A founder came to see me yesterday to give me an update on how last year went and to bounce some ideas off of me for where to take the company next. The company is a small business that is approaching $1 million in revenue. Their software serves a very narrow market niche currently and has generally been an installed piece of software until the last 12 months or so when they offered up a web-based version. In looking at their market and segments within it, we figured they’d probably landed about 10% of the target customers. And they’ve sold the boxed version of the software to about 3,000 customers and the online version has now been sold to about 200 more.
Their software application, with a bit of investment and a new hire or two, could be adapted to a couple of other niche industries. And the founders love their little application. Their potential new market niches seemed to get the founders pretty excited and they had basically defined their fundraising needs so that they could build the new product and start marketing it to the new customer base. A customer base they know nothing about.
I asked him why he would want to do that. He said it was because “the application is just so darned flexible.” I told him that I thought his 3,000+ customers deserve more from him than that, and so do the next 3,000 customers!
Now I’ll be honest. Many of the clients I work with have very few clients. So my rather dull eyes immediately focused on all those shiny customers. I felt it was obvious that he was in danger of ignoring the most important asset his business had accumulated over the years…his customers! The first version of the software he built was built on an ancient platform and very difficult to use, as evidenced by the support document which was a 500 page, photocopied, ring-bound tome. And this unsophisticated mess was released not 20 years ago, but in 2003! And guess what…? People were buying it! And now he has managed to begin converting his customer base to the online version of the site, which they’ll have to visit every single day their businesses are open. He landed one of the largest companies in the industry as a client at the end of 2011. And yet, somehow, he was fixated on the other potential markets for the software and not the customers.
There are certainly opportunities to pursue the development of other market applications with their platform. However, these should be opportunistic at best and will not likely involve his company directly, but perhaps through some licensed version of the code. Without a doubt, for some other companies, pursuing new niches is a good idea strategically…especially when your current niche ain’t buyin’. So every company is different. But when you’re having the kind of success mining a mountain that this company is having, and you’ve only mined 10% of the gems, why would you go looking for a new mountain?
Another client and I had a conversation today about a strategic decision he is facing. His business has entered a bit of growth phase and has been approached by a foreign company about a strategic relationship…possibly an investment to allow the foreign company to enter the US market with a line of products that are similar and complementary to my client’s products. For a variety of reasons, it is a tempting option, but one with risk. We spent about an hour discussing the other company and its product line and finally we got around to discussing the target market of my client where he is beginning to gain increased traction. I said “have there been companies in your targeted industry and size range that you lost but might have won by including this foreign company’s products?” When he said “maybe, but probably not,” the decision regarding the foreign company got easy. If you think in terms of your customers and not your technology, it becomes easier to make clear decisions with no regrets. There is always the chance that the road not chosen could have led you to the promised land. But you have to play the percentages…and I’d bet on my existing customers every time.
Also today, I met with a brand new start-up and we were going over their investor deck. It was pretty good, but just didn’t sit well, overall, with me until we went back to slide 3 where the company had their one-sentence elevator pitch. It said something like “Our company is a cloud-based, crowdsourced platform that generates new sources of funding by leveraging…something, something, something…for medium sized companies in the publishing industry”. When we went back to that, I realized what was wrong…the first words they used to describe themselves were about their technology, NOT their customers! PEOPLE! If you want to develop cool technology, go to a hackathon. If you want to build a business, solve a customer problem!
The outcome for all of these companies is still uncertain. But my advice to you as you build your business is the following:
1) If you are a relatively small business (<$5 million in revenue) and can evaluate your customer base and see that a meaningful majority of it can be described in a certain way (eg., medium-sized US clinical laboratories) and you haven’t even landed half the businesses in that segment…go dominate that segment! Don’t start changing your product or service to chase an unknown segment yet. 2) If you’re starting to penetrate an easy to define market segment, evaluate every strategic decision about product development, partnerships, new hires, etc. with the eyes of that customer segment in mind. “How will this help me dominate this customer segment?” 3) If you’re just starting out and don’t have any customers yet, pick a target and define your business as one that serves that target, not as one with a particular type of technology.
Wayne Barz is Manager of Entrepreneurial Services for Ben Franklin Technology Partners of Northeastern Pennsylvania. Follow Wayne’s blog at www.TechonomicMan.com or on Twitter @TechonomicMan.