The problem with Segmentation, Targeting, and Positioning

In yesterday's post, I described how Bounty had been effective in applying the principles of Segmentation, Targeting, and Positioning. In a perfectly competitive market, goods are indistinguishable from each other, so one company is not able to easily charge a premium or gain a dominant market share over others. However, in the paper towel market, Bounty has, through marketing, gained a dominant position 40% share of the market.

Stories such as Bounty's create awe and wonderment. It fuels MBAs to apply Segmentation, Targeting, and Positioning (STP) to every problem - including those related to startups. Yet, in the world of startups, STP is often the wrong tool for the job. We can see this by looking at a recent post from Ben Horowitz:

Most people thought only scientists and researchers would use the Internet. The Internet was thought to be too arcane, insecure and slow to meet real business needs. Even after the team introduced Mosaic, the world’s first browser, almost nobody thought the Internet would be significant beyond the scientific community­—least of all the most important technology industry leaders who were busy building proprietary alternatives.

If you followed the STP methodology at the dawn of the Internet, you would have quickly calculated that the market for online commerce, payments, search and other services was restricted to at most a maximum number of users (market size) - of a few million across the world: i.e. the scientists and researchers. The world quickly changed and those who were visionary enough or accidental enough to see that the segments, and market, was bigger capitalized on the opportunity. This is perhaps perfectly captured by the story of Yahoo:

The two founders of Yahoo!, David Filo and Jerry Yang, Ph.D. candidates in Electrical Engineering at Stanford University, started their guide in a campus trailer in February 1994 as a way to keep track of their personal interests on the Internet. Before long they were spending more time on their home-brewed lists of favorite links than on their doctoral dissertations. Eventually, Jerry and David's lists became too long and unwieldy, and they broke them out into categories. When the categories became too full, they developed subcategories ... and the core concept behind Yahoo! was born.
...
Jerry and David soon found they were not alone in wanting a single place to find useful Web sites. Before long, hundreds of people were accessing their guide from well beyond the Stanford trailer. Word spread from friends to what quickly became a significant, loyal audience throughout the closely-knit Internet community. Yahoo! celebrated its first million-hit day in the fall of 1994, translating to almost 100 thousand unique visitors.

While STP has its uses, in the world of startups, it can be perilous to think you know exactly who your market is, and how big the opportunity is.

Segmentation, Targeting, and Positioning

Marketing in an MBA program teaches you to segment, target and postion - STP. Who are all the possible people who could use your product? Knowing all the different segments, which one is it must lucrative to target? How do we then position ourselves in the minds of that segment? In our Models of Consumer Behavior class, we took this lesson one step further.

The paper towels market is an example of STP in action. You would think that all paper towels are all the same. After all, they are pretty standard commodity items. How different can one be from another? Well, the data shows that this is a $2.33Bn market, and Bounty, with $914.6M in revenues, has almost 40% share of the market. This should be a perfectly competitive market - because the goods are difficult to distinguish between each other. Yet, Bounty clearly has a dominant position, so it is not.

While there are many different people who use paper towels - including me - and thus many different segments, Bounty has determined that the most attractive segment is 'busy moms'. There are more of those who will buy these paper towels than there are people like me. For these busy moms, Bounty perfectly positions itself in that target's mind not as a paper towel, but as an insurance policy. For these busy moms, when the baby knocks over some milk, or what is cooking on the stove spills over - for these use cases - Bounty positions itself as, and markets itself as, the perfect solution.

There may be twenty different brands of paper towel that function just as well as Bounty. However, it is Bounty that is shouting out to the specific segment of busy moms. It is Bounty that portrays itself in its marketing as the ideal solution for that segment's problems. Consequently, while the paper towel market should in theory be a perfectly competitive market, it is not. The products in this market are differentiated - but not through significant differences in the product. The are differentiated simply through branding and marketing.

The Pain of Moving

I feel like I should be working on my startup right now. Yet moving, which is always a huge pain, is currently getting in the way. If there is one area that is need of disruptive technology, it is removals. There has to be a better way to do this.

The Proximity Principle at work

One of our first lessons at Kellogg, in MORS430, concerns that of the Proximity Principle. This principle suggests that we are mostly likely to communicate with those that we are physically close to. The principle has been shown to be true through experiments such as tracking the people a person emails. More often than not, this method of communication, which opens the doors for you to reach contacts in distant places, is used simply to mail the person sitting not very far from you.

With the proximity principle in mind, for a while I thought I would continue to live in Evanston after Kellogg. The PhD students I work with on my startup have yet to graduate, and I want to be able to continue the teamwork. However, as graduation has come and gone, I have realized that whatever resources that I may have access to at Kellogg and Northwestern, I think I have now pretty much tapped them out.

We've recently been given the opportunity to use the TechNexus space at the ITA. This opens the door to get to know the greater Chicago tech landscape. Being in a hub, such as TechNexus, again put the proximity principle at work, but in helping us get to better know the resources Chicago has available for startups. We'll soon discover what the breadth of depth of these resources are.

Help others succeed

"It is literally true that you can succeed best and quickest by helping others to succeed."

-- Napolean Hill, author

The Crazy Ones

Steve Blank on Tech Bubbles

Steve Blank describes the phases of a bubble in an Economist debate:

One of the least understood parts of a bubble is that there are five types of participants: the Smart Money, the Shills, the Marks, the True Believers and the Promoters. Understanding the motivations of these different groups helps to make sense out of the bubble chart below. 

 

Smart Money are the prescient angel investors and venture capitalists who started investing in social networks, consumer and mobile applications and the cloud three, four or five years ago. They helped build these struggling ventures into the Facebooks, Twitters, and Zyngas before anyone else appreciated that these companies could have hundreds of millions of users with off-the-chart revenue and profits. 

In a bubble, the Smart Money doubles down on their investment in the awareness phase, but—when it starts becoming a mania—the Smart Money cashes out. (Really Smart Money recognises it is a bubble, and bets against it.) They manage this all with knowledge of the game they are playing, but they do not hype it, talk about it or fan the flames. They know that others will. 

The Shills are the middlemen in a bubble. They profit from the boom times. They are the mortgage brokers and real estate agents in the housing bubble, the investment bankers and technology press in the dot.com bubble. Since it is in their interest to keep the bubble going, they will tell you that housing always goes up, that these bonds are guaranteed by a big bank, and that this tech stock is worth its opening price. All the stories peddled by Shills have, at their heart, why "it is a new age" and why "all the old ways of measuring value are obsolete". And why "you will be an idiot if you do not jump in and reap the rewards and cash out". 

The Marks are your neighbours or parents or grandparents. They are not domain experts. They know nothing about real estate, financial markets or tech stocks, but they do not want to miss the "investment opportunity of a lifetime". They hear reassurance from the Shills and take their advice at face value, never asking or questioning the Shills' financial incentives to sell you this house/mortgage/tech stock. They see others making extraordinary amounts of money at the start of the mania—"just buy a condo or two and you can sell them in six months". What no one tells the Marks is that, as they are buying, the Smart Money and institutional investors are quietly pulling out and selling their assets. 

The True Believers do not financially participate in the bubble like the Marks (for lack of assets, timidity, or time) but they would if they could. They have no rational evidence to believe, but for them it is a "faith-based" belief. By their numbers, they give comfort to the Marks around them. 

The Promoters are the ones who keep the bubbles inflated even when they know that the asset exceeds its fundamental value by a large margin. While Shills have no credibility, Promoters have "brand-name" credibility that makes the Marks trust them. What makes the Promoters' role egregious is that they are a small subset of the Smart Money. They loudly tell the Marks and the Shills that everything is just fine, enticing them to buy into the bubble, as the Promoters are liquidating their own positions.

The irony of the Internet: Getting stuck in our small world

The Internet was supposed to democratize information, breaking apart the stranglehold that big media channels had in determining what we had access to. Yet, in recent years, Internet sites such as Google and Facebook have become better and better at automatically personalizing and tailoring content to each user. This means we are becoming trapped in a circle of information that we find interesting and exciting, with other - often contrary - information edited out from our view. Instead of editors at big media channels determining what we can see, algorithms are now playing this same role.

5,000 Hours Later: 8 lessons from starting a company at Kellogg (Part 4 of 4)

My central focus while at Kellogg has been starting a company. What follows is the fourth part of an article I wrote for The Merger, Kellogg's school newspaper. It recaps, in brief, my experience at Kellogg.

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5,000 Hours Later: 8 lessons from starting a company at Kellogg

7. Every waking moment has something that needs to be done

By Winter 2011, I had freed my responsibilities on The Merger to the current team. Consequently, every waking moment through the winter quarter seemed to revolve around PreScouter. Two PhD students from Northwestern’s Chemistry and Material Science programs curated content for the reports delivered to the three customers. Meanwhile a team from Shein’s New Venture Formation class started looking at how to systematize the business, determining what the operational processes and metrics needed to be. A second Kellogg team, from Razeghi’s Introduction of New Products and Services, worked on figuring out how the scale the business.

By the end of Winter 2011, over 40 students from across Northwestern had expended over 5,000 hours between them on PreScouter. From law students working on customer contracts to computer science students building the technology, the effort had been vast.

8. Growing is painful too

Through Spring 2011, we’ve been incubated in the Levy Center. With Doug Pollina ‘11, Ashish Basury (NU Chemistry PhD ’12) and Alok Tayi (NU Materials Science PhD ’11), with support from Hithesh Raghavan ’11, we’ve hit the phones once again, in search for new customers. Meanwhile we negotiate with existing customers to move them to longer-term contracts at higher price points, from paying hundreds of dollars per month to thousands, so the business is able to sustain a few people’s salaries. Through shear will and brute force, we’ve pushed the boulder this far up the mountain. We can’t have much further to go.

5,000 Hours Later: 8 lessons from starting a company at Kellogg (Part 3 of 4)

My central focus while at Kellogg has been starting a company. What follows is the third part of an article I wrote for The Merger, Kellogg's school newspaper. It recaps, in brief, my experience at Kellogg.

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5,000 Hours Later: 8 lessons from starting a company at Kellogg

Lesson 5: Customers often have the answers

Using the $25,000 of funding, I had hired two undergraduate software engineers over the summer to continue building the product. With these two teenagers, I drove around Chicagoland through the summer, demoing the product to whoever would meet us. Our demo with the R&D Director at the medical device company was met with a luke-warm response, similar to other meetings we’d had. Yet, rather than turn us away, as others had, he told us about another service that his company once used, which he yearned for again.

Inspired by the R&D Director’s fond memories, we built a service like that which he spoke of. We called it 'PreScouter'. When we returned six weeks later to present PreScouter to him, he was enthralled. However, when we asked for $7,000 a year to deliver the service, his eagerness quickly dissipated. I reached the end of the summer frustrated that I had not accomplished my personal goal of generating revenue. I was not even sure that this third idea – PreScouter – was better than the previous two.

Lesson 6: Kellogg buys from Kellogg

When I started the second year in Fall 2010, I enrolled a team for Goldsmith’s Marketing Research class. Instead of running a Qualtrics survey, as is typical for projects from this class, we decided to conduct thirty phone interviews with PreScouter’s target customers. We provided them with a sample report, which was a sample digest of academic research, and sought their feedback on it. At the end of each interview, we threw in the question, "Would you be interested in trialing this service, at cost?"

I expected the project to be as disastrous as my attempts over the summer, when I called on alumni of Northwestern’s engineering and science programs. However, this time we turned to Kellogg alumni. The initial emails we sent out produced a tidal wave of responses. At the end of the very first of the thirty interviews we conducted, when we asked the question of trialing the service, the answer came back, "Absolutely, I’ll try this service". After the experience of the summer, I was blown away: could this thing actually work?

Ten of the thirty interviewees ultimately agreed to trial the service. Because of operational constraints, we proceeded to operate the trial with the three Fortune 500 companies that were most eager and interested.

5,000 Hours Later: 8 lessons from starting a company at Kellogg (Part 2 of 4)

My central focus while at Kellogg has been starting a company. What follows is the second part of an article I wrote for The Merger, Kellogg's school newspaper. It recaps, in brief, my experience at Kellogg.

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5,000 Hours Later: 8 lessons from starting a company at Kellogg

Lesson 3: Resources act as social proof, helping you gain more resources

By Spring 2010, I had ditched the hyper-local news idea. I was firmly pursing the second idea of connecting professors to corporations seeking them. Viewed as a B2B media business, with professors creating quality content for corporations, and with the undergraduates already building a product, I was able to win $25,000 from a program the McCormick Foundation runs with Northwestern’s Media Management Center. A team from Mayberry-McKissack’s Entrepreneurial Selling class developed a sales pitch for the idea, while a group doing Marketing Research agreed to use their project to inform the product specification. I felt like my ambitions were sailing forward.

Lesson 4: When things don’t go right, persistence pays

The Media Management Center incubated the business over Summer 2010. As I sat in the attic of Fisk Hall, home of Northwestern’s Medill School of Journalism, I little anticipated the lower floors below would be full of young journalism students – mostly girls. They were draped across the corridors, on their cell phones, conducting interviews with Chicagoans, to write news stories for their class assignments.

Meanwhile, just like those journalism students, I too was making phone calls. I was calling on alumni of Northwestern’s engineering and science programs. I was trying, and failing, to set up meetings with anyone who might be a potential customer – any corporation that might seek to hire professors for consulting. On one particular day, I remember making thirty-three phone calls – and either not getting through or being received coldly by the other party. I was despondent. It was a low point. However, the thirty-third call that day, at 9:15pm, to an R&D Director at a medical device company became a turning point.

5,000 Hours Later: 8 lessons from starting a company at Kellogg (Part 1 of 4)

My central focus while at Kellogg has been starting a company. What follows is the first part of an article I wrote for The Merger, Kellogg's school newspaper. It recaps, in brief, my experience at Kellogg.

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5,000 Hours Later: 8 lessons from starting a company at Kellogg

My central focus while at Kellogg has been starting a company. I skipped the recruitment rounds, Tuesday nights at the Keg and many other quintessential aspects of the Kellogg experience so I could work on this project. Three business ideas later, these are some of the lessons I’ll leave Kellogg with.

Lesson 1: The team comes first

On a Tuesday evening in December 2009, a Kellogg classmate and I huddled around a table at Pomegranate, the Evanston eatery. Three undergraduates from the McCormick School of Engineering joined us. We were about to to start a company called Adaptly. By May 2011, in the span of fifteen months, Adaptly had raised $2.7M in venture financing and made headlines in tech startup publications across the US. Unfortunately for me, I dropped out of the team weeks after that first meeting at Pomegranate, before Adaptly’s story had even begun.

I did not realize that it takes particular skills to start an early stage web company, and that there is even a skill in identifying people with those necessary skills and bringing them together. Worse, I did not realize many of those skills already lay in the Adaptly team. I made the mistake of putting the idea before the team.

Lesson 2: Pursue the idea that others will throw resources behind, rather than the one that takes your fancy

The idea I arrived at Kellogg with, in Fall 2009, was to aggregate hyper-local news, so a person could – on one website – see everything that was being written around them, from blogs and local newspapers, to Twitter steams and Flickr photographs. When an opportunity arose to run the school newspaper, The Merger, I figured it would give me direct access to one of these sources, so I jumped at the opportunity. Yet, I little realized that my grand plan had one fatal flaw – I could muster few resources around my idea.

As I wandered around the halls of the Ford building, in search of student software developers that could help me build out the product, I struggled to enthuse anyone around my idea. I was unconvincing in answering the question, “What’s the path to revenue?” This included the Adaptly team, formed out of the NUvention Web class, who pursued a different idea without me.

In the meanwhile, I could not fail to notice that some professors at Northwestern seemed to enjoy lucrative consulting engagements with corporations. Since these engagements seemed to materialize sporadically, I wondered if there was an opportunity in creating a website that could more efficiently connect professors with consulting engagements. This passing idea hit a nerve with a professor at Northwestern’s computer science department. He quickly dispatched a team of undergraduates to start building the website.

Kellogg Expects

"Kellogg has high expectations of you. Fulfill them."

Kellogg Prof Steven Rogers (ad-libbed).

Convocation

The secret of business

"The secret of business, especially these days, is to focus relentlessly on your unfair advantage - the thing you do that others don't."

-- John Rollwagen, executive

Chromebook: Is the world ready for this?

Google has launched a laptop that has no desktop, no files and no applications, in the traditional sense. Instead, it is simply just a window to the Internet. Through initiatives such as Google Apps, Google has been working to ensure you're going get along just fine without all these things.

Does this change everything? Possibly. If Chromebook is successful, in one swoop it will displace Windows, Linux, Mac OS and all other forms of operating system. It will be a move similar to the way in which Microsoft's Windows became the platform for computing, displacing the 'IBM PC' as the standard that consumers looked to for desktop computing.

Is the world ready for this?

Mohan Sawhney on Customer Insights

The Beauty of Competition in Cloud Computing

There are some tough problems that are difficult to crack. Cloud computing has been one of these. Cloud computing has the promise of providing instant and ubiquitous access to documents and other information currently locked on your desktop.

There was once a time in the late 1990s when Sun attempted to introduce netbooks, under the banner - 'the network is the computer'. It was a novel idea that was way ahead of the times. Now companies such as Google, Amazon and Apple have taken on the mantle of attacking this problem. In contrast to Sun's prior sole effort to solve this problem, there is now an arms race to solve the problem. Competition has almost ensured that we're going to see this problem cracked. TechCrunch highlights the different approaches that competition has produced, as each company attempts to outsmart the other:

Google's approach has been to make the cloud more accessible to existing PC users. They’re doing this by extending familiar concepts. Google Docs is Microsoft Office, but in the cloud. Your main point of interaction is a file system, but in the cloud. Gmail is Outlook, but in the cloud. Etc.

Meanwhile, another company now largely associated with the cloud, Amazon, has essentially turned it into one giant server/hard drive that anyone can use for a fee. But it takes developers to build something on top of it to give users a product to use. Some are great. But many again just extend the idea of the cloud as a remote hard drive.

While the fundamentals are the same, Apple's approach to the concept of the cloud is the opposite of their competitors. Apple’s belief is clearly that users will not and should not care how the cloud actually works. [...] You're working on a document in Pages on your iPad, you move over to Pages on your Mac, and there it is. It even remembers where you were last editing. You download a song to your iPhone, you pick up your iPad, there it is. It all just works.

Banner Ad Blindness

Users almost never look at anything that looks like an advertisement, whether or not it's actually an ad. Mark Suster recently highlighted an eye tracking study found the following:

The areas where users looked the most are colored red; the yellow areas indicate fewer views, followed by the least-viewed blue areas. Gray areas didn't attract any fixations. Green boxes were drawn on top of the images after the study to highlight the advertisements.

Rodney Brooks says robots will invade our lives

Coping with the information overload

What happens when you live in a world where anyone is able to communicate with almost anyone else -- the world the Internet is introducing us to? There is information overload.

We can't cope with all the emails, blog posts, twitter messages and everything else that is thrown at us. So we create filters. At the simplest level, we just ignore most things and only respond to those items that are most pertinent to us. At a more sophisticated level, we create mechanisms for measuring how important a message is: was this referred to me by someone I trust?

GMail's Priority Inbox seeks to tackle some of these problems by using algorithms to highlight the most important email to you. Startup Digest curates the most pertinent web postings and articles that busy entrepreneurs and techies need to read.

I wonder what other innovations we'll see in this space.

The end of classes at Kellogg

This week is the last week of the quarter at Kellogg. Perhaps poetically, my last class was Prof Steven Roger's Entrepreneurial Finance. In this last class, Rogers recalled his life stories leading up to joining Kellogg's faculty.

Rogers left us with four lessons in particular:

• A good idea is not enough. It comes down to you: the jockey. If you are successful once, future opportunities come to you.
• Passion is not enough; you need skills - can you execute on the plan?
• The entrepreneurial route can be travelled in many ways, e.g. franchising, acquisition, startup.
• Valuation can and should be as simple as we make it.

Getting closer to the Semantic Web

With almost little fan-fair, Bing, Google and Yahoo announced earlier this month that they had partnered with each other to introduce structured data markup for web pages.

For years, techies have been seeking to introduce technologies that will enable a 'Semantic Web'. Most of these efforts have had little success. Wikipedia describes why the Semantic Web is important:

The main purpose of the Semantic Web is driving the evolution of the current Web by allowing users to use it to its full potential, thus allowing them to find, share, and combine information more easily. Humans are capable of using the Web to carry out tasks such as finding the Irish word for "folder," reserving a library book, and searching for a low price for a DVD. However, machines cannot accomplish all of these tasks without human direction, because web pages are designed to be read by people, not machines. The semantic web is a vision of information that can be interpreted by machines, so machines can perform more of the tedious work involved in finding, combining, and acting upon information on the web.

The Bing-Google-Yahoo partnership could be the first tangible, baby step towards creating the Semantic Web.

The Workaround

How do you find the next business idea to work on? Some people want to build a better mousetrap. This is a reasonable strategy. I'd argue a better strategy is to find situations in which people have created 'workarounds' because existing products and services just don't manage to suffice.

The classic example of the workaround is the Post-It Note from 3M. It is said that office workers at 3M once sello-taped and paper-clipped pieces of paper to their screens and documents. When 3M found a glue they had developed did not work as well as desired, an inventor found a use for it in temporarily sticking notes to other objects. The Post-It Note was an instant hit.

In a more modern day setting, airbnb.com started life by connecting visitors to big events with people willing to offer their rooms for rent during those big events. One example is the Obama nomination speech at the Democratic Convention, when hotels would be booked out and you could only stay by renting a room from someone who lived nearby. This was a workaround for lack of hotel space. Airbnb is now valued at $1Bn.

Sometimes, looking at where people are using workarounds to solve their problems could lead you to the next big business.

An Introduction To Stock and Options

A useful summary, even for us MBAs!

Intro to Stock and Options

Kellogg Buys From Kellogg

When you decide on the MBA program that you choose to undertake, there are many things that you have to consider: the quality of the education, the reputation of the school, and the facilities the school offers, for example. Yet, I'm finding the most invaluable element to be the alumni network.

There is an written rule among Kellogg alumni that they will help one another. It is perhaps first evident when you apply to the school, at which point you are interviewed by alumnus. This practice is also evident when you graduate, at which point you are already helping the school by interviewing prospective students.

As an entrepreneur, I've found the individuals at companies who have been most willing to give me a few extra minutes to explain my service, those who have given me the benefit of the doubt most - are Kellogg alumni. This, in itself, raises expectations - that you are not going to let them down, and that you will deliver on what you say you will and reward their commitment. So my first focus when I graduate will be in making sure that I stay true to their commitment.

The Lean Startup

Click for larger image.

Moving Goalposts

When I started out on this adventure, I had one clear goal: to generate revenue. I thought, "If I have a business that makes money, that's a real business!" I eventually got there. By the end of 2010 we had three companies sending us money. Then it hit me: revenue is not enough. I had to admit to myself, "I still don't have a proper business".

Now my goal is for us to make payroll. If we can make payroll, we can support a few people's salaries. Yet, just as before, I have a feeling that once we make it there, I'll find we're still not quite there yet. It might be that I'll think, "We need employees! Once we have employees, I'll have a proper business..."

Don't benchmark yourself

"I don't benchmark myself against others – I don't care where I am on any particular list, I don't care what other people are saying, I don't care what is written about me (good or bad). I just try to learn from each experience and get better."

-- Brad Feld, Investor, in Inquiry as a replacement for self-doubt

Turning online waste into gold

From oDesk's Future of Work video: