clearly, it’s come a long way from its original focus on Ruby on Rails developers.

Other software businesses have followed a similar approach with freemium. Box started by offering 1GB of virtual storage for free. Individual customers using more storage had to pay for it. And, businesses that reached a threshold of employees using the product, also had to pay for it. Since, customers signed up for a Box account with their email address – usually using their business email – Box has been able to identify companies that had a growing number of employees using the product. This was a critical strategy: infiltrate enterprises by targeting the individual employee and gaining word-of-mouth and adoption within that employee’s company. Then, once that employee’s company reach a threshold of people using Box with the company’s email domains, Box used this as leverage to sell that company’s IT team a premium, enterprise version of Box that consolidated employee accounts into a secure system managed by the IT team. Slack, potentially that fasted growing B2B tech company in history, has used this same strategy: offer free, basic versions of the product to individual customers at the bottom of the buyer value chain; offer paid versions of the product with more storage space to individual customers further up the buyer value chain; and, finally, offer enterprise level versions of the product to businesses at the top of the buyer value chain.

The auto industry also gives us an example of how to expand up/down the buyer value chain. The chassis is essentially the car’s skeleton. Large multi-brand automakers like General Motors will design a new chassis, and then implement it across brands. For example, the Chevy SuburbanGMC Yukon XL and Cadillac Escalade each target a different customer segment, but share the same chassis. Similarly, the Chevy Traverse, Buick Enclave, GMC Acadia and Cadillac SRX share the same chassis. What differentiates these cars are the exterior designs, price points and associated brands – each targeting a different customer segment along the buyer value chain. Chevy is the everyman American’s brand. GMC is the higher end, professional grade brand. Buick is the economic luxury brand. And, Cadillac is the aspirational luxury brand.

Similarly, Tesla, after launching in Quadrant 4 (as most tech startups do), is deploying a Quadrant 2 growth plan that started at the top of the buyer value chain and is moving downwards over time. In a brilliant strategy, Tesla first launched with its Roadster – a $100,000, limited edition, high performance sports car – in order to build an aspirational brand with wealthy, highly visible and influential customers. This strategy allowed Tesla to, essentially, sell prototypes of very expensive electric vehicle (EV) technology, build word-of-mouth and demand, and begin to bring down the cost of the EV technology. Its next product, the Model S, leveraged improved technology at more efficient costs to offer the vehicle at a reduced price of around $70,000, targeting high end luxury sedan buyers. Next on the product roadmap are the Model X, Tesla’s first SUV offering, and the Model 3 – a more affordable sedan. With each of these products, Tesla creates offerings further down the buyer value chain.

Expand Industry Verticals. Finally, a key opportunity to bring your current offerings to new customer segments is by expanding into new industry verticals. Nike serves as an exceptional example of Quadrant 2 (and Quadrant 3) innovation strategy in the consumer goods and athletics space. The quote below from this Harvard Business Review article summarizes Nike’s approach:

“Nike begins by establishing a leading position in athletic shoes in the target market. Next, Nike launches a clothing line endorsed by the sport’s top athletes—like Tiger Woods, whose $100 million deal in 1996 gave Nike the visibility it needed to get traction in golf apparel and accessories. Expanding into new categories allows the company to forge new distribution channels and lock in suppliers. Then it starts to feed higher-margin equipment into the market —irons first, in the case of golf clubs, and subsequently drivers. In the final step, Nike moves beyond the U.S. market to global distribution.”

As you can see, Nike begins with Quadrant 2 strategy, adapting its core product (the athletic shoe) for a new customer segment (golfers) in a familiar geographic market (the U.S.). It uses endorsement deals to gain visibility and credibility in this new segment (just as Tesla used wealthy, influential Roadster customers to build its brand reputation in the auto industry). Nike also uses this time to adapt its business model for the segment by solidifying distribution channels and suppliers. Then, Nike moves into Quadrant 3 strategy, offering the golf segment more products such as a clothing line, balls and clubs. Once Nike successfully adapts its business model for the new segment and gains market share in that segment, all the while building word-of-mouth and pent up demand for its new products outside of the U.S., Nike shifts back into Quadrant 2 strategy, offering its full golf product line to new customer segments outside the U.S. market. This is a proven, repeatable process that Nike has deployed time and again to enter new verticals within the athletics industry.

B2B companies frequently use a similar innovation and growth approach. Often times a tech company begins by developing its technology for a specific industry. But, over time, as the company’s market share gains (Quadrant 1) level out, and the company looks for new growth opportunities, a natural progression is to find other industries that share similar characteristics with those of its core industry. Then, the company can adapt its technology and messaging to expand into those adjacent industries. For example, a company that services the highly regulated health care industry, might naturally expand to adjacent industries that are also regulated, such as financial services or energy.

QUADRANT 3: NEW OFFERINGS
In the next post in this series, I’ll cover Quadrant 3 strategy. As you may have noticed in this post – particularly the Nike example – Quadrant 2 naturally progresses in to Quadrant 3 and vice versa.

To read about Quadrant 1 – grow market share – click here.

To read about Quadrant 3 – new offerings – click here.

To read about Quadrant 4 – new offerings to new markets – click here.