Recently I have been enjoying reading The Logic of Life by
Tim Harford. He is an economist who uses the framework of economics to
understand the apparently irrational decisions that people make in everyday
life. The point he makes throughout the book is that people are almost always
rational, it’s just that their measures for cost and benefits may be different
to yours.
In other words your potential customers are rational when
they don’t buy your product. I don’t know about you, but I find this a good
challenge to my thinking. Here are a few thoughts.
1) As a first pass, price is important. Are you overpriced?
Is your pricing structure too complicated? The complicated
point is key. You might think you are doing the right thing by your customer in
offering all sorts of optionality and usage based pricing, but most of the time
your customers are looking for a simple price with options on when they pay
(e.g. discount for paying a full year upfront through to monthly payments).
Keeping it simple is even more important for new companies as if you are even a
whiff more complicated to deal with than the incumbents then you will be
screened out of consideration.
2) How much of their core business or business IP are you asking
them to trust you with?
Purchasers in mid to large companies will be looking closely
at your business and the sustainability of your business. Let’s unpack this a bit further:
a) How much time do they need to invest to prove they can
upgrade to your service?
No rational company will run the same system in complete
duplication for a long period. They might run in duplicate for a test period
but not for the longer term. Can you use their existing data fields, metatags
or match their existing platform’s processes. This can be a powerful selling
point, but is likely to cost you a lot of unrecoverable time in customisation.
A better approach would be to allow them to keep their
primary systems (databases, data warehouses, etc.) and then use APIs to access
that data, and make it useful in their everyday lives, especially on mobile
platforms. The flaw in this approach is that if their primary system provider
decides to add that functionality then you are toast, in which case you are
really a stopgap solution.
b) Proprietary information, where is it hosted?
When dealing with enterprises you need to offer data storage
on their own devices and servers, without a copy ever coming through your
system. Smaller companies may be happy to use Dropbox or Onedrive but large
companies will assume by default that your system is the weak link in their IT
system as far as security of their IP is concerned.
c) Who are you, and how do I know you can deliver?
Success breeds success, but at the beginning of your
business you need to find your first buyers to have any success. You need early
adopters who will go with you through the early stages, and be more relaxed on
the two points above.
If your balance sheet is small and your trading history is
short then larger buyers will likely screen you out by default. A key strategy
to deal with this would be to identify the highest ranking decision maker you
can find and give them the information they need in order to champion the
adoption of your product.
If you stay lower down in the decision making foodchain, you
will find that the people you are dealing with have other motivations (rational
ones) about keeping their career intact, which often involves not taking big
risks, meaning they won’t be taking major risks on you.
3) They love the idea, but ….
This is the killer for most new businesses, everyone seems
enthusiastic but they won’t open their wallets. What they really mean is a
variation on the following:
- It will take too much time out of my day to use it
- I don’t how this will be useful in my everyday working life
- I can already do half these things, maybe not as well, but the systems seems to work
- I have people who already do this
There is no simple answer to this. It can be hard to crack
these issues, you might need to take a bit of a risk to get there. Larger companies have an advantage over you
in this regard as they can afford to put in the time and budget to develop a
complete product, as compared to most of us who can only afford to bankroll a
minimum viable product.
4) No budget
In the current economic climate, this is going to be the killer
for your product. Yes, everyone wants to save money, and improve productivity. But,
and this is the big one, they are all working within a budget system in which
they have to prove their utility, the need to maintain staffing levels and on a
purely practical political level, no rational manager wants to shrink the size
of their personal empire.
When a company makes deep cuts to budget and staff then they
might well become a purchaser in order to implement new ways to do things.
However, you will find just as often that they just adjust their way of doing
business to match their limitations in resources.
One way to break this cycle is to get to those so high up
the food chain that they can genuinely see the benefits. Think of the CFO, CIO
and CEO as your potential champions in this regard.
5) New and novel …. I just don’t know
If I am betting a good chunk of the future of my own
business on your new technology or service, then I really want to know that you
can deliver. This applies just as much to foreign companies cracking a new market
as it does to start up businesses.
The classic way to overcome this is to demonstrate the benefits
of your service at a minimum of cost to your buyer. That way if it doesn’t
work, they can let you go without them being too deeply out of pocket.
For example, you could ask for a smaller part of the
business to prove what you can do. You could also offer free trials, or low
cost, no penalty to cancel demonstrations. Indian and Chinese companies are aggressively
trying to take on the US and Japanese incumbents in the enterprise sector using
this exact approach.
6) Existing suppliers
It is easier to crack the supply of simple physical goods
with new customers if you offer the right combination of price, customer
service and quality.
With complicated services which are implemented over a
period of time, there is a large penalty to the buyer if you don’t perform.
Changing out suppliers doesn’t just cost money, but valuable time, and delays
to their own business.
You need to develop a track record however you can.
You need to be able to offer guarantees/warranties on your
service too.
Fortunately, in the current economic climate many companies
are starting to treat services as a commodity. This is fortunate in the sense
that if you are offering the same service as the incumbent then there is a
chance that your customer will be running tenders in order to do test the market.
This is your chance to swap out the existing supplier. Beat them on service,
price, quality or a combination thereof.
If you can get inside your customer’s thinking you will find
that they are in fact rational in their decision making according to their own
take on costs and benefits. Don’t assume they are stupid or slow, try to
understand them and match their view of the world.
