You Can Change It Later

The Blog Of David Marks

Twitter Weekly Updates for 2012-04-08

Posted on | April 8, 2012 | No Comments

  • AT&T *finally* will unlock your out-of-contract iPhone devices starting tomorrow: http://t.co/0QpU6lfV #

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Why do investors care about going after a huge market so much?

Posted on | April 2, 2012 | No Comments

httpv://www.youtube.com/watch?v=nKN-abRJMEw&feature=youtu.be&t=4m27s

“Target big markets”

– Don Valentine, Sequoia Capital

 

Every entrepreneur has heard this, but what’s a big market and what happens if you don’t pick one? This was illustrated to me on a recent visit to the small town of Americus, Georgia.

Americus is a small town, with a population of 17,041. There’s a quaint downtown area with a few restaurants and a hotel bar. And according to my local contacts, hot dogs are an, um, hot item. I heard multiple people talking about where to get hot dogs, which were better, and what a Georgia hot dog must absolutely include.

 

Among the hot dog vendors, a war is brewing.

 

Initially, each hot dog vendor tried to out-do each other with better hot dogs, toppings, and buns. Then one day, one of the top hot dog spots decided to cut it’s prices. First from $2.00, to $1.50. The other shops followed suit. Then one cut prices to $1.00. Now, a few places are experimenting with sub-$1 hot dogs. It’s pretty hard to justify buying a $2.50 hot dog when you can get a decent gourmet dog next door for $0.75!

 

Some of these establishments offer these high-end hot dogs in sit-down restaurants. It’s a bit of a financial disaster, though I’m sure none of the customers are complaining. It’s really hard to compete in the tough hot dog market.

 

Small market = high competition and low margins for everyone.

 

Imagine this was a city like NYC or San Francisco. In those big markets, the #1 hot dog shop would be inundated with customers and able to keep prices high. They might even be able to raise prices and margins over time. This is what places like Ike’s sandwiches, or Delfina Pizza have done in their respective food areas. They’re known as the best, and in a big market their high-end slice of the market is enough to put lines out the door 7 days a week.

 

This is why it’s important to pick large markets. It’s not as if you must capture 100% of that market to succeed. It’s because in a large market there is room for a lot of competitors to do well, generate some profits, and grow. And the top 1-2 businesses might do really, really well.

 

Before everyone runs out to create pitch decks showing multi-billion-dollar markets for their product, note that in many cases markets start small then evolve into huge markets over a few years. The trick is to start with a really juicy segment that loves your product that is likely to grow into gigantic market in the future as the world evolves.

 

 

Twitter Weekly Updates for 2012-04-01

Posted on | April 1, 2012 | No Comments

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Twitter Weekly Updates for 2012-03-11

Posted on | March 11, 2012 | No Comments

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Twitter Weekly Updates for 2012-03-04

Posted on | March 4, 2012 | No Comments

  • Thought: Does #google miss vertical opportunities because their UI encourages clicking on the first few results? #

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Twitter Weekly Updates for 2012-02-26

Posted on | February 26, 2012 | No Comments

  • How much should overhead ratios matter in non-profit org performance? Not a lot. http://t.co/JIA36rNT #

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Observations about the Spotify product and user acquisition strategy (or, you catch more flies with honey than vinegar)

Posted on | February 14, 2012 | 1 Comment

How My free Spotify trial convinced me to sign up for MOG instead.

A few months ago I was excited to try the free Spotify trial. I love music, and my first impressions of the application were positive. Lots of music! Decent user interface! Free! I even bought a new headphone amp to celebrate my increased music consumption.

But soon, I was starting to get annoyed at the advertisements. I don’t have a problem with ads; it’s an ad supported service after all. But these ads were junk: irrelevant, repetitive, ineffective schlock. Sometimes an ad would play two or three times back-to-back, just for kicks. I’m simply not going to decide to buy that boy band album because I’ve heard the promo ad 10 times in an hour. Nor am I likely to purchase pants named after a monkey just because a tart with a British accent told me 500 times that they will make my butt look good.

I and others openly wondered if the ads were actually designed to motivate free users to just pay the $5/month for the paid service. A sort of inverse recommendation engine designed to annoy with statistical precision. But also just wondered if maybe Spotify was still ramping up ad sales in the US, unable to play relevant ads because they simply didn’t have them yet.

Then I saw this announcement: Spotify is capping the free service to 10 hours of play per month. This suggests that the ad supported service is unprofitable: it is merely a user acquisition strategy for the paid service. The company as a whole has been growing revenues quickly, but is also unprofitable as a whole losing $42M in 2010. So they have to cut expenses (licensing fees) and increase revenues (mainly paid subscriptions).

 

An annoying free service is a terrible way to acquire paying users.

Thanks to the ad supported service,  I have had a practically unlimited time to experience the limitations of the Spotify service. The shrinking music catalog which has poor coverage of classical, world, and jazz music. The low streaming quality of the free service and limited number of tracks available at higher bitrates. The poor mobile offering. The whole pop-music-centered-ness of the service that continues to push me to listen to top 10 hits when they should know by now I’m just not into that kind of music.

 

But mainly, I associate Spotify with trying to annoy me with ads to coerce me to sign up for their paid service. And there’s just no way I’m going to give money to a service that thinks that is ok. 

 

A great free service with a limited preview period would have been more effective.

If  the goal was simply to acquire users who are likely to convert to the paid service, Spotify should have focused on creating the best possible user experience for those trial users. Give them high quality streams. Don’t bug them with ads that don’t pay the bills anyway. Give them the mobile app. Make them love your service. Addict them to your service, so when you take it away they have to sign up!

 

How did I end up with MOG? They offered a really nice trial service for a limited time. I compared Spotify with MOG, and MOG had better streams and a much larger catalog of the music I listened to. The IU needs polish, but the music sounds great and they have almost everything I’ve searched for.

 

Take aways for product designers.

  • Annoying freemium products create opportunities for your competition (unless you’re a monopoly).
  • It’s sometimes better to offer a great free trial than a disabled free version of your product.

 

A final word.

It’s entirely possible that none of the above issues will matter for Spotify. They have huge traction, and are growing rapidly. Their biggest problem is that they’re dependent on licensing music from labels who will squeeze all the revenue out of them they can. But if Spotify does well over time, that doesn’t mean their freemium model is a good example for your own product design efforts. They could have grown faster with a great free product, or been more profitable with a user acquisition strategy that was more sustainable than the ad concept.

Twitter Weekly Updates for 2012-02-12

Posted on | February 12, 2012 | No Comments

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Lean Startups & Big Companies: Challenges and Recommendations

Posted on | February 9, 2012 | 7 Comments

How do “lean startup” techniques work in large companies?

Over the last year or so I’ve worked with a few large organizations to solve product strategy issues. Typically, the organization is working to introduce a new product line or concept to the market, and sometimes they have already entered the market but don’t have a clear understanding of what stands between the product and financial success. My observation is that large corporations have a capable process for bringing incremental products to market, but there are many issues when they try to enter a new market or create a disruptive new product for their current markets. Yet this kind of innovation is critical to the long term success of the organization.

 

This isn’t a new problem nor is it poorly studied: corporations have always struggled with disruptive innovation.

 

Challenges

There are a few recurring challenges unique to large corporations when it comes to adopting lean, iterative product development techniques:

  • Secrecy: Large corporations tend to keep projects under wraps until they are ready to launch. This makes “launch early, iterate often” tricky. It’s difficult to even create a landing page for the product that can be publicly tested, leading to a waterfall-style development style.
  • Brand risk: Large corporations are careful not to do attach their names to products that might cause a problem with their customers, markets, regulators, etc. They are risk adverse because there is a lot to lose. Startups have nothing to lose! Approval cycles, extensive legal requirements, and general risk aversion can make running a quick experiment hard.
  • Budgeting Process: The standard budgeting process at a large organization requires long term staffing and revenue projections, even for new products. There is a need to show how the product gets to high revenue fairly quickly in order to justify bothering with the product. This goes against the lean style of testing the concept out in a limited way. The project lead isn’t safe to say “We’re going to spend 500K testing this concept out to see if it resonates, but don’t expect revenue for 2+ years since this is a really new concept.” There is intense pressure to ask for more money than is needed, spend it so you don’t lose funding, and project huge earnings well before they are realistic. Uh oh!
  • Team: A tendency to hire employees who have very strong resumes from other large (non-lean) corporations, but who are not necessarily experienced with scrappy startup process. I’ve seen far too much money wasted when a team of highly compensated executives executes on a new product in a waterfall milestone-driven manner despite a mountain of data telling them to stop and change direction.
  • Need to move the needle of a huge org: There’s a ton of pressure to justify the value of a project by showing how it will generate huge revenue in year 2. If it’s a disruptive idea, it won’t! You will serve a tiny market of early adopter customers and it will take years for the wider market to adopt your disruptive innovation. The issue is that stating this in the budgeting process is likely to put the project on the chopping block pretty fast.
  • Politics: Disruptive products often attack the existing product lines or otherwise create political tension with other groups. Sometimes, there is an existing business unit that would have to compete with the new product directly. Sometimes, another department in the organization wants to own the market that is being targeted. And finally, on occasion efforts to reduce redundancies call into question supporting multiple solutions for the same problem.
  • Habit: There is benevolent pressure to adopt the existing process at the corporation, even where it does not make sense. For example, the marketing department might be planning on a huge product launch and PR campaign for V1.0. The sales department might allocate salespeople to the new product prior to launch. This can eat up needed funds and create unrealistic expectations, and reduce the ability to iterate on the product sufficiently before taking the step of ramping marketing and sales spend.
Solutions

Enough with the challenges! I do see some ways to minimize these issues and attain success in large organizations with disruptive products.

  • Get a senior sponsor: The project needs a senior sponsor who can create an environment that allows for rapid iteration and experimentation in the public eye and communicate with the other executives who determine what projects receive resources.
  • Educate: Get buy in on using an iterative approach from senior executives. Help them understand why a new approach can be more effective for disruptive innovation, and how important it is to support disruptive innovations. Communicating the stages of product development to the executive team so they can that the product team isn’t just mucking around can be a huge help to getting buy-in.
  • Assign ownership: Hire and empower a single product manager to run the project. The new project needs a sort of mini-CEO who can drive product development and who understands both the technology and business elements of the product. Otherwise, it’s likely that the default process for the organization will take over very quickly and the focus will switch from creating a successful product to simply executing on milestones blindly.
  • Stage the funding and expectations: Invest in disruptive projects like a startup investor: Invest a little capital to seed fund the concept and prove out the market need, then more and more as the risk is reduced for the new product. Align expectations with the stage of the product. For example, perhaps fund a small core team  of 2-4 with the goal of testing demand for the SaaS version of our enterprise software product with existing customers. Then invest more and more as the product is validated and the go to markt strategy better understood.
  • Be realistic: Give disruptive initiatives enough time to iterate and for the market to mature. It usually takes several years for disruptive products to be in demand by the mainstream market, and financial projections should account for this need for the market to develop. Additionally, expect that the concept will change between the inception phase and success. Leave time for iteration and experimentation.
  • Ask the sponsor to run defense for the team: Help the product team focus on the outside world, not internal politics or survival. Nothing slows progress like having to keep fending off internal attacks from other groups who see the project as competing with their unit.
  • Create a sandbox for experimentation: Can the product be rolled out under a separate brand or sub-brand to reduce the risk to the main corporate brand? This might enable the product team to take risks without engaging in extensive review and approval cycles.

 

Are “Lean” techniques valuable in large organizations?

Qualified yes! If the innovation is potentially disruptive to the market that the corporation serves, then lean techniques help the innovation create the right product more quickly. For incremental products, I’m not so sure that wholesale changes to the product management approach are justified by the increased risk of implementing the cultural and procedural change process.

 

A note about acquisitions

I suspect that many of the above issues and solutions also apply to mergers and acquisitions. This should not be a surprise, since many large corporations acquire innovative startups as a method of disruptive innovation. Perhaps some of the solution ideas above could help maximize the value of acquisitions for the acquirer?

 

Twitter Weekly Updates for 2012-02-05

Posted on | February 5, 2012 | No Comments

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