Founder/CEO: Knowing what you don’t know

June 28, 2013 by Leave a Comment

Recently I have seen several occasions when the Founder/CEO thought they knew more than they did and could not see the cliff that was quickly approaching them. The bigger challenge was that someone was trying to help them see what was coming, but the Founder/CEO wasn’t listening. As a result,  a small issue that could be addressed now becomes a much larger effort to correct.  Whether it is re-writing code, shifting resources from one product to another or re-organizing an entire functional group, the effort to fix it can easily be 10X what it would have been to get it right in the first place.

Company Fix trajectory lines

The reality is that most Founder/CEO’s haven’t done this before, and quite often neither has anyone else on the team. But there are people who have the relevant experience. Although it may not be exactly the same experience needed for this new opportunity, it certainly rhymes with the past.  The risk is that they have ‘big company’ experience and don’t know how to be scrappy and learn to selectively pick what is really needed for a fast growing startup. But these days there are many people who have big company pasts and enough startup experience to strike the right balance.

So, how can a Founder/CEO anticipate the challenges ahead and plan appropriately when talking to experienced talent?

  1. Be open minded – you’ll be surprise how much you don’t know

There is nothing wrong with a confident CEO, but that doesn’t mean you shouldn’t listen to folks with years of experience.  In almost every conversation you should be able to find at least one insightful nugget that will enhance the lens through which you view the world.

  1. Find a specific problem to solve

Being open minded might be a start, but really it all gets down to brass tacks.  Instead talking to experienced talent in the hypothetical try picking a real problem that you currently have (or anticipate) which is in the wheelhouse of your expert.  Working through a real-life issue can surface many benefits:  better understanding of the problem, possible solutions, and how the person would work in the organization.

  1. Don’t expect experts to be totally startup savvy

It takes about 6 months for someone who has been working at a large company to shake all the big company habits that are better left behind at a startup. This doesn’t mean that they won’t fit in or add tremendous value, it just means that they need to get used to their new environment and figure out how to find the best of both worlds.  Focus on the value they can provide to accelerate the company and ensure they don’t put their foot on the organizational brakes by accident.

There are many people out there with a tremendous amount of experience that can be purposefully leveraged at a startup, but knowing how to leverage that experience requires some thoughtful effort.  As a Founder/CEO your job is to find the best way to solve your problems in new ways leveraging the talent and organization you have AND want to build. Make sure you take the time to figure out how to assemble the right amount of talent and experience for the company you are building.

Filed under Hiring, Startup, Strategy, Team

Startup challenges and how they can differ from large companies: Focus

March 28, 2012 by Leave a Comment

As someone who has spent about half my career in startups and the other half in large organizations, I constantly compare one to the other as a way to figure out how to get the best of both worlds.  There are many examples (and sterotypes) about how big companies are notoriously slow and lack innovation.  Just about anyone who has worked in both types of businesses can put together a big list of pros and cons of big versus small.

The questions that I continually ask my network of former large organization leaders who now work at startups typically relate to the common challenges startups face and what could they learn from large organizations.

This post is the first in a series stemming from recurring observations and conversations I have had across many startups in which benchmarking successful large companies practices would benefit a growing startup.

To start we will discuss ‘Focus’.

There are many smart people who have already discussed the importance of focus to any organization.  Just about every organization says they are focused, and even believe it. However as you start to peel the onion and ask specific questions, you can see how startups try to be clever in investing in too many opportunities at the same time.  To me, in a startup there are two elements to being focused. The first is having the right amount of time, people and resources to successfully achieve a project’s goals. But the second is also not investing in additional projects that could draw on resources, cash or leadership attention that your main project could have/would have needed.

The first question I like to understand about a startup is where they are at as a company. Are they before or after product-market fit?  When I worked at Emmperative we had two big customers who wanted very different enterprise marketing solutions.  Coca-Cola wanted a Sales & Marketing digital asset management distribution solution while Procter & Gamble wanted a Brand Management workflow product. Let me tell you, these are very different types of products. But we wanted to keep both name-plate companies happy. So we split our engineering efforts to solve two separate jobs.  Without going into all the details, our products were still so young they didn’t solve either customers needs completely.

At Adify, we hadn’t yet gotten to product-market fit with our first Build-Your-Own-Network solution, yet we were going after four completely different markets trying to see where we could get traction. Of course each of the markets had their own unique requirements, so until they began to focus on just one market segment which showed promise a lot of cash and resources were spent inefficiently.

One way to think about focus is to divide a startup’s offerings into the three buckets.

#1      Growing & profitable

#2      Fast growing, but not yet profitable (after Product-Market fit)

#3      Before Product-Market fit

If your startup is far enough along to have a product line in bucket #1, it really makes sense to keep investing in your success and allocating resources to buckets #2 and #3 (we can discuss the proportion at another time).

However most early stage startup’s primary/flagship offering is in bucket #2 or #3.

Let’s tackle the easy case first, bucket #3. If your startup has not yet reach product-market fit with its primary offering, investing in multiple offerings or customer segements will be a challenge as you dilute your focus. Even if it the same platform but targeting different markets, this will be a distraction to your team and scarce resources. Now, this doesn’t imply doing market research to seeing how close an offering could meet a different market segment’s need. Or going on a sales call to a potential customer in a different category. I am referring more to building market-segment specific capabilities into your offering that would ‘enable’ you to sell to two different customer types at the same time.  This is where not being focused comes into play.

Now let’s discuss the more common situation. Where a company’s main offering(s) are in bucket #2 and yet they also are investing in new offerings in bucket #3. (And to be clear, in this case I am not talking about a bucket #3 product which is a next-generation version of a product in bucket #2. In fact I would consider that investment as part of bucket #2.)   I am talking about where a company has a fast growing product that still hasn’t reached scale or profitability (bucket #2), and yet the company is investing significantly in new markets, customer segments or products (with or without the same technology platform)  (bucket #3).

There is a company I know who has a phenomenal offering in market that is growing quickly, but has not yet reached scale or profitability.  Thanks to that main product line’s success (with product-market fit) the company has been able to raise lots of cash. With this new cash influx, the company has invested 20%- 50% of its monthly cash burn into new products/markets that leverage the existing technology platform (bucket #3).

Here are some of the issues facing the company:

–          The main product line is struggling to get to scale and profitability.  The company has been able to find a market for their product and sell it, however the commercialization and operational efficiency required to get to scale has yet to occur.  Management experience and organizational focus on these two areas are seen as the primary reasons.

–          As the company struggles to get to profitability with their main product line, the investments in the early stage product development (bucket #3) has siphoned talent, resources and cash from the company.  Their balance sheet looks weak and these new products will still require a huge investment to get to product-market fit.  This has put the company in a challenging position to consider raising more cash that they really shouldn’t need if they were more focused.

–          Given the lack of ability to commercialize and scale the primary offering, there is a lack of organizational confidence that even if the new offerings find product-market fit that the company will be able to scale them too.

The challenges this company faces are pretty big. There are many challenges the leadership needs to address and they need to do it quickly before their cash position creates problems. Their situation is a wonderful example how the leadership did not did not make thoughtful decisions on how to keep the organization focused in a manner which struck the right balance of short term delivery of results and long term growth.

While I don’t know the right amount of resources to allocate to non-primary Bucket #3 opportunities for a early stage startup, I am sure the maximum number is less than 20% and probably more around 10%.

Larger companies with profitable product can (and should ) invest in high growth opportunities. Due to their size they can take a more portfolio management approach to their investments and balance short vs. long term growth in way that fits their ability to generate cash from their core businesses.

If you are in an early stage startup, you should ask yourself how much of the company time, people and resources are we dedicating to these Bucket # 3 (before product-market fit) opportunities? And how much is it ‘costing’ to pursue them in terms of cash, resources and management focus.

Filed under Product Development, Risk, Startup, Strategy, Team

How to interpret VC feedback – standing out from the crowd

December 9, 2011 by Leave a Comment

In my past I have been turned down by VCs many, many times.  And while some of the VCs may not be so great at being a VC and not ‘get it’, for what I was pitching, it kind of didn’t matter.  Overall if you speak to more than five investors and basically get the same result it ain’t them it’s you.  But how do you know what ‘it’ is and figure out what to do about it?  It is really hard for someone who is raising money to figure out how to interpret the feedback (explicit or implicit) received.

You can break down what it takes to get funding into three big buckets Team, Concept, Traction.  Just about every question or discussion you had with an investor is evaluating at least one of these areas.

To get funded, you mostly need high marks on two of the three and ideally all three.  And sometimes funding is a no-brainer. If you are already a successful entrepreneur you can probably get by with just having a team and are essentially ‘instantly fundable’.  But most folks raising money don’t have a previous success.

The other ‘instantly fundable’ attribute is having big and growing traction. Mark Zuckerberg was able to raise his Series A from Accel Partners not because of the team, but because he had a pretty good concept and most important traction. Having great traction solves almost everything (except for maybe a small market) in order to get funded. And not just good traction, accelerating traction.

So assuming you are not a previously successful, repeat entrepreneur and don’t have accelerating traction, then it is basically a mix of the team, concept and traction that the VC is looking at.

With your product still in development (and likely without deep proprietary technology behind it) and traction several months away, it is all about evaluating the concept and the team. Interpreting all the messages that were sent by an investor can tell you how close you are.  Do not be surprised if you are a lot further than you expect to be despite all the nice things the VC says to you (like ‘when you have a lead’ or ‘I’m very interested to track you guys as you see some results’).

So let’s start with the team starting with the founders.  Attributes to look at include the technical background of the team. How much engineering experience is there on the team that knows how to ship a scalable product. Also, how much business acumen on the team to address acquisition and monetization elements of the strategy.  Education and previous companies worked at play a role in experience, but at the end of the day an investor wants to know if they can trust the team to build something and get people using it.

One thing most first-time entrepreneurs don’t appreciate is that most other entrepreneurs are also really smart. Most have really top notch educations, strong technical backgrounds and some previous experience in a related field to what they are working on. The question that a VC is trying to answers is ‘Are you exceptional?’.  The best (clichéd) analogy is American Idol. However, not during open auditions, but when the number of contestants has been narrowed down to a much smaller number like 20 or 30.

At that point everyone is a great singer. But what makes you have star potential even though you have never recorded an album before and not a professional singer? What makes the VC believe you have star potential?What crazy thing(s) have you done that most people would never do that shows you got something special? Did you start a business when you were 12 years old?  Did you build a cool product on your own that solved a cool problem? The ‘exceptional’ usually involves some level of either incredible domain expertise that you were able to do something great with or demonstrating some form of salesmanship that accomplished something most people would never dream of even trying.

There are many things that could show that you are ‘exceptional’, but in reality most don’t.

Given the market the team is going after, how much domain expertise is there to understand the nuances associated with the target customer. Of course, more is better.  Most thoughtful VCs can quickly ask a few questions to the founding team to see if the understand the basics and some subtleties associated with the market they are pursuing.  In a consumer business, developing some consumer insights and understanding behaviors is critical.  I can’t tell you how many times I have spoken to a startup who is developing a new product and has yet to talk to anyone who would be a target user.

At the end of the day, a VC is trying to understand if you know your stuff and do you have the passion and dedication to figure it out quickly.

A related element to evaluating the team is their ability to eloquently address the second big attribute VCs care about…the concept.

By concept I mean everything from ‘What is the problem being solved’ to the product experience, to proprietary technology, distribution to market potential.  All that rolled into one. Like we used to say at Intuit…Is it a big unmet need, that you solve well and can you have a durable competitive advantage?

And then there are the other common questions:  How will you get users/customers? How will you get them to come back? How often will they use it? How will you make money? Basically Acquisition/Distribution, Retention, Engagement and Monetization. Related to this is the network effects and scalability of your offering or model.

Do not underestimate the need to have convincing arguments for each of these elements.  Without data around adoption of your product it is very possible that there are risks on several of these attributes. Each of these risks affects your fundability.   This is where an investor can easily drill down and see how well you understand your business by asking questions about your metrics. Even if you don’t have any tangible numbers, you should know the benchmarks you will be compared to. Whether it is eCPM, DAU/MAU, CPA etc. a good knowledge of the key target metrics will demonstrate that you know your stuff.  A red flag for an investor is if they know more about the metrics than you do.

Finally, one last attribute to consider is sex appeal. How hot a space are you pursuing? If you are working on a standalone web property versus a social, mobile, local (insert hot space name here) then you probably won’t be doing so great on the sizzle scale.

It is hard to get a term sheet from a venture capital firm. All you need to do is to look at the numbers of how many Series A investments any firm makes compared to how many startups are created annually.  A longtime venture capitalist once told me that VCs are not risk takers. In fact they are exactly the opposite, they are risk eradicators. The more you have reduced each of the risk factors related to the team, concept and traction described above, the much higher the probability of closing a venture round. Do you have what it takes to be the next American Idol?

Filed under Concept, Risk, Startup, Strategy, Team, Venture Capitalist, Venture Captial

Increasing the Odds of Success: Don’t Expect Cascading Miracles

October 21, 2011 by Leave a Comment

Recently one of our investors asked me to meet with a friend of his who had his own startup and was looking to raise money.  I often get asked to look at startup companiesor ideas by people in my network to let them know what I think. Typically it is because they are looking to make an investment, join the company or want me to give them advice on starting their own company.  I both love and hate doing this.  What I do like is learning about new companies and the problems they solve, the different spin each one of them has and most importantly seeing how other entrepreneurs work.  What I don’t like is when I have share with another entrepreneur what I really think about their idea.  You see, like any VC will tell you, most ideas that I see aren’t venture fundable. However, unlike most VCs, I feel I have an obligation as an entrepreneur who has been around the block a couple of times to be candid in my feedback about the prospects for their company based on what I learned (so far).  In my mind, since I personally don’t have an agenda, I feel  giving the entrepreneur feedback that other folks may not share with them can be pretty helpful. I know I want to hear that kind of stuff, even if it hurts.  Anyone who knows me well knows that if asked I am pretty candid about my assessments.  And while I am occasionally wrong, I have saved my network lots of money and time (last year I helped one of my investors save over $1M).

So when I was asked to meet a fellow entrepreneur I agreed to meet for breakfast with my investor’s friend who was working on a new kind of calendaring product.

Evaluating a Startup for Investment

Before our meeting, I checked out his website and saw that I needed to complete the site’s registration process in order to see the product.  Immediately a flag went up in my head when I couldn’t use my Facebook, Google or Twitter profile to authorize the app.   In 2011 there is basically no excuse not to offer at least one of these login options for a consumer application.  I also checked out the founder’s profile on LinkedIn and saw he had some phenomenal PD experience at one of the most successful consumer technology companies around so he knew how to build great products.  Heading to breakfast I didn’t know what to expect but I was hoping my initial login issue was just a beta release nit and that I would be blown away by when I learned more about what he was doing.

At breakfast I was pretty impressed with my fellow entrepreneur’s background. Great product and technology experience. Also lots of startup stints, so he knew what he what he was getting into.

We started by him explaining the problem he was trying to solve. And it is clearly a big problem that many people have.  And many people have tried unsuccessfully to solve. There are dozens of free competitive/substitute solutions in market. None have solved the problem completely, but most people use some solution that solves part of the problem. So, kudos to him for trying to solve a big unmet need.

He spent a few minutes giving me a demo of his product and it was clear he knew how to build software. The UI was very attractive, looked pretty easy to use and had lots of features that would be needed to complete the most common jobs to be solved. But as I started asking questions about what it would take to make the product work well for most users things started to unravel pretty quickly.  It turns out that a lot of the content required to populate the application would need to come in via a feed similar to an RSS feed. These feeds would be provided by both large and small publishers. It turns out that most sites do not offer this kind of feed.  It would also require users of the application to know how to import these feeds. I don’t know about you, but I never figured out how to use RSS feeds properly. If it weren’t for the Rockmelt browser that basically did it for me, I would never use  feeds.  I couldn’t imagine your average user to be able to know how to import feeds for this app. In fact the overall product seemed like it would be easy to use IF it was an enterprise application, but it was a consumer application. It was apparent that it was not drop dead simple to figure out how to make it work for most users given the nuance of how each event could be created and shared.

Risk factors:

I then started going down the typical list for evaluating companies…user acquisition, retention, monetization, network effects etc.  It turns out my sign on process wasn’t misguided. There was not social networking capabilities built into the product other than email notifications.  Non-event organizers would not need to use the software and probably wouldn’t want to given the limited benefit unless everyone they knew used it too.  Hmmmm.  Retention was dependant on power users but lots of light users – kind of like Evite but without the pageviews.

So there was nothing built into the product that was social or incentivized non-users to use the product themselves.  The target would then be power users with no easily identifiably attribute to be able to find them in a haystack.

Given the competitive landscape he couldn’t charge for the product and I have my doubts about the other monetization options given all the factors that need to work in order to make the big bucks. The current plan for monetization was contextual advertising and selling content (specialized feed and template) subscriptions. Advertising seemed to be too distant from the core problem being solved to be able to capture high conversion rate CPAs and the subscriptions could work, but for a small market.

The best definition I have heard for marketing is “Identify a consumer need, meet a consumer need”.  But for an entrepreneur I have added a word… “Identify a consumer need, meet a consumer need, profitably”.   While it takes skill to build a great product, there are lots companies that can create products that solve a big unmet need, but never make any money.

Cascading Miracles

You see the challenge I found with this company and many other companies I have looked at is that they needed cascading miracles in order to be successful.  A hard product problem in general just to make the product easy, heavy users needed to know how to use feeds, publishers needed to provide them, users somehow needed to find the product, somehow making money would have to come together. This is way too many risk factors for a startup.  The probability of success just seemed too low.

I shared with my fellow entrepreneur my appreciation for him tackling a real, hard problem. But I also questioned the number of challenges he was going to face in order for his company to succeed.  We both understood the incredible effort required to scale a startup even in the best of conditions, why would you make your life so stressful by tackling something that would be hard almost every step of the way?   It takes just as much energy to build a company that only requires one miracle to succeed as one that requires three or four.  So why would you choose an idea/ product/ comapny  that needs more than one (or maybe two if you feel really confident or have lots of cash)? Life is too short to depend on cascading miracles for your company’s success especially if it isn’t riding any waves that give you huge momentum these days like social, mobile or local.

Facing Reality

At the end of our conversation I shared with him that I thought his startup fell in the bottom half of all startups that I see.  It was probably the bottom of the third quartile. No one likes to hear their baby is ugly.  I know I never liked hearing the truth about what was wrong with my startups.  In reality he could pivot and make something of his technology. This introduces a topic for another blog entry about how entrepreneurs can often get too attached to their ideas and develops blind spots to the realities of their company.  I wished him luck and advised my investor to pass on the opportunity.

Filed under Startup, Strategy Tagged with , , , ,

Pricing: Capturing As Much of the Value That You Create As You Can

September 1, 2011 by Leave a Comment

I’ve wanted to write about pricing for a long time. Finally, I have put together my first piece on a practical framework I’ve seen in action during my career. Pricing is one of the most important and hardest strategies to develop. It goes without saying that a product or company’s revenue is directly a function of their pricing model. Pricing is what drives revenue, margins and profitability.

I am not an economist and do not claim to be an expert in micro-economics, even though I am familiar with most of the basic concepts. In this blog you will not see me recommend that you set your price at the point where marginal revenue = marginal costs. In the world of internet software where marginal cost is usually negligible that concept is somewhat meaningless. Instead…

Pricing is all about capturing the value you create for a customer.

Let me explain the three core concept in more detail: creating value, capturing value and price.

Creating Value:

By definition if you have created a product or service that people are willing to pay for there is some value that you have created which is greater than your customer’s current state without it.  Somehow the offering you have put together is better for your customer than doing nothing or trying to do it themselves.  A few obvious examples are buying a ready-made cake at the bakery instead of baking it yourself.  It may be cheaper to buy all the ingredients yourself and bake it, but it you may not have time or be willing to risk having the cake not turning out as well as the store-bought one. Thus the value created by the bakery is greater than the value of the cake you would make yourself. Net, net it is some combination of costs reduced and/or benefits created that determine the value of an offering to a customer (relative to their current state or substitute option).

We will talk a little more about this later, and without getting into too much micro-economics, the value created by an offering isn’t the same for every customer. This is basically what people refer to as the demand curve. At different prices more or less people will want to buy your product.

Capturing Value

This is one of the most important (and sometimes ‘hidden’) elements of pricing. The essence of which is, given that you create real value for customers (save money, make money, other valued benefits that are delivered) is how can you capture as much of that value that you create for customers?  Is there a way to tie the price your charge to the value created for your customer? This may sound obvious and easy, but it isn’t. This is especially true if there is a big range of value created for different customers for the same product. A great example of this is Microsoft’s Excel. The value to a college student using Excel to do homework assignments etc. at school are very different compared to a management consultant building a sophisticated M&A model – yet the price is essentially the same for the two different types of customers (ignoring the small price difference between MSFT business vs. school edition of Excel).

Furthermore, a concept I like to refer to as ‘metering’ is how a product ties its price to the value it creates for customers. An easy example of this is buying a box of cereal. The metering device is the physical box that the cereal comes in that sits on the shelves at a grocery. There are usually several sizes at different price points based on the volume that you are buying. Another historically great example of metering to capture value has been the phone company. They were able to charge for long distance telephone calls where the phone company metering device was based on both the duration of the phone (i.e. number of minutes) and the distance between the callers. The phone is one of the greatest inventions but without having metering devices built in, the phone companies may not have been able to generate as much revenue. (Of course the world has change thanks to VOIP technology so this example is not as black and white as it used to be thanks to All-You-Can-Eat pricing, Vonage and Skype).  I will touch a little more on this later, but building in pricing-related metering devices to capture value is a critical investment for a technology company.

Price

I am sure this is a gross over-simplification of different pricing strategies, but in my real-life experience in consumer products, enterprise and online software there are basically four ways to look at price.

They are:

  1. Pricing relative to costs
  2. Pricing relative to competition
  3. Pricing relative to value
  4. Psychological pricing

I won’t spend much time on 4. Psychological pricing which entails things like fashion and status related items or specific price points like $9.99 for a book or $0.99 for an iTunes song.  These are special pricing types and I am sure there are other sources of well-research experts who can explain these less tangible and sometimes more tactical price points. Instead I will focus on the first three.

Other elements I won’t touch on here are price optimization, which to me has more to do with price elasticity (to be covered an upcoming blog) and bundling. These two concepts are ‘click down’ components that get deeper into the mechanics of your pricing strategy once you have your basic principles figure out.

1. Pricing relative to costs

This is pretty much what it sounds like – you figure out what your costs are and the determine the margin that you would like to achieve. In many industries there are standard margin expectations. Not sure how these have held up over time, but the rules of thumb I have used historically were professional services at 50%, retail food/CPG 30%,  restaurants 60%. I am sure I am over-generalizing, but this type of pricing easily applies to when your customer can easily do the math on how much it would cost to find an equivalent solution to yours on their own.  Since it usually isn’t worth the effort for them to build vs. buy they will choose to buy yours solution if the margin premium you are charging is reasonable. Pricing relative cost is also frequently used in commodity-like markets where there are many suppliers offering a very similar, mostly undifferentiated solution compared to yours.

2. Pricing relative to competition

The basic premise of pricing relative to competition is looking at direct competitors and substitute products for yours. For example, if something breaks in your TV or game console and you go to a repair shop to get it fixed you will compare how much they will charge you to buying a new one (all else being equal).  When I worked at Kraft I was involved in launching a new dessert product and we compare equal servings of bakery desserts, versus packaged desserts versus from-scratch to get the spectrum of competitive prices to see where we would fit in.

Another example is video games. For simplicity sake let’s say Madden Football or Call of Duty costs $50, most buyers will ask themselves will I spend at least 10 -15 hours playing this game?  Why? Well because they are probably comparing the entertainment value of the game versus going to watch a movie in a theater. Assuming each movie cost about $10 and lasts a couple of hours, it is pretty easy to do the math on whether or not you think the video game is worth about as much as five movies.

The less differentiated your solution is compared to alternate solutions the more you will end up with this type of pricing strategy.

3. Pricing relative to value

As discussed earlier, this is the case where you try to capture as much of the value (cost reduction and/or benefits created) that you deliver to customers. At Emmperative we tried to price our software based on the value we created. As an enterprise software company our primary value proposition was all about increasing time to market with higher quality for our customers along with some cost savings along the way.  One of the challenges was selling the fuzzy revenue benefits to our pricing as customers focused on the cost savings as a way to pay for our software. In hindsight the primary challenge I think we faced is that we tried to price the software as too high a percentage of the value we were creating. Over the past 10 years I have developed a rule of thumb that you should expect to capture 10%-15% of the value you create for your customer. This way they should easily see that buying your solution will provide an order of magnitude improvement over the current state.  Of course early on you could easily charge a higher percentage due to your first-to-market position, but in the longer run the 10% rule-of-thumb is pretty helpful is assessing the potential for a technology business.

One of the best models in the history of pricing relative to value is Google AdWords. When Google AdWords (and AdSense) achieved scale/network effects their auction-based pricing per click of keywords allowed them to capture almost the entire amount of value their ad/search system created for advertisers. Since most sophisticated advertisers work with some type of Cost-Per-Action the advertiser can easily do the math to figure out the value of each click and bid up to that amount and be happy paying it.  As a result, Google has a near perfect system to capture the value they create all along the demand curve by having different keyword pricing for each advertiser based on what they are willing to pay.  Without scale and network effects that Google has other ad network solutions can’t capture anywhere near the same value as Google does.

Picking the attributes to meter

Sometimes you have the ability to have a very dynamic and flexible price metering capability like auction-style model of Google Adwords or eBay.  But many times you will need to pick specific price points.  Many broad-appeal technology based solutions have a feature based two or three tiered pricing Basic/Premium or Good/Better/Best (as I saw at Intuit with their QuickBooks and TurboTax products) (note: QuickBooks is a great example where the value of QuickBooks for many customers is more than 10X what they would pay relative alternate solutions like an accountant’s hourly rate). This type of pricing basically segments the market into different user types or levels/types of functionality and prices accordingly (and may include a free version a la “freemium model”).  However there are other ways to price beyond feature breadth and depth.  Subscription pricing is usually time-based, enterprise solutions can be based on number of users, and others like Dropbox are based on storage capacity.  Understanding the different types of customers, their segmentation based on usage and profile and what they value is the key to picking which attributes to meter.

Building the metering capability into your product

It’s great that the phone company was able to allow anyone to call anyone else; a phenomenal innovation back in the day. However, the ability to measure the duration of a call and the distance between the callers was just as critical to their success as the actual phone call.  I am sure a large amount of resources went into building these metering measurement and billing systems – maybe even as much effort as rolling out the telephony technology? The point being with all new ways to deliver web-based solutions these days, the effort required to build pricing-related capabilities can be a significant investment. The earlier you include this into your development plans the higher the probability of you maximizing your value-capture.

Putting it all together

Figuring out the attributes you are going use to meter the value delivered to customers and charge for early on is critical to the success of your offering/company.  The earlier you build the metering (and measurement) plumbing into your offering relative to the value you create, the better your likelihood of being able to maximize your revenue potential. My experience has been that putting in the metering and measurement tools take almost as much effort to build into your product as the core functionality of the product. So if you solely focus on building the customer solution you may unknowingly be making major compromises to your revenue potential if you need to retrofit your solution or find a less optimal metering tool to charge with down the road.

Filed under Margins, Pricing, Product Development, Strategy, Value

Launch & Learn – quickly adapting to insights from our users

July 28, 2011 by Leave a Comment

Well the last month has certainly been very interesting. We launched a Private Beta version of Jernel to a few select folks including a couple of friends who are product design and usability folks. I also set up shop in a couple of Starbucks and did some usability testing with random users in San Francisco and Las Vegas.  It’s amazing how quickly we got consistent feedback from everyone who tried Jernel out.

First the good news, everyone loves the Jernel concept of it being a fun, easy way to share and remember your life experiences.  Then, when we tell them that Jernel also allows you to add on specific Jernels for different life events or hobbies I immediately get their request for some specific type of Jernel that suits their world. Then they send me their email to sign up to be a beta tester. This is awesome, we really couldn’t ask for a better qualitative response.

On the other hand we got very direct and actionable feedback in two key areas:

To start, as easy as our product is to use (as demonstrated by our task completion rate and user confidence) it was still not easy enough. We realized that we still had a gap between ‘Easy’ and ‘Drop Dead Simple’. Thanks to some excellent, actionable recommendations by my design friends and being able to quickly get feedback to the new wireframes with real users we made the decision to make a major UI change to how Jernel entries are added and displayed.  Thanks to the latest jQuery tools and other fancy Javascript capabilities we’ve been able to simplify the Jernel entry process to just a couple of clicks. Luckily these changes are mostly cosmetic at the presentation layer and do not require many changes to the core functionality and as a result we’ve been able to make the changes in just a few short weeks.

The second major theme we heard was all about branding and graphic appeal.  We started from a place where we were making everything customized – each type of Jernel, badges, buttons etc. And while they were generally consistent, they didn’t really have a broad enough appeal or we created user complexity by offering too much choice. So we took that feedback to heart and have tried to solve for the ‘highest common denominator’ in our branding and graphical design. We have simplified our color palette, use of colors and number of badges. While I am not 100% sure that is where we want to be in the long term, to get to a public launch it really made sense to simplify right now and then expand later based on in-market learning.

Net-net, we have dramatically simplified our product for the initial Beta release. In fact, we have stripped out the majority of functionality we have built to get to market quickly and learn from our users.  While we expect to use all the stuff we removed in subsequent realeases, I am sure they won’t necessarily return in their original form but be adapted based on new insights.

The flip side to simplifying functionality and streamlining our branding/graphics within the app is that we’ve made a choice to provide less capabilities and options to our users.  I am expecting us to hear that we over-simplified things and that users will demand more if they are going to make Jernel a regular part of their life.  I am looking forward to that moment because we are ready for it.

Filed under Product Development, Strategy

The Biggest Decision

June 2, 2011 by Leave a Comment

So we have been working  on Jernel with our small team since about November. It is now June. We thought v1 would have been completed by March and in reality it won’t be ready until at least next week – so essentially about 3 months behind what we expected. Like most startups we have been trying to deliver a Minimum Viable Product (MVP) for v1 (a la Lean Startup philosophy). The reality is that we are delivering a lot more than an MVP. This has to do with a decision we made a long time ago about how we would architect our product platform.

Let me take a step back and explain.

Last year we had a working model of the Jernel offering and did some user testing which taught us a lot. Not only did we get a feel for what users valued and what they didn’t, we also got a pretty good qualitative feel for the appeal of Jernel. Now past experience has taught us not to overvalue user feedback in usability testing on how well a product will do, but this time was a little different because the sentiment was nearly unanimous and consistent. It has been the same since I have told or shown anyone about Jernel and how it works. I am sure many marketing purists will tell me I should not overweight this feedback – but at this point in time (before we do our next set of user research) I still believe we have something special in development.

After we did the user research I also went to visit a few friends on Sand Hill road just to share with them what we were doing, get their feedback and start having them track our progress. By far the best piece of feedback we received was from a young VC partners at a major firm who suggested we horizontalize our offering and create add-in vertical solutions. This meant that instead of having unique offerings for each vertical to allow users to have a general version of our app and add ‘action packs’ as he called them for each area of interest to the user. “Otherwise you idea seems to narrow” he said. Several other good points were made that I hope to include in future posts.

The main benefit to creating a single product platform would be the ability to only need to acquire customers once and then retain them for life while they Jernel about all their interests in single location. This made a lot of sense given our learning from our first offering.

However, this feedback meant we would need to fundamentally change how we architected the product. Instead of separate instances of each vertical we needed to have a single platform with users would customize by adding the individual verticals that were right for them. This meant the set-up process was to be more complicated and user experiences needed to be adapted to toggle between verticals. It would also mean changing the paradigm the user would need to understand how the product worked. Net-net this added complexity and time to our development.
Now that we have an almost-ready for primetime product it is clear the decision to have a horizontal platform with vertical solution was the most important and best decision we have made so far for Jernel. Without making that choice it is likely we would have created our “start-up ceiling”, limiting our potential before we even started.

Filed under Product Development, Strategy Tagged with , , ,