Summary.
The high-tech marketing guru (and principle of The Chasm Group marketing consultants), Geoffrey Moore offers time tested insights into the problems and dangers facing growing technology and software companies a blueprint for survival. This classic book (first published in 1991) is widely accepted as “the bible for bringing cutting-edge products to progressively larger markets.
For many business startups, plans are based on a traditional Technology Adoption Life Cycle, a smooth bell curve of high tech customers, progressing from Innovators, Early Adopters, Early Majority, Late Majority, and finally Laggards. In turn, this model becomes the traditional foundation for a marketing model which says the way to develop a market is to work the curve from left to right, progressively winning each group of users, using each “captured” group as a reference for the next.
The technology adoption life cycle
Innovators:
They pursue new technology products aggressively. They sometimes seek them out even before a formal marketing program has been launched. This is because technology is a central interest in their life, regardless of what function it is performing. Winning them over at the outset of a marketing campaign is key because their endorsement reassures the other players in the marketplace that the product does in fact work.
Early Adopters:
They buy into new product concepts very early in their life cycle, but unlike innovators, they are not technologists. Rather they are people who find it easy to imagine, understand, and appreciate the benefits of a new technology, and to relate these potential benefits to their other concerns. Because they rely on their own intuition and vision, they are key to opening up any high-tech market segment.
Early Majority:
They share some of the early adopter’s ability to relate to technology, but ultimately they are driven by a strong sense of practicality. They want to see well-established references before investing substantially. Because there are so many people in this segment—roughly one-third of the whole adoption life cycle—winning their business is key to any substantial profits and growth.
Late Majority:
They share all the concerns of the early majority, plus one major additional one: Whereas people in the early majority are comfortable with their ability to handle a technology product, members of the late majority are not. They wait until something has become an established standard and tend to buy from large, well-established companies. Like the early majority, this group comprises about one-third of the total buying population.
Laggards:
They simply don’t want anything to do with new technology, for any variety of reasons, some personal and some economic. Laggards are generally regarded as not worth pursuing.
Illusion and Disillusion: Cracks In The Bell Curve.
However, the this Marketing Model is not accurate. A more accurate model is this revised Technology Adoption Life Cycle. Between any two of the psychographic groups there are gaps that symbolise the difficulty any group will have in accepting a new product if it is presented in the same way as it was to the group to its immediate left.
The First Crack. This is the gap between the innovators and early adopters. It “occurs when a hot technology product cannot be readily translated into a major new benefit.”
The Chasm. This is a wide chasm between the early adopters and the early majority. It often goes unnoticed because the customer list and size of the order can look the same, though the basis for the sale… is radically different.
The reasons for the sale can be put down to the following:-
A Change Agent: What the early adopter is buying is a change agent. By being the first to implement this change in their industry, the early adopters expect to get a jump on the competition. They are also prepared to bear with the inevitable bugs and glitches.
Productivity Improvement: By contrast, the early majority want to buy a productivity improvement for existing operations. … They want technology to enhance, not overthrow, the established ways of doing business.” And they do not want to debug somebody else’s product.
The Early Majority are pragmatists and they care about the company they are buying from, the quality of the product they are buying, the infrastructure of supporting products and system interfaces, and the reliability of the service they are going to get… Pragmatists tend to be ‘vertically’ oriented, meaning that they communicate more with others like themselves within their own industry than do technology enthusiasts and early adopters… It is very difficult to break into a new industry selling to pragmatists. References and relationships are very important…Pragmatists won’t buy from you until you are established, yet you can’t get established until they buy from you.
You should note that , ‘Early Adopters’ do not make good references for the early majority. And because of the early majority’s concern not to disrupt their organisations, good references are critical to their buying decisions.”
“On the other hand, once a startup has earned its spurs with the pragmatist buyers within a given vertical market, they tend to be very loyal to it, and even go out of their way to help it succeed. When this happens, the cost of sales goes way down, and the leverage on incremental R&D to support any given customer goes way up.
That’s one of the reasons pragmatists make such a great market… “They like to see competition… Pragmatists want to buy from proven market leaders because they know third parties will design supporting products around a market-leading products… aftermarket.
Overall, to market to pragmatists, you must be patient. You need to be conversant with the issues that dominate their particular business. You need to show up at the industry-specific conferences and trade shows they attend. You need to be mentioned in articles that run in magazines they read. You need to be installed in other companies in their industry. You need to have developed applications that are specific to their industry. You need to have partnerships and alliances with the other vendors who serve their industry. You need to have earned a reputation for quality and service.
Pragmatists are not anxious to reference visionaries in their buying decisions. Hence the chasm. Four fundamental characteristics of visionaries that alienate pragmatists:
- Lack of respect for colleagues’ experiences.
- Taking greater interest in technology than in their industry.
- Failing to recognize the importance of existing product infrastructure.
- Overall disruptiveness.
To cross the chasm, Moore advocates that a company focus on a single market, a beachhead, win domination over a small specific market and use this as a springboard to adjacent extended markets to win.
Before we talk about crossing the chasm a little on Applications or Platforms: For actual chasm crossing, applications have a huge advantage. That’s because disruptive innovations are more likely to be championed by end users than by the technology professionals that operate in the current infrastructure. Applications are what an end user sees and if the application fixes a broken, mission-critical business process, they can insist on its deployment in spite of an IT department’s reluctance.
To accelerate the adoption of platforms, then, vendors must disguise them in applications clothing. That is, they must tie them directly to an application in order to gain the end-user sponsorship necessary to secure a beachhead. Briefly, the way to cross the chasm requires the following steps (Moore spends an entire chapter on each of these):
- Target the point of attack: Target a specific market niche as your point of attack and focus all your resources on achieving the dominant leadership position in that segment. This Includes identifying the primary market identifiers: e.g:
- target customer,
- compelling reason to buy,
- and competition
and secondary market factors such as: partners and allies, distribution, pricing, positioning, next target customer.
- Assemble an invasion force: Create the whole product, by thinking through your customer’s problems– and solutions– in their entirety. This includes the core product plus everything else you need to achieve your compelling reason to buy, including additional software, hardware, systems integration, installation and debugging, training and support, standards and procedures, etc. These may be provided in-house or by using partners and alliances.
- Define the battle: that is, create the competition, define positioning, develop the elevator pitch, build this into all your company communications.
- 1. Focus the competition within the market segment established by your must-have value proposition.
- 2. Create the competition around what, for a pragmatist buyer, represents a reasonable and reasonably comprehensive set of alternative ways of achieving this value proposition. Do not tamper with this set artificially excluding a reasonable competitor.
- 3. Focus your communications by reducing your fundamental competitive claim to a two-sentence formula…in every piece of company communications..always be sure to reinforce the second sentence of this claim, the one that identifies your primary competition and how you are differentiated from it.
- 4. Demonstrate the validity of your competitive claim to conclude you are the indisputable leader.
- Launch the invasion: distribution and pricing. Note: Committing to the Point of Attack. You do not have to pick the optimal beachhead to be successful. However what you must do is win the beachhead you have picked. And yes, size matters Too large of a target market can spread your sales resources too thin. If you find the target segment is too big, subsegment it. … If the target segment is too small… augment it.
There are currently a wide variety of distribution channels for the high-tech market, here are just some of them:-
Direct Sales. Employment of your own direct sales force. More about this below.
Two-tier retail
This consists of vendors shipping to the first tier which stages inventory and manages credit for the second tier.
One-tier retail
This consists of superstores that for the bulk of goods sold fulfill both the wholesale and retail functions.
Internet retail
This consists of one or two tiers with sales occurring on the Internet.
Two-tier value-added reselling
This consists of “products that are too complex for retail [where the companies] specialize in a particular technology [or] vertical market.”
National roll-ups
This consists of local VARs (value-added resellers) rolled-up into national chains.
OEMs (original equipment manufacturers)
This consists of at least a two-tier (and can be up to four-tier) transaction where manufacturers integrate purchased products into their own systems.
System integrators
This is not a channel per se rather, it is a project-oriented institution for managing very large or very complex computer projects.
Your channels need to be optimised for different purposes:
Demand creators versus demand fulfillers.
Direct sales forces, for example, are optimised for creating demand, while retail superstores are optimised for fulfilling it.
System integrators and VARs are optimised for playing a very large role in providing or developing the whole product. Retail and Internet channels are the opposite.
Potential for high volume. It’s important to note that Channels optimised for whole product development are not effective for high volume delivery. The low-cost, low-service channels are just the opposite.
The direct sales channel is the best channel for crossing the chasm as it gives us maximum control over our own destiny. However there are some important principles to consider:
- For the customer, the key condition is that the vendor supply a broadly comprehensive and reasonably competitive set of offerings.
- For the vendor, the key condition is both the volume and the predictability of revenues.
- There is a price point below which this method of distribution cannot work.
- There has to be a fundamentally uncompetitive agenda between a company and its vendors.
The direct sales force is optimised for creating demand. At its center is the consultative salesperson who works with the client in needs analysis and then, supported by a team of application and technology specialists, develops and proposes solutions, which, after additional interaction with the customer, and a competitive procurement, turn into purchase orders. However this is a very expensive way to sell.
Factors hurting direct sales are:
Vendors who exploit the uncompetitive-agenda relationship through unfairly expensive maintenance agreements and new releases. Dropping retail prices and rising overhead costs and margins. The increasing complexity of total solutions to the point where no single vendor can cover it all alone.
Retail Sales.
The retail system works optimally when its job is to fulfill demand rather than to create it. … Because it does not create demand or help develop whole products, retail distribution is structurally unsuited to solving the chasm problem.
Once your product is established in the mainstream market it will be a natural candidate for retail distribution. These approaches can be an intermediary step to prepare the product for this channel:-
- Direct response advertising, these are trial versions of the product that can be directly sent to potential customers.
- Telesales (and teleservice),these are well-trained customer service personnel that offer better-than-retail services for all of the pragmatists’ questions.
- Value-added resellers, these are resellers that tend to be dominated by problem solvers rather than salespeople who promote your products.
Value added resellers.
VARs are problematic as mainstream distribution channels. They are best used to support product lines that are dedicated to niche markets. The factors that limit their effectiveness in mainstream markets are:-
- Developing this market requires marketing, and few VARs have either the resources or the inclination to do any marketing.
2. There are not enough VARs to go around.
3. Because their best margins come from labor, not product, they tend to sell enough to fill up their people then stops selling.
Alternative Channels
From a chasm perspective, these are either inappropriate or too specialized to warrant a lot of attention.
System Integrators
They focus on servicing early market opportunities sponsored by visionary customers.
Super-VARs
They focus on pragmatist buyers in medium to large-scale companies.
OEMs
They focus on big-ticket products that come out of the company’s own R&D labs, not the add-on product coming in from another vendor.
Selling Partnerships
This involves co-selling with a whole product partner. Unfortunately, this is an expensive method.
Outbound Retail
This involves delivery to the customers. Unfortunately, this is a demand fulfillment tactic.
THE INTERNET
For direct sales of chasm-crossing high technology, this channel is ineffective because crossing the chasm requires face-to-face meetings with the target customer. The Internet should still be part of your overall marketing mix, however.
So what’s the right choice?
First, use direct sales and support as a demand-creation channel to penetrate the initial target segment then, transition to the most efficient fulfillment channel for your offer.
A little on Pricing.
Distribution oriented pricing.
Set pricing at the market leader price point and build a disproportionately high reward for the channel into the price margin, a reward that will be phased out as the product becomes truly established in the mainstream, and competition for the right to distribute it increases.
Customer-Oriented Pricing
Visionaries are relatively price-insensitive. For them, use value-based pricing model.
Pragmatists expect to pay a premium price for the market leader. For them, use competition-based pricing model. Conservatives are price-sensitive. For them, use cost-based pricing model.
Vendor-Oriented Pricing
This is a function of internal issues such as costs of goods, sales, overhead, etc. However, this represents the worst basis for pricing decisions during the chasm period because we must be entirely externally focused on gaining new customers and new relationships.
FINANCIAL DECISIONS: BREAKING THE HOCKEY STICK
The purpose of the post-chasm enterprise is to make money. We need to recognise that this is not the purpose of the pre-chasm organization. The purpose then, is to prove there is customer demand.
Hockey stick forecast of revenue growth
This is where revenue first grow slowly, then shoot upwards. It is the most common model currently, and is traditionally endorsed by the venture capital community. It is also flawed.
Staircase forecast of revenue growth
This is where revenue grows in spurts, then flattens, like a staircase. The flat/slow periods are where the company is entering new markets. This isn’t rocket science, but it does represent a kind of discipline. And it is here that high-tech management shows itself most lacking. Most high-tech leaders, when it comes down to making marketing choices, will continue to shy away from making niche commitments, regardless. Like marriage-averse bachelors, they may nod in all the right places and say all the right things, but they will not show up when the wedding bells chime.
Why not? First, let us understand that this is a failure of will, not of understanding. This is, it is not that these leaders need to learn about niche marketing. MBA marketing curricula of the past 25 years have been adamant about the need to segment markets and the advantages gained thereby. No one, therefore, can or does plead ignorance.
Instead, the claim is made that, although niche strategy is generally best, we do not have time—or we cannot afford—to implement it now. This is a ruse, of course, the true answer being much simpler: We do not have, nor are we willing to adopt, any discipline that would ever require us to stop pursuing any sale at any time for any reason. We are, in other words, not a market-driven company; we are a sales-driven company.
Now, how bad can this really be? I mean, sales are good, right? Surely things can just work themselves out, and we will discover our market, albeit retroactively, let to it by our customers, yes?
The true answers to the previous three questions are:
(1) disastrous,
(2) not always, and
(3) never in a million years.
The consequences of being sales-driven during the chasm period are, to put it simply, fatal. Here’s why: The sole goal of the company during this stage of marketing development must be to secure a beachhead in a mainstream market—that is, to create a pragmatist customer base, we must ensure that our first set of customers completely satisfy their buying objectives.
To do that, we must ensure that the customer gets not just the product, but… the whole product, the complete set of products and services needed to achieve the desired result… Whole product commitments, however, are expensive… Therefore must be made not only sparingly but strategically… This can only happen if the sales effort is focused on one or two niche markets.
One of the keys in breaking into a new market is to establish a strong word-of-mouth reputation among buyers. Seeding this communications process is expensive, particularly once you leave the early market, which in general can be reached through the technical press and related media, and make the transition into the mainstream market. Pragmatist buyers, as we have already noted, communicate along industry lines or through professional associations. Is Winning over one or two customers in each of 5 or 10 different segments (the consequences of taking a sales-driven approach) will create no word of mouth effect.
This lack of word of mouth, in turn, makes selling the product that much harder, thereby adding to the cost and the unpredictability of sales. Finally, there is a third compelling reason to be niche focused when crossing the chasm, which as to do with the need to achieve market leadership.
Pragmatist customers want to buy from market leaders. Now, by definition, when you are crossing the chasm, you are not a market leader. The question is, How can you accelerate achieving that state? This is a matter of simple mathematics. To be the leader in any given market, you need the largest market share—typically over 50 percent at the beginning of a market, although it may end up to be as little as 30 to 35 percent later on. So, if we want market leadership early on the only right strategy is to take a “big fish, small pond” approach. For all these reasons (for whole product leverage, for word-of-mouth effectiveness, and for perceived market leadership) it is critical that, when crossing the chasm, you focus exclusively on achieving a dominant position in one or two narrowly bounded market segments. If you do not commit fully to this goal, the odds are overwhelmingly against your ever arriving in the mainstream market.
Final Word.
This is a very important book which brings the concept of product launches bang upto date even though it was written nearly 30 years ago. It focuses on developing the right niche for your product or service right at the beginning and having the discipline to stick to that niche. Which is extremely difficult for even the most dedicated business builder.If you’re truly serious about building a successful business then this book is a must read. Grab a copy and have a read for yourself.
Happy reading
Twelve intensive half-day meetings.
