This article appeared in TechCrunch Jan 19, 2013.  Here's the link.   
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A friend of mine told me recently that he closed a $240,000 account. A competitor (let’s call it BigCo) was bidding for the business. I doubt that BigCo even considered my friend’s company (let’s call it SmallCo) a direct competitor. BigCo is a major player in their space and it raised a lot of money from good VCs and has a strong customer base.
SmallCo’s product doesn’t have a tenth of BigCo’s features. And yet in spite of that, SmallCo won the account. Actually, it was because of that.

As products mature, companies continue to compete in heated battles with their competitors by adding more features and more functionality. Investors and shareholders want to see steady revenue growth, so prices creep up. Yet, the truth of the matter is that a lot of customers need only a fraction of a product’s capabilities.  In fact, many of them would prefer fewer features because extra features tend to make products clunky and difficult to use. Still, companies become feature-producing machines.

As a result, what often happens is some small company comes out with a product that’s just good enough and just cheap enough for the lowest tier of customers and BigCos start losing business. BigCos console themselves by saying the customers weren’t all that profitable and that it’s too expensive to serve them.  And they walk away and focus upstream. SmallCos gets a foothold and releases a new set of features.  And the process repeats.

There are hundreds of examples. PCs disrupted mainframes exactly this way. Japanese cars and electronics disrupted American ones, only to be disrupted later by Korean companies and now Chinese companies. Merrill Lynch was disrupted by Schwab and then E-Trade. Phone companies by Skype. Visa and Mastercard by Square. Cisco was disrupted by WebEx, then acquired it, then screwed it up, then got disrupted by Citrix and LogMeIn. Smartphone cameras disrupted Nikon and Kodak.

The process of Low End Disruption is beautifully described in Clayton Christensen’s series of books:The Innovator’s Dilemma, The Innovator’s Solution and The Innovator’s DNA. If you haven’t read them, you should. What’s amazing about these books is not only how important their conclusions are but how well researched they are. These are academic works of the highest quality (I should know. I studied under Jeff Dyer, who co-authored “The Innovator’s DNA”).

So why is this relevant to the deal that I mentioned above? Because I believe the process starts much sooner now. Companies that are barely out of the gate are getting disrupted. The rapid pace of innovation we are experiencing, plus the low costs of starting a company and the reasonable availability of venture capital, add up to a large number of startups fighting for survival in very close quarters. I found the following perceptual map of photo sharing services a couple of years ago.

There are a lot of companies. But just think how many more aren’t on the map: iPhoto, 500px, Tumblecloud, Skitch and ACD. And never mind Facebook, Twitter and Instagram. All of them are differentiated – all of them have something unique – and yet I doubt that too many customers use more than one or two. And that’s when the trade-off happens. In each segment, customers tend to pick the one service that addresses their most salient need the best and other needs just well enough. Those who want to manage albums get Picasa.  Share with friends? Facebook. Mobile? Instagram etc., etc., etc. And now we have come full circle. In my view, companies of all sizes need to think about “good enough” competitors.

So what can be done about this?

1. Identify the function that most customers of your segment find most important – this requires a lot of customer discovery – and make it the focus of your value proposition. Be AMAZING at it. Photobucket is good at mobile, but Instagram is great. For example, RingCentral provides VoIP as a part of some of its services. But we never positioned ourselves as a VoIP company because that’s not our most important thing. Cloud business phone system is.
2. Think about your space not only in terms of who competes with you directly but who is capable of addressing the same customer needs you do. When talking to prospects, don’t just ask them which competitors they are looking at but ask them about ALL the needs they hope to address with your product. By asking this question a few weeks ago, we identified the opportunity we won today.
3. If you are a larger company, defend your lowest tiers fiercely. Better yet, disrupt yourself. Launch a stripped down, low-cost version of your product. This doesn’t happen much. I discussed the difficulties of this on my blog earlier this year. One example I gave is Charles Schwab’s launch of eSchwab. Do you have others?

There’s one other thing you should do as part of your go-to-market strategy. You need to very clearly identify an underserved (or over-served) market segment and make it your own. If you can’t find one that fits, INVENT one! At Influitive for example, we define our focus as “advocate mobilization.” And if that sounds strange, just remember that only a handful of years ago when Eloqua was founded, “marketing automation” sounded strange. Yet today, it is a whole industry with such great companies as Eloqua, Marketo, and ActOn leading the charge. Perhaps there’s an industry segment with your company name on it.

This article first appeared in the SiliconAngle on September 12, 2012http://siliconangle.com/blog/2012/09/12/beyond-product-design-company-design/ and was co-written by me and my frequent collaborator Ben Smith IV 

Have you ever seen the startup competitions and investment panels, such as those run by the VC TaskForce, JumpStartDays and theSVForum?

These events are designed for early stage startup founders to sharpen the pitch and practice speaking about their companies to a rather critical investor audience. The format allows a brief presentation (often without slides) followed by several minutes of Q&A. It is designed this way in order to impose a Twitter-like design constraint on the presenter. The purpose is to force the entrepreneur to get to the very core of their idea. Having been on the other side of the table many times, we are very empathetic to the problem of getting lost in the minutia and not being able to explain the core value in a concise and powerful way. And we value the clarity of thought that is required to use this format effectively.

Besides the market need, team composition etc, most other questions tend to focus on four somewhat related topics:

§  How will you scale customer acquisition to acquire a large number of customers?

§  How do you get a lot of high-quality revenue? “High-quality” money, in our minds, means recurring revenue coming from strategic activities. We frequently see companies that generate revenue from professional services or other forms of customization. This is tactical revenue and it tends to defocus the company.

§  How do you not only enter the market effectively but also shut the door behind you?  How do you make your product inherently sticky?

§  If you actually win, is it a game worth winning? Is the business something that can capture substantial protectable value and change the ecosystem if you actually make it happen?

What we aim to do in this paper, is dispel the idea that a “small” startup has little chance of success over large established players. Instead by following key concepts, many proven through the investment forums mentioned above, startups can play big and succeed.

Here’s how we think about it:
 

1.     One of the keys to scaling customer acquisition is “trial-ability”. Trial-ability goes far beyond a free trial or money-back guarantee or the freemium model.  Trial-ability is a quality of the product stemming from deliberate and systematic elimination of all obstacles a user faces when trying your product for the first time. Every extra step customers need to take before being able to use your product, every decision they need to make, every question they need to answer, every bit of software they need to download and install, every bit of information they need to type in is an obstacle.  It is essential to think about what is the unavoidable and necessary minimum.

2.     Two key components of high quality revenue is combination of high margin and high value vs the Next Best Alternative (NBA). The trick here is to be mindful of what is the NBA. Often, entrepreneurs compare their solution only to direct competitors. They often say “my product is great because no one else is doing exactly what I’m doing”.  This is a wrong way to think about the business.  Good questions to ask are: What would my customers do if our service didn’t exist; Can customers address their need in another way; Can a similar solution be “jury-rigged” using existing services; Can they get value without a big upfront time investment? This has to not only consider the monetary cost but the cost of effort and time.

3.     One of the best ways to prevent customers from leaving is to deliberately design products with very high switching costs (the cost for a customer to cancel your service).  These costs can be expressed in dollars – like contract termination fees for wireless carriers – but this way isn’t the best because it actually reduces trial-ability (see 1).  A much better way is to measure switching costs in units of satisfaction (or inconvenience).  Think about leaving Dropbox after you’ve shared your documents with a bunch of people. If someone offered you a similar service for a couple of bucks less, would it be worth the hassle?

4.     One way of thinking about the impact of your business on the ecosystem is by using game theory. Game theory offers methods for evaluating how ecosystem participants are likely to react to your strategic “moves”. Another idea is by focusing on network effects.  This term is often used and almost as often misused.  A network effect is impact that one user of a services has on the value that another user derives from this service.  Social networks are an obvious example.  But there are many more examples:  Wireless carriers offer discounts on calls made “on network” because they have a lower cost.  In the payment industry, wholesale rates depend heavily on volume of transactions so payment processing companies with larger volume are able to offer deeper discounts to their customers.

Personal examples: Our companies MerchantCircle, and Influitive offer some examples of how these approaches were implemented in practice.

Influitive, which just raised its seed round from 11 investors, is designed to be sticky.  Advocates engage with companies they are passionate about (such as ActOn, Dell Kace and Eloqua) through Influitive’s Advocate Hub platform.  As the key interface to companies’ most valuable constituency and through deep integration with other players in the ecosystem, such as CRM, Marketing Automation and Demand Gen vendors, Influitive becomes an integral part of these companies’ go-to-market strategy.

At MerchantCircle, the key focus was on two fundamental problems in the local business, both of which came down to distribution. We knew we could provide value to local merchants and consumer once we had a critical mass network, so we spent every day working experiments to build a network of merchants through organic and eventually business development efforts.

Not everything we did worked, and there are 20 things we would do better the next time, but we knew that the product focus was building a network of merchants on a scalable basis.  We did this with a free platform, if there is a network effect and a zero marginal cost of delivery, the answer is always focus on distribution and free is a big part of the answer. People are always asking about how we did it, the short answer is we got out of bed in the middle of night thinking about how to grow merchants.  If you have a smart team who is willing to experiment and they focus on a key metric like distribution or RPU or content depth, it will happen.  The key thing is picking a metric that matters for the product and that once you have won on it, will matter.

Conclusion

For a long time, the mantra has been – address customer’s needs.  And it seems like we are there.  Almost every pitch we hear does a good job of solving customer’s problems.  But that isn’t enough anymore because your competitors are thinking the same way, too.  And there are always many ways to solve each problem.  So how do you pick the right one?  Well, you can use some of the tools we suggested above, but most importantly don’t just focus on designing a great product – design a great company.

About Authors

Victor Belfor is the VP of Business Development at Influitive.  Influitive is a platform for mobilizing brand advocates.  He’s also an angel investor and startup advisor.  Prior to his role at Influitive, he was the head of strategic alliances at RingCentral.  His blog is vbelfor.weebly.com and his twitter handle is @vbelfor.

Ben T. Smith IV is CEO of ShopCo, a startup focused on reinventing online discovery shopping by delivering the most engaging social shopping experience for consumers, wherever they happen to be.  He is also a Venture Partner at Accelerator Ventures and co-founder of MerchantCircle.com and Spoke.com. Ben blogs at btsiv.com, and you can follow him on Twitter at @bentsmithfour