Download Selling and Marketing in the Entrepreneurial Venture

Entrepreneurship
Lynda M. Applegate, Series Editor
+ INTERACTIVE ILLUSTRATIONS
Selling and
Marketing in the
Entrepreneurial
Venture
FRANK V. CESPEDES
HARVARD BUSINESS SCHOOL
8086 | Published: September 1, 2014
Table of Contents
1 Introduction .......................................................................................................... 3
2 Essential Reading .................................................................................................. 4
2.1 Understanding Customers ................................................................................
Products versus Problems ...............................................................................
New Product versus the Status Quo .................................................................
Early Adopters versus Mainstream Customers ..................................................
4
5
7
8
2.2 Visiting Potential Customers ............................................................................ 10
Selecting Customers and Scheduling Visits ..................................................... 10
Planning and Conducting Visits ...................................................................... 10
Learning from Visits ....................................................................................... 12
2.3 Identifying Core Customers ............................................................................. 12
Determining Identification Criteria.................................................................. 13
Assessing Transaction Costs ........................................................................... 14
Segmenting Rather than Partitioning Customers .............................................. 15
Managing Opportunities: Transaction versus Relationship Buyers ..................... 16
2.4 Identifying a Venture’s Core Customers: A Case Study ...................................... 17
Assembling and Analyzing Customer Data ...................................................... 18
Developing Preliminary Hypotheses................................................................ 18
Refining the Hypotheses ................................................................................ 19
Tailoring the Sales Model to Core Customers................................................... 19
2.5 Entrepreneurial Selling: Why, What, How, Where.............................................. 20
Why Selling Is Important ................................................................................ 20
What Research Indicates About Effective Salespeople ..................................... 21
How to Get Better at Selling ........................................................................... 21
2.6 Integrating Entrepreneurial Selling and Marketing ............................................ 23
Sales as a Boundary Role ............................................................................... 23
The Sales Funnel ........................................................................................... 24
The Go-to-Market System............................................................................... 25
3 Supplemental Reading .......................................................................................... 28
3.1 A Closer Look at the Status Quo Bias ............................................................... 28
Loss Aversion ................................................................................................ 28
How Entrepreneurs Can Combat the Status Quo Bias ....................................... 29
3.2 Case Study: SignalFire Telemetry Inc. .............................................................. 30
4 Key Terms ............................................................................................................ 35
5 For Further Reading .............................................................................................. 35
6 Endnotes .............................................................................................................. 36
7 Index ................................................................................................................... 38
This reading contains links to online video and interactive illustrations, denoted by the icons above. To access these
exercises, you will need a broadband Internet connection. Verify that your browser meets the minimum technical
requirements by visiting http://hbsp.harvard.edu/list/tech-specs.
Frank V. Cespedes, MBA Class of 1973 Senior Lecturer of Business Administration, Harvard Business School, developed
this Core Reading with the assistance of writer Lauren Keller Johnson.
Copyright © 2014 Harvard Business School Publishing Corporation. All rights reserved. To order copies or request permission to reproduce
materials (including posting on academic websites), call 1-800-545-7685 or go to http://www.hbsp.harvard.edu.
8086 | Core Reading: SELLING AND MARKETING IN THE ENTREPRENEURIAL VENTURE
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1 INTRODUCTION
B
eing an entrepreneur requires more than simply recognizing business
opportunities, formulating a business model, and raising money. At some
point—and sooner than many aspiring entrepreneurs think—it also requires attracting
customers. Selling and marketing are thus essential entrepreneurial activities.
What do we mean by selling and marketing? Probably the best summary of these terms,
and of the difference between them, is Theodore Levitt’s classic definition: Selling is
preoccupied with the seller’s need to convert a product or service offering into cash; marketing
with ensuring that the offering and the cluster of activities through which it is created,
delivered, and used satisfy the customer’s needs.1 In most textbooks and, indeed, in most
corporations, selling and marketing are treated as separate activities. For instance, Marketing
departments are most often responsible for customer research and product management,
while Sales departments are responsible for customer contact and closing deals. However, in
most start-ups, selling and marketing are not easily separated, owing to resource constraints,
the need for cash, and the links between identifying potential customers and determining the
selling activities needed to serve them. Customer discovery and acquisition are linked in a
start-up, because entrepreneurs are often refining their understanding of customers’ needs
and the features of their product offering during the process of selling. Thus, whatever else
entrepreneurial marketing encompasses, it almost always includes selling: the getting and
keeping of customers and revenues.
Entrepreneurs face special sales and marketing challenges. The market research tools that
established businesses use typically assume the existence of benchmarks (such as the features
of current products in a given product category or customer buying behavior in an established
market segment). These benchmarks are then used to gauge what a company’s mainstream
customers think about a particular product or service. But a start-up doesn’t have benchmarks
if its offering is creating a new category or is otherwise new to customers. Moreover, in its
early stages, the venture often has early adopters of its offering, who differ markedly from the
mainstream customers the entrepreneurs may ultimately hope to attract.
Owing to these challenges, entrepreneurs must find relevant and cost-effective ways of
carrying out the following activities critical to selling and marketing:
•
Clarify key distinctions about potential buyers to define how best to sell to them. Often, the
only way to do this is by visiting prospective customers. This reading discusses important
distinctions—between products and the problems they may or may not solve, between
products and services that are familiar and those that are new, and between different
kinds of customers. An approach for conducting customer visits is also outlined.
•
Identify the venture’s core customers. This reading also outlines a process for identifying
core customers for a new venture. It then presents an example and explores the
implications of core-customer identification and selection for a venture’s business
model.
•
Sell. The old saying “Nothing happens until you make a sale” isn’t entirely true. But in
start-ups, selling is a critical part of understanding buyers’ behavior and their
perceptions of the offering’s value, and of developing customer selection criteria. Myths
about selling abound. Therefore, this reading also includes an overview of what research
does—and does not—tell us about selling, and provides some guidelines for
entrepreneurs.
8086 | Core Reading: SELLING AND MARKETING IN THE ENTREPRENEURIAL VENTURE
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•
Understand customers. Entrepreneurial selling and marketing begin with understanding
customers—including what kinds of problems or opportunities they want to address and
how a venture’s offerings can help them do so. Visiting potential customers can help an
enterprise’s leaders gain valuable insight into these questions and sharpen their sense of
who constitutes the company’s target customers. Although selling is difficult for many
entrepreneurs, they can still learn to become better at it. And when they strengthen their
selling skills, entrepreneurs stand a better chance of mastering the integration of selling
and marketing activities, including getting maximum business value from their sales
funnel and go-to-market system. Both of these concepts are discussed below.
This reading concludes with some frameworks to help entrepreneurs think about how to
integrate their sales and marketing activities. In the Supplemental Reading, the first article
takes a close look at the status quo bias, which makes customers value the products and
services they’re already using much more than the products and services they aren’t, then
offers some tips for overcoming status quo bias. The second article is a case study of SignalFire
Telemetry Inc., which provides an in-depth look at how the founders of this new venture
approached their earliest sales and marketing challenges. They did this by developing an
understanding of the needs and opportunities of potential users of the company’s technology,
identifying their target customers, overcoming the reluctance to switch to new technology,
closing sales, managing relationships, and positioning the company for the future.
2 ESSENTIAL READING
2.1 Understanding Customers
Before an entrepreneur can sell a new product or service, he or she must answer important
questions about prospective customers.
•
What customer problems or opportunities does our product or service address?
•
Do potential customers view these problems or opportunities as important? If so, which
potential customers have the most compelling need for our product or service?
•
If the venture is in a B2B market (that is, if it sells to other businesses), who at those
businesses cares about that problem or opportunity? Who doesn’t?
In analyzing potential customers, it is important for entrepreneurs to recognize the following:
•
differences between products and problems—from the customer’s perspective;
•
differences in customers’ evaluations of new products and of products they already use,
which we call the “status quo bias”; and
•
differences between early adopters and mainstream customers.
By making these distinctions, entrepreneurs can determine what types of selling behaviors
will be relevant and effective as they progress along the path from identifying prospective
customers to closing a sale to delivering post-sale service. Let’s consider each distinction in
turn. These questions are covered in more depth in Core Reading: Recognizing and Shaping
Opportunities (HBP No. 8056) and Core Reading: Experimenting in the Entrepreneurial
Venture (HBP No. 8077).
8086 | Core Reading: SELLING AND MARKETING IN THE ENTREPRENEURIAL VENTURE
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Products versus Problems
There’s a difference between what a venture sells (the features of a product or service) and
what customers buy (a solution to a problem, satisfaction, or other relevant business or
personal outcomes). To be sure, entrepreneurs must understand their offering and its features.
But to evaluate demand for their offering, they must also understand how those features
translate into benefits that matter to target customers. Product or service features are
characteristics and attributes that deliver functionality, such as a specific amount of data
storage in a computer system or the industry expertise of a team of management consultants.
Benefits are outcomes that matter to the customer, which are delivered by the features of a
product or service. For instance, if the amount of storage provided in the computer system
increases (feature), then customers can stop worrying about running out of storage space
(benefit). And if the consulting team has expertise in industry regulations (feature), clients can
be sure that their organizations will be compliant with those regulations (benefit).
To understand how features of a product or service create benefits, entrepreneurs must
interact with potential customers early on to learn about their particular challenges and
opportunities. During these discussions, entrepreneurs can gain important insights by
exploring the following questions:
•
What difficult problems or unrealized opportunities are customers facing?
•
What result(s) do they need in order to address a problem or opportunity more
satisfactorily than they currently do?
•
What combination of product or service functions, features, applications, or support is
relevant to addressing the problem or opportunity more satisfactorily?
Answering these questions is not the same as doing research and development (R&D). The
goal here is not to determine how to build the product or service. Instead, the goal is to
determine whether the venture has an offering, concept, or potential application that delivers
relevant benefits to potential customers. If it does, the entrepreneur can assume that there will
be reasonable potential demand and that it is worth beginning the R&D process needed to
identify the best way to build or refine the product or service.
Entrepreneurs can validate potential demand for their product or service in a number of
ways. Below are several examples, which are compared and contrasted in Exhibit 1.
•
Focus groups. The entrepreneurial team brings together a small group of individuals in a
relevant market segment to learn about their opinions and attitudes regarding a product
or service that’s in development.
•
Customer surveys. The entrepreneurial team surveys prospective and current customers
about the frequency of purchases within a given category of products or services,
preferences regarding features, and purchase intent or satisfaction with current offerings.
•
Letters of intent. The entrepreneurial team invites potential early adopters to try out its
product or service—often using an initial prototype—and then asks them to sign a letter
of intent (LOI) to try or buy the proposed product with specific features once it’s ready.
If most prospects sign an LOI, the venture has some evidence that there may well be
demand for its offering.
•
Market trials. The entrepreneurial team tests products or services with a subset of the
intended customer base to validate demand and to gather feedback that will help the
venture refine the features and marketing approaches before investing in a full-scale
launch. For instance, a venture that’s developing a consumer packaged goods product
may test it by launching it in one city that has a large base of potential customers.2
8086 | Core Reading: SELLING AND MARKETING IN THE ENTREPRENEURIAL VENTURE
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EXHIBIT 1 Comparing Demand-Validation Techniques
Technique
Benefits
Focus groups
Can generate rich data including Conducting them requires
participant body language, facial skill, so market research
expressions, and tone of voice
professionals are sometimes
needed
Can generate insights for line
extensions, especially in
Not as valuable for new
consumer goods and for adding products in a new market,
new features to industrial
because current users aren’t
products
good at verbalizing responses
about products they haven’t
experienced
Exploring current usage by
mainstream customers
Low cost
Gathering initial and
general information about
category purchases and
preferences
Customer
surveys
Letters of
intent
Relatively easy to implement
Difficult to write and ask
unbiased, objective
questions
Accessible way to start learning
about potential customers
and/or relevant product
features
Difficult to recruit
respondents who are
representative of early-stage
target customers
Can increase purchase/use
commitment of potential
customers
Not legally binding
Suggest presence or absence of
demand for a proposed product
offering
Market trials
Challenges
Can help validate demand and
refine product features and/or
marketing messages for initial
target customers
Opportunity to gather, measure,
and analyze conversion funnel
metrics
Risk of gathering one-off
preferences and
“requirements” that aren’t
representative of other
customers
Need to determine relevant
customer/market scope for
trial to be useful
Time and cost of managing
information flows with trial
customers, especially in B2B
ventures
Use settings
Better for disconfirming
than validating hypotheses
Can be used to generate
new hypotheses that must
then be validated through
other techniques
Better for disconfirming
than validating early-stage
demand hypotheses
Best for the early-concept
stage of a venture’s
product and customer
development process
Best when venture is
beyond early-prototype or
minimum-viable-product
stage of development
Source: Adapted and reprinted from Harvard Business School, “Customer Discovery and Validation for Entrepreneurs,” HBS No. 812–097
by Frank V. Cespedes, Thomas Eisenmann, and Steven G. Blank. Copyright © 2012 by the President and Fellows of Harvard College; all rights
reserved.
It is important for entrepreneurs to validate the level of demand for the product or service
they plan to offer. (See the sidebar “Managing Uncertainty in a New Venture” for more on
reducing the uncertainty inherent in new undertakings.)
8086 | Core Reading: SELLING AND MARKETING IN THE ENTREPRENEURIAL VENTURE
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Managing Uncertainty in a New Venture
To manage the many uncertainties inherent in a new venture—including those about potential
customers’ needs and the viability of the venture’s business model—entrepreneurs can take
what some call a hypothesis-driven approach. To do so, they translate their vision into
hypotheses—falsifiable statements about what would need to be true in order for the venture
to succeed. They then test those hypotheses using a minimum viable products (MVP)
approach. An MVP is a prototype that includes the smallest set of features and/or activities
needed to confirm or disprove a hypothesis. On the basis of feedback from the tests,
entrepreneurs can decide whether to continue with a proposed business model, revise the
model, or abandon the start-up. This approach can help them mitigate the biggest risk facing
all start-ups: wasting scarce resources on building a product that no one wants. Core Reading:
Experimenting in the Entrepreneurial Venture (HBP No. 8077) offers an overview of the MVP
approach to product development.
Source: Harvard Business School, “Hypothesis-Driven Entrepreneurship: The Lean Startup,” HBS No. 812-095 by Thomas R.
Eisenmann, Eric Ries, and Sarah Dillard. Copyright © 2011 by the President and Fellows of Harvard College; all rights
reserved.
As Jessica Herrin, the founder of Stella + Dot, a company that helps women build homebased businesses selling jewelry and accessories, explains in the interview seen in Video 1,
entrepreneurs can set the stage for successful sales by ensuring that their offering helps
customers resolve pressing needs and by providing exceptional service.
VIDEO 1 Design Your Product to Sell Itself
New Product versus the Status Quo
Research indicates that people tend to evaluate new products or services on the basis of
subjective or perceived value, not only on objective criteria such as features and price. In
addition, their evaluation often involves a reference point—usually the product or service they
already own or consume to deal with a specific opportunity or problem. Research also suggests
that people view improvements relative to the reference point as gains, and view shortcomings
or changes that they would need to make in order to switch to the new product as losses. Most
important for entrepreneurs, perceived losses have a much greater impact on buying behavior
than similarly sized gains, a phenomenon called loss aversion, or the endowment effect.3 Thus
it’s often not enough that a new offering delivers an improvement over the status quo or
additional benefits. In fact, unless the gains significantly outweigh the perceived losses
incurred by switching to the new offering, customers won’t buy.
Meanwhile, entrepreneurs are understandably biased toward their product and often
overvalue the proposed benefits of their offering by as much as customers overvalue the
solution they’re currently using. According to some researchers, the result is often a mismatch
of 9:1 between what innovators believe customers want and what actually motivates customers
to switch.4
Understanding this status quo bias and its behavioral implications is essential for most
entrepreneurs. For example, a customer may have to pay a fee to activate a new service, spend
time learning how to use a new software program, or figure out what do with a DVD
collection when switching to a streaming video service. Many customers view these
expenditures of money, time, and effort as losses, and this perception can cause them to stick
with what they’re already doing.
To manage this bias, entrepreneurs have various generic options. They can accept that
people’s decisions to adopt a new product will unfold slowly and then deal with the funding
implications: The venture will need more money from investors for a longer period of time.
8086 | Core Reading: SELLING AND MARKETING IN THE ENTREPRENEURIAL VENTURE
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For example, Amazon, Bose, and Federal Express, among many others, were unprofitable for
far longer than their founders’ original business plans assumed. Alternatively, the
entrepreneur can try to minimize the behavioral changes that customers would be forced to
make when adopting the new product or service. For example, Dropbox lets customers keep
their current means of saving and sharing files while adopting its product. Finally, whenever
possible, entrepreneurs can make the benefits of their innovation so great that they
significantly outweigh the customer’s perceived losses.
When introducing a new product to a potential customer, it is helpful for the entrepreneur
to answer the following questions:
•
What changes must this potential customer make to adopt our product? Is this
customer’s problem or opportunity big enough to justify the changes?
•
Can we quantify the added benefits the customer will receive in return for making the
changes?
•
Can we demonstrate the value of switching to our product and thus inspire potential
customers to do so?
Early Adopters versus Mainstream Customers
An entrepreneur has another option for dealing with the inertia exhibited by many potential
customers: Identify a subset of customers who value the benefits inherent in the new offering
so much that they’re willing to buy it before it has been proven in the market—and sometimes
even when it’s still in prototype form. Such customers are known as early adopters, and they
may be individual consumers (for business-to-consumer ventures) or buyers working within
organizations (for business-to-business start-ups). In his work on high-tech markets, Geoffrey
Moore points out that early adopters’ buying criteria differ from those of mainstream
customers, who often come into the market later.5 He outlines four types of buyers, each with
their own buying criteria:
Early Adopters
•
Early-market “visionaries.” They buy to gain a competitive advantage when pursuing a
new opportunity.
•
Early pragmatists. They buy to fix or improve a business process or solve a current,
pressing problem.
Mainstream Customers
•
Late pragmatists. They seek to buy the lowest-risk or highest-value proven solution.
•
Conservatives. They want the solution that’s best for maintaining, amortizing, or
leveraging their investments in the category.
One important implication for entrepreneurs is that focusing market research on
mainstream buyers can inadvertently hurt attempts to sell to early adopters. By the same
token, an overly narrow focus on early adopters can prevent a venture from later catering
effectively to mainstream customers. Moore calls this challenge “crossing the chasm.” Thus, a
dynamic approach that understands buyer behavior over time and in different contexts is
essential. The sidebar “How to ‘Cross the Chasm’ ” offers a brief overview of Moore’s
suggestions.
How can a start-up identify early adopters? There is no simple answer. Research in a
variety of new-product adoption contexts has generated multiple and often conflicting
criteria, and simply calling early adopters “visionaries” or “evangelists” doesn’t help much.6
8086 | Core Reading: SELLING AND MARKETING IN THE ENTREPRENEURIAL VENTURE
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How to “Cross the Chasm”
In his book Crossing the Chasm: Marketing and Selling High-Tech Products to Mainstream
Customers, Geoffrey Moore offers advice about how new ventures can “cross the chasm”—
that is, move from selling to early adopters to selling to mainstream customers. To bridge
that yawning gap, Moore recommends focusing on a single market—a beachhead—and then
using success in that market to support movement into adjacent extended markets. Most
strategic target markets have connections to other markets that create entry points into a
larger segment.
Moore suggests these steps for crossing the chasm to mainstream selling:
1 Target the point of attack. Identify a specific market niche as the point of attack, and
focus all resources on achieving a leadership position in that niche.
2 Assemble an invasion force. Create a product that completely solves target customers’
primary problem, augmented by any services needed to compel customers to buy (such
as installation and training support).
3 Define the battle. Articulate who your competitors are, define your product’s unique
positioning in the market, develop your “elevator pitch”—and weave all such information
into your company’s sales and marketing communications.
4 Launch the invasion. Determine the right pricing, and optimize your sales force to create
demand. For instance, Moore maintains that direct sales is the optimal channel for selling
high-tech products. At the center of this channel is a consultative salesperson who works
with clients to analyze their needs. Supported by application and technology specialists,
the consultative salesperson then proposes solutions.
Source: Geoffrey A. Moore, Crossing the Chasm: Marketing and Selling High-Tech Products to Mainstream Customers (New
York: HarperCollins Publishers, 1999).
One approach is to look for customers who are already grappling with the problem or
opportunity the new offering intends to address. For instance, Intuit sold check-writing and
bookkeeping software to early personal computer adopters who were trying to find ways to get
the most out of their new machines and to accountants who were looking for ways to
streamline various financial tasks. Another way is to find prospects who aren’t currently using
existing alternatives to the venture’s offering and whose status quo bias, as a result, is
proportionately less. Examples include auto makers’ targeting of first-time car buyers who are
checking out hybrid cars, Apple’s original strategy of selling at a bulk discount to schools (and
thus targeting young people who had never used computers), and Rent the Runway (which
targeted buyers who would otherwise not be in the market for expensive designer dresses).
Regardless of the method chosen, entrepreneurs need to consider whether they’re calling
on the right prospects and, when they’re targeting organizations as possible customers,
whether they’re calling on the right decision makers within those organizations. In addition,
entrepreneurs can benefit by considering what cultural or community factors might
characterize early adopters in the relevant product or service category. For example,
Scandinavian customers have historically been lead users in “green” or ecologically friendly
product categories, while American farmers have been among the world’s fastest adopters of
genetically modified crops.
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2.2 Visiting Potential Customers
In many new-venture situations, face-to-face visits with potential customers are the only way
to unearth crucial information about them.7 Such visits can help entrepreneurs demonstrate
prototypes of their offering and identify unmet needs; learn how customers are currently
dealing with tasks, problems, or opportunities important to them; and explore what they do
and don’t like about the products or services they’re currently using.
Attention to the following three steps can help entrepreneurs get the most from early market
interactions:
•
Selecting customers and scheduling visits
•
Planning and conducting visits
•
Learning from visits
Selecting Customers and Scheduling Visits
In general, an early-stage venture should target potential early adopters, rather than
mainstream customers, for face-to-face visits. These are customers who are probably most
concerned about the opportunity the venture’s product or service would enable them to
pursue or the problem it would help them solve. In addition, these early adopters may be
dissatisfied with current alternatives and be actively searching for a better solution. The
following activities can help entrepreneurs identify and gain access to such interviewees:
•
Ask friends, business contacts, and members of your alumni network to introduce you to
potential customers via e-mail or social media. Provide text they can copy and paste into
an e-mail or other message. Tell them how you plan to communicate with their contacts
and what you hope to gain from the introduction. For instance, “I’ve got a product idea
I’m trying to validate with [type of customer]. My goal is for them to visit my splash page
at [URL] and indicate their level of interest in the idea and whether they’d be willing to
meet with me to discuss it. I’ll contact them to set up a meeting only if they give me
permission to do so. Could you send the following message to people you know who fit
this target?”8
•
Attend relevant trade shows, industry conferences, shareholder meetings of established
competitors, and networking events. At these gatherings, look for people whom you
might interview to gain insights about the target market, features most important to that
market, and potential early adopter customers.
•
Use AdWords, Facebook Ads, Twitter Search, Google Alerts, and other online services to
describe the problem your offering plans to solve and to find relevant interviewees. For
instance, you can set up Google Alerts for your offering. When the service finds relevant
blog posts or comments, you can e-mail the authors to ask for a visit. Such online
services can unearth potential interviewees who are geographically dispersed, so meeting
in person might not be possible with each of them. In such cases, a Skype meeting may
be the next best thing to a face-to-face visit.
Planning and Conducting Visits
Once an entrepreneur has arranged for face-to-face visits, careful planning can increase the
chances of getting maximum value from them. Edward F. McQuarrie recommends the
following process for planning and conducting visits:9
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1
Set objectives. Entrepreneurs are likely to have a long list of information gaps, but a sure
way to do poor customer visits is to impose too many agendas on them. Specify the kind
of information you want to collect during the visits. For example, discussing potential
pricing for your offering is generally not a good objective. Market research repeatedly
uncovers big differences between what people say they are willing to pay in hypothetical
situations versus their actual purchase behavior.10 Instead, pricing should be tested in the
marketplace. Useful types of information to gather during visits include estimates of
current usage costs; the prices of products or services the customer is currently using;
and features and benefits that the customer finds most compelling.
2
Select a sample size. Determine how many customers you want to meet with, recognizing
limits on time, money, and access. This underscores the importance of setting clear
objectives for each visit.
3
Identify the players. Determine who from the venture will participate in the visits and
what they will do (ask most of the questions? listen? take notes?). In general, the people
who must assess and use the information from the visits should be there to hear what
potential customers say and how they say it. Plan to have several people from different
functions conduct the visit, interpret the findings separately, and then compare results.
This can help counteract any functional biases that the interviewers bring to the visit. For
visits with high-level decision makers, the entrepreneur may want well-known investors
or advisors to attend.
4
Develop a discussion guide. List the questions that will help unearth the most valuable
information. Asking the right kinds of questions is critical for learning as much as
possible from a customer visit. These visits are generally not good for gathering input
about product features. For example, “What features would you like in this product?”
may seem like a reasonable and appropriate research question, but it tends to produce
open-ended wish lists. Avoid questions that, in effect, ask customers to tell you what to
design. Instead, focus on questions about how a product does or does not help users
perform relevant tasks, such as, “What do you love or hate most about the product
you’re using?” “Does the prototype I’ve shown you solve your problem better or worse
than what you’re currently using? How? What do you love or hate most about it?” and
“Why did you choose the solution you’re using now over alternative solutions?”11 For
instance, an entrepreneur developing an online grocery shopping app could ask the
following questions:
“How does your household handle grocery shopping? How is that process currently
working for you?”
“Have you tried other approaches, like online grocery delivery or keeping a list on
your iPhone? If so, how did those work for you?” (Note: Customers who have not
been satisfied with existing online or mobile solutions may be so motivated to fix the
problem that they could become early adopters for this app.)
“What do you do immediately before you go grocery shopping? Immediately after?”
“If you could improve anything about your grocery shopping routine, what would it
be?”12
5
Conduct the visits. Remember that a customer visit is not a sales call or an opportunity to
overcome objections to or misunderstandings about your offering. The primary goal is
not to sell; it’s to learn what potential customers might buy. A good rule of thumb is to
spend 80% of the visit listening and 20% probing (that is, drilling deeper to determine
the root cause of the customer’s issues).
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Learning from Visits
A customer visit is a complex event that can yield many valuable insights. But making sense of
the information doesn’t occur automatically. Entrepreneurs need to take time immediately
after a visit to debrief. There are several ways to do this. One is using an approach called the
“Five Whys,” during which an entrepreneur asks “why” at least five times about each customer
problem, opportunity, or objection encountered during a visit. The intent is to go from listing
symptoms to identifying root causes. Another approach is an after-action review (AAR),
which moves systematically through the following questions:
1
“What was our intent with this visit?” Review your objective(s) and ask, “To what degree
have we fulfilled that intent?”
2
“What happened in the interview? What did we actually hear, and what does it imply?”
Cite data or specific examples. “In what parts of the interview did we achieve our
objective(s)? In what parts did we not?”
3
“What did we do well to achieve our objective(s) for the visit? What could we have done
better? And what lessons did we learn?”
4
“What can we do differently in subsequent interviews to improve?”
If an entrepreneur conducts multiple visits, it often becomes clear that some lines of
inquiry are more productive than others; that new approaches to achieving the objectives have
emerged; and that the discussion guide should be revised. A debriefing is essential for
discussing these possibilities.
Entrepreneurs may respond to what they learn from customer visits by changing their
offering. In fact, to develop a successful product, many entrepreneurs find they need to build
an experimental version of it, test it, and gather feedback from early users on how it could be
improved. Eric Ries explains how this process can help manage uncertainty in entrepreneurial
ventures in Video 2.
VIDEO 2 The Feedback Loop
2.3 Identifying Core Customers
The purpose of gathering information is to make better decisions.13 When launching new
ventures, major marketing and selling decisions include:
•
Determining customer identification criteria
•
Assessing transaction costs
•
Segmenting rather than partitioning customer opportunities
•
Understanding transaction versus relationship buyers.
In turn, clarity about these decisions is essential for tailoring marketing strategies that
target customer groups and avoiding the pitfalls and expense of indiscriminate selling
activities. This is all part of defining the business model, discussed in the sidebar “What Is a
Business Model?”
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What Is a Business Model?
A venture’s business model is an interconnected set of choices affecting how the enterprise
provides unique value to customers—and how it will design its own and its partners’ activities
to deliver that value while earning a profit. Savvy entrepreneurs design and continually adapt
their sales and marketing activities in ways that align with their business model, making
adjustments in these areas:
1 Customer value proposition. What unmet needs will the venture address? What kinds of
customers will the company target? What features will distinguish the product or service
the entrepreneur wants to offer?
2 Operations. What activities will be required to develop and produce the venture’s
offering? Where will these activities be performed—inside the organization or within
partner, supplier, or customer organizations? What specific units or individuals will
perform these activities?
3 Go-to-market plan. Through what channels will the venture educate prospective
customers about its offerings, deliver its products or services, and provide post-sales
service? How much is it willing to invest in acquiring customers? How will it “cross the
chasm” from selling to early adopters to selling to mainstream customers?
4 Profit formula. How much profit does the venture expect to earn per unit of product or
service sold? What fixed costs will the enterprise incur? How many units will the
company have to sell before it reaches the breakeven point and has positive operating
cash flow?
Determining Identification Criteria
Depending on the venture, criteria for identifying core customers might include one or more
of the following:
•
Order size. Most large orders are not proportionately more expensive to fulfill than small
orders, so customers placing bigger orders may be worth pursuing. But depending on the
venture’s business model, this rule of thumb may not apply. For instance, for a producer
of a premium-priced differentiated product, buyers generating the biggest orders will
probably be aware of their status. As a result, they’ll have greater bargaining power to
negotiate lower prices.
•
Product mix. Customers who buy a mix of offerings from a start-up may also be good
core customers. However, their sensitivity to price may vary considerably across those
products and services.
•
Customer development and maintenance costs. Customer profitability can vary
considerably when the longer-term costs of acquiring and maintaining a customer are
taken into account. Entrepreneurs need to ask whether they can handle the heavy cash
outflows required to sell to and build relationships with certain customers. Similarly, in
many ventures, post-sale expenses (such as service and application support) differ
considerably from one type of customer to the next.
•
Degree of prestige. Some big-name customers can help establish a start-up’s credibility
and generate sales from others. In many health-care markets, for instance, teaching
hospitals often play this role for medical device companies as successive waves of medical
students use their products and disseminate them to other institutions.
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Assessing Transaction Costs
For any company, customers ultimately represent a stream of orders that exert a domino effect
on many parts of the venture’s organization, as shown in Exhibit 2.
EXHIBIT 2 Orders Affect Multiple Areas of a Business
Source: Adapted and reprinted from Aligning Strategy and Sales: The Choices, Systems, and Behaviors that Drive Effective Selling by Frank V.
Cespedes. Harvard Business Review Press, Boston, MA: 2014. Copyright © 2014 by the Harvard Business Publishing Corporation; all rights
reserved.
Customers always come embedded with transaction costs for the seller. Some orders are
easier (and thus less expensive) to produce and process, while others are harder (and therefore
more expensive). Consider the difference between fulfilling an order for an item that is in
stock versus one that must be custom-made, or the difference between providing a service to a
client who requires just one proposal versus one who wants multiple proposals. Such
differences influence “upstream” elements in the venture’s business model, such as decisions
about a product or service mix and the utilization of people and skills needed to create and
produce the offering. These differences also affect “downstream” elements, including post-sale
maintenance and servicing costs. Together, those factors affect the cumulative net cash flow
associated with each customer, the prices needed to make that customer profitable, and the
cash or profit left over that the company could use to meet other business needs.
Even with high sales and a good product mix, transaction costs can vary widely and erode
a company’s margin. To demonstrate how, consider the two customers in Interactive Illustration 1. Each customer has placed an order for a variety of items that sell at different prices,
although the total price for each order is $200,000. Assuming that the company has a 40%
gross margin (Gross margin = (Revenue – Total Costs) ÷ Revenue), this leaves the enterprise
with $80,000 after accounting for cost of goods sold (COGS) and overhead ($200,000 ∙ 40% =
$80,000). However, there is a cost ($100) for picking and packing each ordered item in the
warehouse. If an item is out of stock, the company has to manufacture a one-off or procure
the item from a supplier, making the cost to fulfill the order even higher ($1,500 per stockedout item). Which customer is more profitable to the firm: one who places an order for 30
higher-priced items, 20% of which are in stock, or a customer who places an order for 80
lower-priced items, all of which are in stock? Explore these and other scenarios in the interac-
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tive illustration, and compare the resulting profit margins on the orders. In the case of an
order that costs more to fulfill than it brings in, what parts of the business in the flow chart in
Exhibit 2 need attention? How might a firm regain its gross margin with the next customer?
INTERACTIVE ILLUSTRATION 1 Customer Profitability
Entrepreneurs ignore these differences at their peril, because indiscriminate selling soon
generates a fragmented array of sales activities that can increase transaction costs and erode
profits. It can also dilute the value proposition because, as customers buy and use the product,
the venture is often pressured by customers to modify the product. If the customer base and
the value proposition delivered are significantly different, the requests for modifications lack a
coherent logic, which can further increase cost and complexity.
Segmenting Rather than Partitioning Customers
To avoid fragmented selling efforts, entrepreneurs need to segment their target market on the
basis of the benefits each customer receives and perceives (such as convenience, affordability,
social status, and so forth) from the offering’s features. Segmentation thus focuses on buyers’
problems or opportunities. This is very different from partitioning a market on the basis of
which customers happen to become accessible to the sales force through customer lists, social
media sites, standard industrial classification (SIC) codes, data from trade associations, or a
flurry of cold calls. An entrepreneur who throws enough money at selling to randomly
accessed customers may achieve some sales. But such sales are often a function of individual
“heroic” efforts and do not provide a scalable platform for profitable growth. Equally
important, this approach inhibits the entrepreneur’s ability to adapt to new information about
customers and their buying behaviors—a crucial requirement for a venture. More important,
over time, this approach can blind the entrepreneur’s leadership team to the real dynamics of
the market opportunity it has identified. For a resource-constrained start-up, it also comes
with an opportunity cost: Money, time, and people allocated to randomly discovered customer
A won’t be available to pursue more promising customers B, C, and D.
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Managing Opportunities:
Transaction versus Relationship Buyers
No matter how large or expanding a market may seem to an entrepreneur, a venture can
extract more or less value from different kinds of customers. Ineffective management of
opportunities eventually leads to loss of money, time, and positioning with customers who are
(or should be) core customers. Over time, it can also cause a venture to invest too much in
satisfying the wrong kind of customer. Moreover, it can lead to the development of
“commodity competencies” as the venture gets better and better at activities that more and
more customers care less and less about.
Most markets present ventures with a spectrum of customers who could represent sales
opportunities, as depicted in Exhibit 3. At one end are transaction buyers, who operate on a
short time horizon when making a purchase in a given product or service category. They may
view their purchase options as interchangeable and switch readily among them because it
costs little to do so. An example might be a business customer who buys standard supplies and
could do so from multiple suppliers. For companies selling to transaction buyers, it doesn’t
make sense to invest in building long-term relationships or to infuse more quality or features
into the product than those specified by the customer, because transaction customers are
unwilling to pay for what they see as “overengineered” products.
EXHIBIT 3 A Spectrum of Opportunities: Who Is the “Good Customer”?
Source: Adapted and reprinted from Aligning Strategy and Sales: The Choices, Systems, and Behaviors that Drive Effective Selling by Frank V.
Cespedes. Harvard Business Review Press. Boston, MA: 2014. Copyright © 2014 by the Harvard Business Publishing Corporation; all rights
reserved.
At the other end of the spectrum are relationship buyers, who operate on a longer time
horizon when making purchases. There is something about the seller, the product, or the
buyers themselves that motivates them to invest more time in evaluating offerings in a
particular category. These kinds of purchasing decisions are often made by committee and
involve multiple levels of management approval. Once relationship buyers have made their
choice, they are less likely to switch. Traditional enterprise resource planning (ERP) software
is a case in point. Adopting an ERP system entails many years of vendor support, upgrades,
and other processes not easily changed after the initial decision is made. As a result, buyers are
purchasing not only the product but also a partner. They want to know about the seller’s
organization, its R&D plans, its commitment to the product category, its long-term financial
stability, and the ability of the assigned account manager to get things done for them. Software
ventures that sell this type of software to these customers need to be willing and able to invest
in a relationship. They also need to be able to manage the costs of longer selling cycles (for
example, having to submit several rounds of proposals to a potential customer) as well as
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ongoing service and support efforts. It is interesting to note that some worry that the shift to
cloud-based enterprise software could begin to transform relationship buyers into transaction
buyers. However, savvy entrepreneurs know that there are still opportunities to preserve
relationships and to embed switching costs in enterprise cloud systems, though they must be
willing to commit to even faster update cycles and a more consultative approach to sales.
Whether transaction or relationship buyers constitute the best customers for a venture
depends on the value proposition as well as resources and capabilities. For instance, most
transaction buyers want standardized products or services that are in the right place at the
right time in the right quantities.14 An entrepreneur selling to these buyers will have to deliver
on these requirements at an acceptable price. That calls for a sales channel that can efficiently
close a lot of sales transactions. And that, in turn, has implications for the salespeople the
venture hires, how it compensates them, and how it manages their performance. Relationship
buyers generally want a high-quality solution that will suit them over time. The salespeople
within these entrepreneurial ventures must be able to customize the offering and provide
continual innovation tailored to these buyers’ needs. This requires salespeople who can help
buyers analyze current needs and envision future ones, as well as work with the organization
to customize the venture’s offering to satisfy unique customer requirements.
In most markets, many customers are neither solely transaction nor solely relationship
buyers; they fall somewhere on the transaction–relationship continuum. And, as always,
customer behavior in a market can change because of new developments in the competition,
technology, or other forces. In the ERP market, for instance, the advent of cloud computing
and software as a service (SaaS) is moving buying from the relationship end of the spectrum
toward the transaction end. But, at the same time, some SaaS suppliers are including
predictive analytic services as part of their software, which tends to increase the relationship
and solution component of the sale. Hence, as indicated in the example in the next section, it’s
not easy or intuitive for a new venture to figure out where it should be aiming in terms of its
core customers. But it’s necessary: The consequences of an enterprise’s choice affect nearly all
other aspects of the venture’s strategy and business model.
2.4 Identifying a Venture’s Core Customers: A Case Study
This section illustrates a process for identifying core customers and developing an ideal
customer profile used by an early-stage company called BusinessProcessCo (BPC, a real
company with a disguised name).15 Founded in 2000 by a visionary entrepreneur, BPC
provided online payroll services to small- and medium-sized businesses. By 2004, the venture
had approximately $40 million in annual sales and 75 salespeople, with each salesperson’s
annual quota of $600,000 and an at-quota target compensation of about $60,000 per rep. In
2004, the founder raised $30 million from investors to develop new products, increase sales,
and scale the business. But two years later, BPC’s revenues had stagnated and its investors
were getting restless. Executives deployed various tactics. For example, they tried product
bundling (combining features at a steep discount), and they let customers have six months of
free service if they made an annual commitment to BPC. They also experimented with
different sales incentives aimed at closing more deals.
Over the next two years, however, BPC’s prices declined faster than its revenues increased.
The company experienced several mediocre months, then two bad months after customer
price incentives were discontinued. The venture failed to meet forecasts, and the 75 sales reps
became an expensive burden. In 2008, when the worldwide economic recession hit, BPC’s
board of directors started asking fundamental questions about the company’s marketing and
selling processes.
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Although BPC did have a product performance advantage over competitors, early efforts to
jumpstart sales had led to an ad hoc, fragmented selling process. The leadership team had
never defined who were—and who weren’t—BPC’s core customers, what their buying
behavior should be, and what this implied for the effective use of sales resources. To begin
correcting the situation, BPC initiated the following process:
•
Assembling and analyzing customer data
•
Developing preliminary hypotheses
•
Refining the hypotheses
•
Tailoring the sales model to core customers.
Assembling and Analyzing Customer Data
BPC’s founder believed that his venture’s target customers were “small, independently owned
restaurants and food stores.” By 2008, such businesses made up 40% of BPC’s customer base,
and the company had been focusing its selling efforts on these kinds of businesses. BPC set out
to analyze data about these and other customers. It pulled together a small team of senior
leaders to look for correlations between customer attributes and BPC’s net margins and other
factors. The team listed all potentially relevant customer attributes, drawing on data from
public sources such as annual reports, websites, and press releases as well as from BPC’s
internal financial records and customer relationship management (CRM) system. Attributes
included revenues, profitability, number of employees, industry, and location. The analysis
revealed the following:
•
For a given customer, BPC’s customer profitability was proportional to the number of
employees in the customer organization. Analysis revealed a “sweet spot,” or an optimal
number of employees for maximizing a customer’s profitability to BPC.
•
BPC’s cost of sales correlated directly with selling-cycle length. Longer cycles typically
meant multiple requests for proposals, product demonstrations, and calls—all of which
raised costs. (The cost to serve installed customers did not vary much; thus selling costs
were particularly important.)
•
Though BPC’s sales weren’t increasing, its customers were satisfied overall with its
services. The most satisfied and loyal were small- and medium-sized but growing
companies.
Developing Preliminary Hypotheses
Findings from the customer data analysis led BPC’s team to develop the following preliminary
hypotheses about what characterized “good customers” for the company. In addition to the
small, independently owned restaurants and food stores that BPC had been serving, good
customers included:
•
Mid-sized professional service firms (15–30 employees). These businesses were large
enough to need repeatable payroll processes but not big enough to afford a large IT staff.
Thus they tended to outsource their payroll services. Moreover, these firms might choose
BPC because it would treat them better than BPC’s larger competitors would.
•
Firms located in cities. Serving clients clustered in urban centers enabled BPC to achieve
economies in its selling processes, because salespeople could conduct more customer
visits within a specified time period. Also, city-based clients tended to be early adopters
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of the kinds of technology solutions BPC offered. And they were more likely than ruralbased clients to have high-speed Internet connections.
•
Operating history. Customers that had been in business for at least five years had much
lower churn rates (cancellation of service or switching to another payroll service
provider). They thus had a higher lifetime value (net profit predicted from the
relationship) for BPC. See Core Reading: Recognizing and Shaping Opportunities (HBP
No. 8056) and Core Reading: Experimenting in the Entrepreneurial Venture (HBP No.
8077).
Refining the Hypotheses
BPC next held an offsite meeting for the top team and the company’s functional leaders to
discuss the data and preliminary hypotheses. Participants considered each customer attribute,
asking “What are the trends with this attribute? How does it affect the costs and efficiencies of
various functions in our company? How long does it take to close a sale with customers with
different attributes (such as industry, size, length of time in business)? How does the mix of
services we offer a particular client affect order fulfillment?” Participants also asked, “If we
could invest our sales, marketing, or R&D resources to pursue one customer segment, which
segment would we choose? Why? And what are the attributes of customers in that segment?”
Drawing on responses to these questions, the team modified its preliminary hypotheses
about what constituted the ideal customer. To illustrate, while small restaurants constituted a
large portion of current customers, they also exhibited high levels of seasonality and high default rates. Similarly, mom-and-pop food stores paid slowly and more of them went bankrupt
without paying BPC. Thus the company eliminated small restaurants and food stores from its
list of ideal customers.
Tailoring the Sales Model to Core Customers
Building an ideal customer profile prompted BPC to shift its selling focus from small
restaurants and food stores to professional services firms with more than 15 employees,
having learned that the number of employees was an important revenue driver. Firm size also
correlated with the age of the potential customer and the stability of its revenue stream for
BPC. This shift had both external and internal implications for the venture.
Externally, small accounting firms that served BPC’s target end customers became a
priority on sales-call lists. Previously considered competitors, small certified public accounting
(CPA) firms now became a source of referrals to target customers. BPC found that most small
CPA firms lacked the resources or desire to handle payroll processing for their clients, and
they didn’t care who took on this task. Thus many of them were happy to make BPC their
preferred partner, once BPC demonstrated how its services could help them add value for
their customers and simplify the audits performed by the CPA firms, reducing their costs.
Internally, BPC changed its sales metrics as a result of the analysis. Before, it had measured
sales force performance only on the number of orders booked—not on order quality or
customer renewal rates. Now, the number of calls to CPA firms became a key performance
metric, which BPC monitored weekly, finding that the more meetings that sales reps
conducted with local CPA firms, the more referrals to other professional services firms the
reps received. Referrals led to product demonstrations at target customers, which in turn led
to closed sales. To back up its newly defined sales performance metrics, BPC paid
commissions to reps only for deals matching the ideal client profile it had developed.
It soon became clear which sales reps could execute the new approach and which could
not. As a result, BPC cut its sales staff from 75 to 35, retaining those with the right skills. The
company also developed a more sophisticated recruiting approach: seeking out salespeople
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with contacts or experience with CPA firms and training all new reps on how CPA and
professional services firms were organized. In addition, BPC redirected marketing efforts to
include events at accounting professional conferences.
The new selling focus led to other changes in BPC’s business model. In product
development, BPC created a payroll and human resources (HR) software bundle to enable
customers to track employees’ dates of hire, benefits packages, salary histories, and
performance reviews. The bundle increased customer renewal rates. Before, some managers at
BPC had suggested adding HR functionality to the product, but others had rejected the idea
because “we’re a payroll company.” Now that BPC could tie this product development
expenditure to customer lifetime value, the debate was resolved.
How did BPC deal with prospects that didn’t fit the ideal customer profile? If a CPA firm
referred BPC to such companies, BPC treated them as transaction buyers and adopted a lowtouch and low-cost selling approach. It contacted these leads by e-mail rather than by sending
a sales rep, and it established an online demo video. Though close rates were lower for e-mail
contacts than for customers who received in-person sales calls, each closed sale resulting from
e-mail contact was less expensive and more profitable than previous sales to such customers.
All of these changes required BPC’s sales staff to adopt new behaviors, many of which were
alien to the reps’ skill sets and work-style preferences. In the first six months after the changes
were rolled out, BPC experienced turnover in more than one-third of its sales force. But over
the following year, the number of orders booked increased by 25%—with fewer sales reps—
and new clients churned at just half the rate of the installed customer base.
2.5 Entrepreneurial Selling: Why, What, How, Where
Many entrepreneurs say that they didn’t really understand relevant buying behaviors and the
importance of core-customer identification until they started trying to sell their venture’s
product or service. And most say that, in retrospect, they should have started selling sooner
than they did. This section outlines:
•
Why selling is an important capability for an entrepreneur;
•
What research does and doesn’t tell us about effective salespeople; and
•
How entrepreneurs can develop this important skill.
The Further Reading section indicates where to look for additional advice and guidelines
about the topic.
Why Selling Is Important
Selling is crucial for gaining what an early-stage venture needs: customers, cash, and market
credibility. Whether or not they enjoy selling, entrepreneurs tend to have a hard time
delegating this activity, for several reasons. The venture may not have designated salespeople,
so it’s not always clear who should take on sales tasks. In addition, buyers often want to deal
directly with a venture’s founder in order to gain assurance from a key decision maker about
matters such as delivery, payment, and personal commitments to follow through despite
constrained resources. Finally, as we’ve discussed, in the early stages of a venture, selling is
often the best way to gather and interpret information about customers and opportunities—
information that may suggest changes in the venture’s business model. This is vital
information for entrepreneurs, and both the incentives and perspectives of a hired salesperson
can differ significantly from those of the venture’s founders.
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For all of these reasons, founders must sell in addition to overseeing the sales activities of
those who work for them. But myths abound regarding what it takes to sell successfully.
What Research Indicates About Effective Salespeople
There are many unfounded assumptions about what it takes to sell. An especially persistent
myth is that effective salespeople share personality traits and behaviors that are relevant across
selling situations. Yet more than a century of research has failed to find a consistent
correlation between behavioral predispositions and sales performance. Studies have explored
the effectiveness of “hard sell” emotional appeals versus “soft sell” rational appeals, different
types of presentations, and product-oriented versus personal-oriented approaches. Other
studies have investigated the relationships between personality traits (such as “forcefulness” or
“sociability”) and salesperson performance, between demographic traits (age, education, years
of sales experience) and performance, and between qualities such as “emotional intelligence”
and communication skills and sales performance. As a recent review of these studies puts it,
“The results of this research have simply failed to identify behavioral predispositions or
aptitudes that account for a large amount of variance in performance for salespeople. In
addition, the results of this research are quite inconsistent and, in some cases, even
contradictory.”16 Even variables that can be assessed with relative accuracy and reliability
(such as age, education, and years of experience) are related to performance in some studies
but are unrelated (or negatively related) in others.
What can entrepreneurs conclude from these findings? First, sales talent comes in all
shapes and sizes. It is not a generalizable trait but a function of the particular sales task—what
is required to sell successfully in a particular situation.
Video 3 outlines the importance of connecting the venture’s strategy with sales tasks.
When entrepreneurs connect sales tasks with what the business wants to achieve, they lay the
foundation for enhancing revenues.
VIDEO 3 Aligning Strategy and Sales
Second, the relevant sales task depends on the target customer, the product, and the seller’s
business model and strategic objectives. Think, for instance, of the tasks involved in selling
consumer goods to and through retailers versus those required for selling enterprise software
or professional services such as management consulting to commercial buyers. Entrepreneurs
embarking on selling should start with analyzing the relevant tasks. They should also be wary
of all-purpose, one-size-fits-all advice about how to pitch their offering.
Third, many (if not most) entrepreneurs start without much prior selling experience or
confidence in their selling abilities, but they can learn to perform these tasks effectively. The
“born salesperson” is just as mythical as the “born entrepreneur.”
How to Get Better at Selling
Selling is ultimately about the buyer, not the seller. As the old saying goes, “Companies don’t
buy; people do.” For this reason, entrepreneurs need to learn all they can about their target
customers and the people who will be making the decision before making a sales call. This
includes who they are, what they care about, and how they evaluate outcomes of using a
product or service. This sort of preparation is descriptive, not prescriptive. That is, it’s about
how buyers actually see—not how they should see—the world and the relevant product
category. Technology is making such information much more easily available. Entrepreneurs
can learn a lot by consulting pertinent websites, blog posts, and social media sites. However,
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they must keep in mind that information obtained from third parties is not a substitute for
visiting potential customers, users within customer sites, channels to key customers, and
industry experts in the field.
Moreover, as with visits to potential early adopters, before every sales call, entrepreneurs
should develop a plan for accomplishing their objectives for that particular call. Those who
lack such a plan or clearly defined objectives should ask why they’re spending precious time
and energy on this activity.
Effective sales calls have multiple dimensions. As depicted in Exhibit 4, these interactions
often depend on “three Cs”—context, content, and contact.
EXHIBIT 4 Selling: A Conceptual Road Map
In preparing for a call and considering how to structure a sales pitch, entrepreneurs should
develop clear responses to the following questions:
•
What do you want buyers to know—beyond what they already may know about you,
your product, your business, and so forth?
•
What do you want them to feel—about the relevant problem or opportunity being
discussed, the relative importance or urgency of the issue, and so on?
•
What do you want them to do—in the form of possible next steps, such as placing an
order at a certain price and quantity, attending a product demonstration, or taking part
in a pilot project or beta test?
Entrepreneurs must excel not only at preparing for sales calls but also at conducting them;
this includes listening to the customer, asking questions to deepen their understanding, and
paraphrasing what they’ve heard to ensure that their understanding is accurate. This kind of
active listening is difficult for a couple of reasons. First, the hopes, expectations, and technical
or other biases that entrepreneurs may bring to each selling situation can make it hard for
them to hear what the customer is saying. Second, the average person talks at about 200 words
per minute but is able to process an estimated 300 to 500 words per minute. As a result, many
selling discussions are not really discussions. Instead, the seller is pretending to listen and may
even be nodding his or her head, but is really waiting impatiently to talk about the company
and product. It’s all too easy for the seller to shut out or inhibit important new information
about the buyer, the company, and the opportunity. Exhibit 5 outlines some simple but
effective dos and don’ts of active listening during sales calls.
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EXHIBIT 5 Some Behavioral Protocols for Active Listening
2.6 Integrating Entrepreneurial Selling and Marketing
Because of their central role in customer acquisition and retention, sales and marketing are
crucial entrepreneurial activities. They affect nearly all other aspects of a venture’s business
model, as well as the nature of the team and the resources required. As we discussed at the
start of this reading, while sales and marketing are distinct activities, in early-stage ventures
they must be integrated. The following sections consider several frameworks that can help
entrepreneurs think through this integration.
Sales as a Boundary Role
Salespeople are the link between the company and its potential customers. They perform what
some call a boundary-spanning role, because they operate at the nexus of two entities and have
to respond to the needs of each in order to succeed (see Exhibit 6).17 As part of their role,
salespeople represent the venture and its promised capabilities to the customer, but they also
represent the customer to their company. Each organization—the venture and the customer’s
company—has its own processes, priorities, and procedures that it considers especially
important. Salespeople must negotiate the boundary between the two. For example, a
salesperson may want to customize the product to meet a specific customer’s needs, while the
new venture’s business model hinges on selling a standard product line through a repeatable
sales process. Or the salesperson may want to offer a price discount to land an account, while
the entrepreneur prefers pricing that ensures a specific profit margin. Thus salespeople must
also manage and, in practice, actively negotiate the boundary between sales and marketing
activities within their own organization, as well as the value delivered within the customer’s
organization and the specific users of the new venture’s products and services.
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EXHIBIT 6 Salespeople’s Boundary Role
Source: Adapted and reprinted from Harvard Business School, “Aspects of Sales Management: An Introduction,” HBS No. 589–061 by Frank
V. Cespedes. Copyright © 1988 by the President and Fellows of Harvard College; all rights reserved.
The Sales Funnel
To integrate sales and marketing, entrepreneurs also need to understand and analyze their
venture’s sales funnel: the activities involved in moving a potential customer from being a
prospect to being an actual buyer. Every sales organization’s sales funnel will be different, and
it will even change over time. Exhibit 7 shows a generic sales funnel.
EXHIBIT 7 Generic Sales Funnel
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Every new venture has an implicit or explicit sales funnel. For some, the funnel may
comprise a long and involved set of activities. For example, as mentioned earlier, selling
traditional enterprise software typically involves many pre-sale demonstrations to multiple
decision makers and influencers as well as post-sale service and support activities. This is also
often the case in selling professional services. In contrast, in other ventures, the steps in the
funnel can collapse into a single sales call. Door-to-door and web-based sales initiatives are
examples. Either way, a venture’s sales funnel is important to understand—for a number of
reasons:
•
Funnel activities ultimately drive many aspects of a new venture’s go-to-market
economics as well as the scaling requirements, opportunities, and constraints facing the
entrepreneur. For instance, markets with long sales cycles (such as capital equipment)
have long sales funnels, owing to the length of time between customer contact and
closing (sometimes years). This can delay revenue generation for the venture, which
results in larger working capital requirements and larger financing needs.
•
By understanding the sales funnel, entrepreneurs can better clarify causal links between
actual sales outcomes and time, money, and other resources devoted to specific funnel
activities. In addition, they can see which marketing activities at different points in the
funnel are likely to have the greatest impact. For example, in many B2B businesses, the
marketing/selling leverage is often near the start of the funnel, in the prospecting phase
and in qualifying sales leads. In a business with long selling cycles, this process of
qualification can help focus limited selling resources on prospects who are more likely to
buy. By contrast, in many online businesses, the theoretical target market is anyone who
can access the venture’s website. Thus the marketing leverage is later in the funnel—for
instance, activities that can increase conversion (closing) rates by a few percentage
points.
•
Clarifying the sales funnel helps entrepreneurs track best practices for moving prospects
from consideration to purchase; disseminate those practices to others in the venture; and
improve hiring, training, and other sales performance management practices.
•
Over time, rigorous sales-funnel management enables entrepreneurs to consider options
for allocating and reallocating limited resources. To do so, they consider questions such
as, “Which steps in the funnel can we off-load to support personnel or conduct online
via a webinar or through third-party channels, such as independent sales representatives,
distributors, value-added resellers, or agents?” Off-loading these steps can free up time
for the venture’s sales force to engage in prospecting and selling.
The Go-to-Market System
Sales and marketing together constitute a go-to-market system that entrepreneurs must
constantly diagnose, manage, and update to adapt to changing market conditions. Exhibit 8
provides a framework for diagnosing what works and what doesn’t in a venture’s current sales
and marketing approaches, probable causes behind problems, options for improving the
enterprise’s go-to-market system, and—perhaps most important—the variables involved in
aligning strategy, target customers, and resulting sales tasks with actual selling behaviors.18
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EXHIBIT 8 Linking Strategy and Sales
Source: Adapted and reprinted from Aligning Strategy and Sales: The Choices, Systems, and Behaviors that Drive Effective Selling by Frank V.
Cespedes. Harvard Business Review Press. Boston, MA: 2014. Copyright © 2014 by the Harvard Business Publishing Corporation; all rights
reserved.
Value in any entrepreneurial venture is ultimately created or destroyed in the marketplace
with customers, not in business plans. Therefore, a venture’s go-to-market practices must
evolve to keep up with changes in customers’ behavior. For example, thanks to the
proliferation of both traditional retail sales channels and newer online channels, customers
now have many more options for deciding what to buy—and from whom. They often jump
from channel to channel, looking for the best value and price. Many customers visit retail
stores in order to handle products and learn about them from highly paid, highly trained
salespeople, but then purchase products online at the lowest possible price. Some sellers label
this “showrooming” process as “bait and switch” behavior, but many consumers consider it
“smart shopping for value.”
Entrepreneurs in many consumer markets must often decide whether to base their go-tomarket approach on a retail-sales or a direct-sales model. They must weigh the trade-offs in
such areas as initial costs, number of units that must be sold for the venture to break even, and
ongoing costs of selling to and servicing customers. Selecting the retail-sales route can have
high initial costs, including retailer margin and the cost of using a distributor. With this
approach, the venture may need to sell a large number of units to break even. Because selling
direct to customers often has lower initial costs than selling through a retailer, the number of
units sold required to break even may be lower. But direct selling typically comes with its own
costs: The entrepreneur must take responsibility for handling tasks such as taking orders,
coordinating shipments, and answering questions. All of this can consume significant
amounts of time each day—and, as the saying goes, time is money. If entrepreneurs don’t
factor such costs into their forecasting, they may be caught off guard and have little time to
focus on equally critical activities, such as analyzing competition or developing ideas for
refining the product.
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Interactive Illustration 2 demonstrates the difference between the two models. The diagram on the left represents how revenue is spent in a retail-sales business model.
The diagram on the right represents a direct-sales business model, in which the entrepreneur
fulfills orders from his or her garage. Around each diagram are task “buckets.” As tasks required for running the business appear at the top of the screen, click “add” to send them into
the correct bucket (or buckets). The cost of these tasks is then calculated in the outputs below
the diagrams. Once all of the tasks have been entered into the interactive, use the slider at the
bottom to change how much cost the entrepreneur allocates to his or her time on an hourly
basis. How do changes in the cost of the entrepreneur’s time affect the breakeven point? What
is the relationship between an entrepreneur’s choice of go-to-market channel (retail sales
versus direct sales) and the venture’s ability to make a profit on unit sales?
INTERACTIVE ILLUSTRATION 2 Retail versus Direct Business Models
To get and retain customers, entrepreneurs need to understand how customers’ behavior is
changing and then adapt their go-to-market system. As we’ve discussed, the starting point is
understanding the relevant sales tasks. What determines those tasks? In large part, it’s the
venture’s business model and strategy, the characteristics of its target or core customers, and
the conditions in the markets where those customers shop and buy. The entrepreneur’s job is
to align actual selling behaviors with the required sales tasks. As the framework in Exhibit 8
indicates—and as we saw in the BPC story—the key levers for doing this are:
•
People. How the venture hires its marketing and sales personnel, who it hires, their
relevant experience and competencies, and how they’re trained as boundary-role
representatives focused on the relevant portions of the venture’s sales funnel.
•
Control systems. How these people are organized, compensated, and incentivized.
•
Sales environment. How salespeople are chosen and managed, how performance reviews
are conducted, and how communication flows between sales and marketing and other
parts of the venture.
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In this system, the people, control systems, and sales environment all interact closely; a
change in one produces changes in the others. To orchestrate these activities skillfully,
entrepreneurs need to engage in constant dialogue with a changing set of buyers, market
conditions, and task requirements as their venture grows. Even with the right compensation,
an effective training program, and a reliable, high-tech CRM system, a venture’s leaders won’t
get far if they don’t also carefully manage the integration of their sales and marketing
activities.
3 SUPPLEMENTAL READING
3.1 A Closer Look at the Status Quo Bias
To successfully launch their innovations in the marketplace, entrepreneurs must understand
and manage common biases at play when customers consider whether to buy a new product
or service. These include the status quo bias, which stems from a phenomenon that
researchers Daniel Kahneman and Amos Tversky called loss aversion.19
Loss Aversion
Whenever people switch from a product or service they’re currently using to a new offering,
they have to make some trade-offs. They gain some things by switching, but they lose some
things as well. For example:
•
People who switch from paperback or hardback books to e-books gain the ability to
download books instantly and to carry them around easily in their e-reader. But they lose
the durability of printed books; the experience of browsing in a bookstore or library; and
sensory pleasures such as the smell of ink on a printed page, the look of a book’s cover
art, and the texture of paper.
•
Individuals who switch from in-store grocery shopping to online grocery shopping gain
the convenience of home delivery. But they lose experiences they can get only by
wandering through a grocery store, such as the opportunity to select the freshest
products, get inspiration for dinner by seeing what looks appealing, and be reminded
that they need certain grocery items.
•
Drivers who switch from traditional gas-powered cars to electric cars gain the ability to
help reduce pollution as well as improve their gas mileage. But they lose the ability to
easily refuel at nearby gas stations as well as the greater power afforded by many gas-only
engines.
The losses involved in switching to a new product or service loom much larger in people’s
minds than any similarly sized gains.
Loss aversion causes the status quo bias, which behavioral economist Richard Thaler also
termed the endowment effect. Through this bias, people value products and services they’re
already using (their “endowment”) much more than those they’re not currently using.
Experiments with diverse goods and services reveal that people want two to four times more
compensation to give up products they already have than they would be willing to pay to get
those items in the first place.
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How Entrepreneurs Can Combat the Status Quo Bias
Loss aversion and the status quo bias can cause much resistance to a new product or service
even though the new offering may promise benefits that existing offerings don’t.
Entrepreneurs can consider the following options to overcome the impacts of this bias:
•
Anticipate a long process of adoption and manage the process effectively. For example, if
the innovation will require significant behavioral changes from adopters (such as a steep
learning curve for mastering a new technology), the status quo bias could prove quite
powerful. In such cases, entrepreneurs must raise capital to cover a lengthy adoption
process, manage costs very rigorously to avoid burning through available capital, and/or
consider “lightweight” or “introductory” products that perhaps provide fewer total
benefits but minimize required behavioral changes by target customers.
•
Try for 10x improvement. Sometimes, entrepreneurs can make the relative benefits of
their innovations so great that these benefits overcome consumers’ overweighting of the
potential losses that would come with adopting the new product or service. When an
innovation offers benefits that are ten times better than what existing alternatives can
provide, consumers will be more likely to adopt the new innovation. For instance,
angioplasties offer a tenfold improvement over bypass surgeries and thus are now
commonly used in medicine.
•
Reduce or eliminate behavioral changes required by the innovation. To illustrate, the
Toyota Prius, which uses a traditional internal-combustion engine plus a self-charging
electric engine, offers a driving experience that is almost identical to that of a gas-only
car. Consumers get a major improvement in gas mileage without having to give up the
benefits of the traditional driving experience. The Prius became the first alternative-fuel
vehicle to win popular acceptance in the United States. Similarly, Dropbox allows users
to continue using established file-saving methods (such as creating document folders on
their computer or on memory sticks) while utilizing Dropbox’s cloud-based method of
file saving and file sharing.
•
Seek out consumers who aren’t yet users of incumbent products. When people don’t yet
have products or services as part of their “endowment,” the loss aversion effect can’t be
activated. For instance, Burton Snowboards targeted young winter sports enthusiasts
who hadn’t yet established themselves as snowboarders. In 2008, Burton claimed more
than 40% of the snowboard equipment industry, which totaled nearly $500 million.20
•
Find “believers.” Seek out consumers who highly value the benefits they could gain from
the new product or who place a relatively small value on the benefits they would have to
give up by switching.
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3.2 Case Study: SignalFire Telemetry Inc.
When Scott Keller and Al Hamilton founded SignalFire Telemetry Inc., a provider of wireless
systems and consulting services for oil and gas fields and for water resource management, the
two entrepreneurs knew they’d face daunting sales and marketing challenges. Keller had an
engineering degree and 25-plus years of experience in engineering as well as in engineering
management. Hamilton had two economics degrees and 30 years of sales and marketing
experience, primarily in engineering-driven companies. The two men had originally met when
both were working for a company that made sensors. Each had gone his separate way after
leaving that company, and they reconnected later in their professional lives. While their skills
were complementary, neither had ever launched a start-up. As they set up their new business
and strived to get it off the ground, they learned from hard experience how to strengthen their
sales and marketing skills in this new, difficult context. See the sidebar “SignalFire at a Glance”
for an overview of the firm.
A Business Is Born
The motivation to found SignalFire came from the
two principals’ frustration with their previous jobs
and what they saw as an opportunity to serve
customers that their more recent employers were
ignoring. BrightTech (an alias), an engineering
consulting company that Keller was working for,
had received several requests from a specialized
wireless mesh network business for a proposal for
a street-lighting system. BrightTech submitted a
number of rounds of proposals that the network
business deemed too expensive. Then Keller urged
BrightTech to build the product anyway and sell it
on the open market, but BrightTech declined.
Keller and Hamilton, eager to explore alternative
businesses, pitched an idea to BrightTech: The two
men would create a new business and approach
BrightTech’s customers to explore possible ways of
serving them. In return, BrightTech’s principals
would receive an equity stake in Keller and
Hamilton’s new business. BrightTech agreed, and
SignalFire Telemetry was born.
SignalFire at a Glance
Industry
Industrial wireless mesh networking
Year founded
2006
Founders
Scott Keller (CEO),
Al Hamilton (President)
Headquarters
Hudson, Massachusetts
Annual revenues
About $1.3 million
Core customers
Systems integrators serving
upstream oil and gas operators
Employees
5 full-time equivalents
Ownership structure
Private (the founders own about
80%, split equally; a third party owns
12%; and the balance is owned by
current and former employees)
Keller and Hamilton approached several streetlighting companies that had been customers of
BrightTech and soon won a contract to develop a
prototype for one of them. With this initial order
in hand, they wrote a business plan and approached several venture capital and angel
investors. On the day they were scheduled to make a major presentation to an investor group,
their street-lighting customer backed out of the deal because it was nervous about doing
business with a small, new supplier. As a result, the investors lost interest as well. The two
men, along with one family member, opted to invest their own money in SignalFire.
After their potential investors drifted away, Keller and Hamilton were approached by
MeterTech (an alias), which had developed vehicle-sensing technology to be integrated with
parking meters. MeterTech wanted to integrate a radio network inside parking meters to
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monitor parking status. It asked SignalFire’s founders if this job could be done. Keller and
Hamilton, desperate for customers and revenues, said “Of course!” MeterTech generated
engineering consulting fees and purchased a technology license from SignalFire, all of which
helped fund SignalFire’s development of what became its core wireless mesh networking
technology. For the next three years, Keller and Hamilton worked without taking a salary.
(Both were fortunate to have spouses who were employed in well-paying positions.) The two
reinvested the proceeds of their consulting efforts into the business.
Finding Early Adopters
At SignalFire, Hamilton officially took lead responsibilities for sales and marketing, but both
principals spent significant time on these two activities. Sales and marketing were closely
linked, as marketing would create brand awareness and leads that could then be turned into
sales. With that in mind, Keller and Hamilton worked to identify and make contact with
potential early adopters of SignalFire’s offerings. At the outset, they had identified oil and gas
fields as a possible market for their technology. Through an acquaintance associated with their
initial street-lighting customer, they heard about a professor in California who had developed
a novel sensor for monitoring oil flow. Hamilton phoned the professor and described the
technology that SignalFire had been developing. He then flew to California to meet with the
professor, who had secured a modest amount of funding from an oil company to do a
demonstration project. At that point, neither Keller nor Hamilton had ever set foot in an
oilfield. They completed the project with the professor but were unable to agree on a
commercial arrangement with him.
Still, through this experience, they gained some knowledge of the upstream oil and gas
industry. Armed with this knowledge, Hamilton identified several companies that provided
monitoring services to small- and medium-size oilfield operators. He then launched a coldcalling campaign, eventually persuading one company that made upstream oil and gas
monitoring systems to talk with him about its needs. The demo project that SignalFire had
done for the California professor led to additional discussions about this prospective
customer’s needs, and the company asked SignalFire to develop a second prototype. This led
to initial orders. Another round of cold calling generated a second customer, which in turn
triggered some positive word of mouth about SignalFire. Soon several additional companies
approached SignalFire, expressing interest in its technology.
During this initial commercialization process, SignalFire continued providing consulting
services to MeterTech and other companies to generate revenue that could fund additional
development of its technology products. Consulting accounted for about 75% of the
company’s revenue and proved especially critical for funding development of products that
met and passed the safety standards that many customers required before deploying sensor
technologies in an oilfield. After securing safety certifications, SignalFire began focusing on
selling its systems in the oil and gas market and began scaling back on engineering consulting.
Consulting now accounts for 10% to 15% of its revenue.
Visiting Prospective Customers
Keller and Hamilton took a disciplined approach to visiting prospective customers. They used
cold calling, broadcast e-mails, word of mouth, and product labeling (for example, putting
SignalFire’s name on the FCC certification and safety labels that go on its products) to attract
potential leads. According to Keller, “It was pretty easy to tell if a customer ‘got it’ during these
initial outreach efforts. Our value proposition, in terms of time and money savings and
increased capability, was relatively easy to see. Customers who were interested tended to ask
for a demo quickly. If they didn’t, we moved on.”
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If they were calling on systems integrators, the two principals typically met with seniorlevel managers or owners. If they were calling on oil and gas production companies, they
usually met with department managers. As Hamilton explains, “The oil and gas business is
slow to change, and customers want to know if you understand enough about the business. So
it was critical to build credibility early in the process of meeting with potential customers.” To
that end, during customer visits, Keller and Hamilton spent time talking about the specific
applications of their equipment in oil and gas fields and about how their technology differed
from that of their competitors.
They also kept the talk focused on prospective customers’ needs. As Keller points out,
getting oil and gas out of the ground and delivering it to a centralized point entails a wide
variety of processes, each of which has its own monitoring and control requirements. During
visits, Keller and Hamilton asked customers to describe their processes and their monitoring
and control needs. Customers’ responses helped the men understand what applications these
companies were trying to manage and what communications infrastructure SignalFire could
deliver to support them.
Distinguishing Between Features and Benefits
In its marketing messages, SignalFire strived to emphasize how the features of its offerings
generated benefits for customers. The fundamental benefit was the ability to monitor
processes remotely. Most oil and gas wells are currently monitored by a “pumper” who drives
to each well every day, checks on the well’s functioning, records some data manually on a
clipboard, and carries out needed maintenance. A pumper might drive more than 100 miles a
day over difficult terrain. Oilfield operators that can detect well problems faster and optimize
pumpers’ activity increase production. They also reduce environmental risks, which has
become imperative in the business.
In the past, companies managed their monitoring and control activities by connecting
sensors and actuators into a control system using wire. Wiring a system was expensive, and
the distance between wells was a negative factor. Wireless technology enabled companies to
install control systems more quickly and affordably and to integrate sensors that could not be
integrated in the past because of distance or other considerations.
SignalFire’s product features provided customers with three major benefits:
•
Unlike most of its competitors, SignalFire didn’t bundle a set of sensors with its systems.
The resulting “open architecture” let a customer use the sensor technology it wanted for
the job rather than being forced to use the sensor that the wireless company offered.
Customers thus gained the flexibility to integrate a wide variety of sensor types of their
choice with differing interfaces into a single system.
•
SignalFire was one of only two companies in the industry that offered mesh networking.
Because sufficiently powerful radios were combined in a single system, customers could
cost effectively deploy them over tens of square miles.
•
SignalFire’s technology adhered to what are known as intrinsically safe standards. By
using this safety standard rather than the alternative “explosion proof” standard,
SignalFire could develop equipment that cost less to build and that thus sold for less than
that of its competitors. Cost was a barrier to wide-scale adoption by customers. Indeed,
customers compared the costs of wireless to relatively short cable runs (tens to hundreds
of feet) when deciding between wired and wireless systems.
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Understanding Customer Switching Costs
No matter how appealing a product’s benefits may be, customers won’t embrace the offering
unless they believe that the benefits of doing so will outweigh the costs. Keller and Hamilton
were up against four major competitors that offered wireless systems for the upstream oil and
gas industry. Also, because customers had a choice between wired and wireless systems,
companies that offered wired systems constituted additional competitors for SignalFire. Some
companies simply preferred wired systems over wireless. In an industry that is mature,
conservative by nature, and set in its ways, inertia can result in customers’ avoiding wireless
sensor networks merely because they are new. SignalFire’s marketing efforts could go only so
far to combat such inertia.
Another hurdle to the adoption of wireless systems was the lack of required skills. Though
the learning curve needed to use SignalFire’s systems was modest, an installer already familiar
with “brand A” might not be interested in changing, even if SignalFire’s technology was clearly
less expensive and offered more valuable benefits. To combat this form of reluctance,
SignalFire offered to send engineers to customer sites to train the customer’s personnel. The
individuals who received the training then became internal advocates for SignalFire’s product.
In addition, the company offered to send demonstration systems to prospective customers. If
the company liked the system and kept it, it bought it. If it didn’t, it could return the demo
within 30 days and pay nothing. Says Hamilton, “We looked at willingness to pay as ‘truth
serum’—it meant they were serious about our technology.”
Managing Customer Relationships
Because SignalFire was small and relatively new to the market, it lacked the resources to build
relationships with the end users of its technology—oil and gas operators and producers
looking to monitor oilfield processes remotely in real time. It thus sold its products to
companies that had existing relationships with these end users. These generally fell into two
categories:
•
Systems integrators. These companies provide integration services for oil and gas
operators and producers. They connect sensors and actuators in a field to a local control
system or to a connection that relays data back to a central (often cloud-based) facility.
Systems integrators now constitute about 75% of SignalFire’s customer base.
•
Distributors. These companies sell sensors and actuators to oil and gas operators and
producers. They now make up about 25% of SignalFire’s customer base.
In addition to systems integrators and distributors, SignalFire also sold to a few end users,
as well as to some companies in the water resource management business.
To determine how much time and other resources to invest in a particular customer, Keller
and Hamilton considered the nature of the relationship. For new customers, they were willing
to send engineers to train the customer’s personnel and to install demo systems. For existing
customers, they tested the depth of their loyalty by asking them to order a minimum quantity
of a new product.
Managing the Sales Funnel
SignalFire used two kinds of sales funnels. The first resembled the traditional funnel:
Prospects came in through the top of the funnel, gathered through trade-show contacts, cold
calling, keyword searches on the Internet, and other strategies. These prospects were then
progressively narrowed down through steps including qualification through a quick phone
call, delivery of demos or pilots, closed deals, order fulfillment, and post-sale servicing (which
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took the form of visits to customers to see how installations were functioning and to
troubleshoot).
Some of these steps were supported by technology and third-party channels. For instance,
SignalFire’s website contained instructional videos showing customers how to use its
technology. These videos served as a marketing tool by capturing the interest of companies
that had stumbled across the website. They also served as a training vehicle for new customers.
They saved SignalFire money as well, because producing them was less costly than sending an
engineer to a customer site. In addition, Hamilton regularly used Google Ads to monitor
traffic to SignalFire’s website and an external service to track open and click-through rates for
the company’s broadcast e-mail campaigns.
The second sales funnel was one that Keller and Hamilton began using after realizing that
they needed a more rigorous, disciplined approach. Resembling a map or a table more than a
funnel, it organized customers by criteria such as “existing customers that are regularly buying
from us,” “customers that have bought from us but have not done so recently,” “companies
that have asked for a demo system but haven’t purchased yet,” and “companies that have
expressed interest in us.” SignalFire’s founders began reviewing this map once or twice a week
and defining actions needed to move each company on the list toward closed deals.
Looking to the Future
Because Keller and Hamilton have been bootstrapping (self-funding) since they set up
SignalFire, the company has continued to be undercapitalized. Indeed, cash flow remains a
constant worry. If enough customers drag their feet paying SignalFire’s bills, the founders still
occasionally must lend the company money from their personal savings to meet payroll for
their employees.
Since the day it opened its doors, most of SignalFire’s free funds have been invested in
technology development, with very little left over for marketing. The founders attend only a
few trade shows a year and do no advertising. Direct, broadcast e-mail campaigning and word
of mouth have been their primary outreach vehicles. While these vehicles have generated
prospects that have led to sales, lack of funding continues to constrain the company’s sales and
marketing activities. The company still has no sales force, though its distributor customers
serve in this capacity to some degree. SignalFire also uses a small, local marketing agency to
give its website, print brochures, and product videos as professional an appearance as possible.
According to Hamilton, building brand recognition among end users has proved
particularly difficult, though targeted e-mail campaigns have helped. Putting SignalFire’s
name on Federal Communications Commission certification and safety labels has further
fostered credibility and brand awareness. (Much of SignalFire’s equipment is “white labeled”:
Customers put their own company name on the equipment before selling it to end users.)
With safety labeling, oil and gas operators can see that SignalFire equipment is being deployed
in oilfields.
Keller and Hamilton have recently received additional signs that things may be looking up
for their company: Several customers expressed interest in acquiring SignalFire or purchasing
a minority stake in it. While none of these possibilities had progressed beyond the discussion
stage at the time this case study was developed, the founders considered this development
good news, as their original vision for the company included eventually selling it.
Meanwhile, SignalFire has continued operating in a complex environment. Its industry is
huge and booming, but its early years unfolded during a brutal economic recession. The
company has managed to meet some of the founders’ goals (including shifting from a
consulting to a products business model) but has fallen short of others (such as revenuegrowth and revenue-per-employee targets).
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As Keller and Hamilton look to the future, they know that changes are coming that may
present them with new opportunities to grow their business. For example, many executives in
the oil and gas business are about to retire. The younger people rising in the ranks will likely
be more open to new technology than their predecessors were. In addition, the United States
is striving to become more energy independent, which means that companies like SignalFire
may be poised to capitalize on this effort.
Still, no one can predict how industry and economic conditions will shift in the coming
years. Whatever shape such changes take, SignalFire’s founders know that they will need to
continue taking a flexible approach to their sales and marketing activities to support their
company’s survival and growth.
4 KEY TERMS
benefits Outcomes that matter to a customer
and that are delivered by the features of a
product or service.
sales funnel The series of activities involved
in transforming a potential customer from a
prospect into an actual buyer.
early adopters Customers of a product or
sales tasks The selling activities that support
a venture’s business model and strategy and are
influenced by the characteristics of the
venture’s target or core customers and the
conditions in those customers’ markets.
service who see the benefits-to-status-quo ratio
inherent in the alternative as better than the
average customer does. Early adopters are
often willing to buy prototypes and accept
evolving promises about the offering’s benefits.
features The characteristics and attributes of
a product or service that deliver functionality.
loss aversion A phenomenon by which
perceived losses have a much greater impact on
buying behavior than similarly sized gains.
Also known as the endowment effect.
transaction buyers Customers who operate
on a short time horizon when making a
purchase in a product or service category. They
may view their purchase options as effectively
interchangeable and switch readily among
them because it costs them little to do so.
relationship buyers Customers who operate
on a longer time horizon when making their
purchases. Something about the seller, the
product, or the buyers themselves motivates
them to invest more time in evaluating and
purchasing the benefits offered by sellers in a
category.
5 FOR FURTHER READING
Broughton, Philip Delves. The Art of the Sale: Learning from the Masters About the Business of Life. New
York: Penguin, 2012.
Cespedes, Frank V. Aligning Strategy and Sales: The Choices, Systems, and Behaviors That Drive Effective
Selling (Harvard Business Review Press, 2014).
8086 | Core Reading: SELLING AND MARKETING IN THE ENTREPRENEURIAL VENTURE
35
Friedman, Walter A. Birth of a Salesman: The Transformation of Selling in America. Cambridge, MA:
Harvard University Press, 2005.
Gardner, Alston, Stephen J. Bistritz, and Jay E. Klompmaker. “Selling to Senior Executives: Part 1,”
Marketing Management 7 (Summer 1998): 10–21.
Gardner, Alston, Stephen J. Bistritz, and Jay E. Klompmaker. “Selling to Senior Executives: Part 2,”
Marketing Management 7 (Fall 1998): 18–27.
Leslie, Mark, and Charles A Holloway. “The Sales Learning Curve.” Harvard Business Review 84
(July/August 2006): 114–123.
Lodish, Leonard M., Howard Lee Morgan, and Amy Kallianpur. Entrepreneurial Marketing: Lessons from
Wharton’s Pioneering MBA Course. New York: John Wiley & Sons, 2001.
Moore, Geoffrey A. Crossing the Chasm: Marketing and Selling High-Tech Products to Mainstream
Customers, rev. ed. New York: HarperBusiness, 2002.
Onyemah, Vincent, Martha Rivera Pesquera, and Abdul Ali. “What Entrepreneurs Get Wrong.” Harvard
Business Review 91 (May 2013): 74–79.
Pink, Daniel H. To Sell Is Human: The Surprising Truth About Moving Others. New York: Riverhead,
2012.
Rackham, Neil, SPIN Selling: Situation, Problem, Implication, Need-Payoff. New York: McGraw-Hill,
1988.
6 ENDNOTES
1 Theodore Levitt, “Marketing Myopia,” Harvard Business Review 82 (July/August 2004): 138–149.
2 Thomas R. Eisenmann, Eric Ries, and Sarah Dillard, “Hypothesis-Driven Entrepreneurship: The Lean Startup,”
HBS No. 812-095 (Boston: Harvard Business School, 2011).
3 For a clear and accessible review of this research, see Daniel Kahneman, Thinking, Fast and Slow (New York:
Farrar, Straus, and Giroux, 2011), pp. 278–309.
4 John T. Gourville, “Eager Sellers and Stony Buyers: Understanding the Psychology of New-Product Adoption,”
Harvard Business Review 84 (June 2006): 99–106.
5 See Geoffrey A. Moore, Crossing the Chasm: Marketing and Selling High-Tech Products to Mainstream Customers
(New York: HarperBusiness, 1991; revised 2002) and Geoffrey A. Moore, Inside the Tornado: Strategies for
Developing, Leveraging, and Surviving Hypergrowth Markets (New York: HarperBusiness, 1995; revised 2004).
6 The best place to review the research about early adopters is the work of Eric von Hippel: The Sources of
Innovation (New York: Oxford University Press, 1988); Breakthrough Products with Lead User Research: Methods
for Uncovering the Ideas and Prototypes of Leading Edge Users (Cambridge, MA: MIT Press, 1998), and
Democratizing Innovation (Cambridge, MA: MIT Press, 2005).
7 This section is adapted and reprinted from Harvard Business School, “Customer Visits for Entrepreneurs,” HBS
No. 812-098 by Frank V. Cespedes, Copyright © 2012 by the President and Fellows of Harvard College; all rights
reserved.
8 Adapted from Cindy Alvarez, “Customer Development Interviews How-To: Finding People,” The Experience Is
the Product (blog), February 4, 2010, http://www.cindyalvarez.com/best-practices/customer-developmentinterviews-how-to-finding-people, accessed November 14, 2013.
9 Edward F. McQuarrie, Customer Visits: Building a Better Market Focus, 3rd ed. (New York: M.E. Sharpe, 2008).
10 Peter F. Drucker, The Practice of Management (New York: Harper & Brothers, 1954), pp. 37–38.
11 Adapted from Laura Klein, “Why Your Customer Feedback Is Useless,” March 15, 2010, Users Know (blog),
http://usersknow.blogspot.com/2010/03/why-your-customer-feedback-is-useless.html, accessed November 14,
2013.
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12 Adapted from Cindy Alvarez, “Customer Development Interviews How-To: Finding People,” The Experience Is
the Product (blog), February 4, 2010, http://www.cindyalvarez.com/best-practices/customer-developmentinterviews-how-to-finding-people, accessed November 14, 2013.
13 This section is adapted and reprinted by permission of Harvard Business Review Press. From Aligning Strategy
and Sales: The Choices, Systems, and Behaviors that Drive Effective Selling by Frank V. Cespedes. Boston: 2014.
Copyright © 2014 by the Harvard Business School Publishing Corporation; all rights reserved.
14 Leonard Lodish, Howard Lee Morgan, and Amy Kallianpur, Entrepreneurial Marketing: Lessons from Wharton’s
Pioneering MBA Course (New York: Wiley, 2001).
15 This section is adapted and reprinted by permission of MIT Sloan Management Review, from “How to Identify the
Best Customers for Your Business,” by Frank V. Cespedes, James P. Dougherty, and Ben S. Skinner III, Winter
2013: 53–59. All rights reserved.
16 Kevin Bradford and Barton A. Weitz, “Salesperson Effectiveness: A Behavioral Perspective,” in Gary L. Lilien and
Rajdeep Grewal, eds., Handbook of Business-to-Business Marketing (Cheltenham, UK: Elgar, 2012), p. 418.
17 The discussion in this section is adapted and reprinted by permission of Harvard Business Review Press. From
Aligning Strategy and Sales: The Choices, Systems, and Behaviors that Drive Effective Selling by Frank V. Cespedes.
Boston: 2014. Copyright © 2014 by the Harvard Business School Publishing Corporation; all rights reserved.
18 The discussion of aligning selling tasks and selling behaviors is adapted and reprinted by permission of Harvard
Business Review Press. From Aligning Strategy and Sales: The Choices, Systems, and Behaviors that Drive Effective
Selling by Frank V. Cespedes. Boston: 2014. Copyright © 2014 by the Harvard Business School Publishing
Corporation; all rights reserved.
19 This section is adapted and reprinted by permission of Harvard Business Review. Adapted from “Eager Sellers and
Stony Buyers: Understanding the Psychology of New-Product Adoption,” by John T. Gourville, June 2006.
Copyright © 2006 by the Harvard Business School Publishing Corporation; all rights reserved.
20 Katy Marquardt, “Burton Snowboards Is King of the Hill,” U.S. News & World Report, September 19, 2008.
8086 | Core Reading: SELLING AND MARKETING IN THE ENTREPRENEURIAL VENTURE
37
7 INDEX
active listening, 22, 23
adoption process, 8, 29, 32, 33
advertising, 10, 34, 35
after-action reviews (AARs), 12
alignment of strategy and sales, 21, 25, 26
Amazon. com, Inc., 8
Apple Inc., 9
behavior, in active listening, 22, 23
behaviors, in buying, 7–8, 15, 17, 18, 26–27, 29
behaviors, in selling, 4, 20–21, 25, 26, 27
believers, in new product adoption, 29
benefits, 5, 29, 32, 35
Bose Corporation, 8
boundary role, sales as, 23, 24
brand awareness, 31, 33, 34
Burton Snowboards company, 29
business models, 3, 7, 12, 13, 14, 17, 20, 21, 23,
27, 34
business plans, 8, 26, 30
BusinessProcessCo (BPC) case study, 17–20
business-to-business (B2B) markets, 4, 8, 25
buying behaviors, 7–8, 15, 17, 18, 26–27, 29
case study, of core customer identification,
17–20
case study, of SignalFire Telemetry
entrepreneurial venture, 30–35
commodity competencies, 16
conservatives, among early adopters, 8
contact, for sales calls, 22
content, for sales calls, 22
context, for sales calls, 22
control systems, 27–28
core customer case study, 17–20
core customer identification process, 3, 12–17,
34
core customers, 12–20
costs. See opportunity costs. See selling costs.
See switching costs. See transaction costs.
“crossing the chasm” challenge, 8, 9, 13
customer data, 18–19
customer identification case study, 17–20
customer identification criteria, 12, 13, 34
customer needs, 3, 4, 7, 9, 10, 13, 17, 23, 31, 32
customer relationship management, 18, 33
customer segments, 3, 9, 12, 15, 19
customer service and support activities, 7, 13,
25
customer surveys, 5
customer value proposition, 13, 15, 17, 31
customer visits, 3, 10–12, 22, 31–32
customers, understanding, 4–9
debriefs, after customer visits, 12
demand, for new products, 5–6, 9
design of products, 7, 11
direct-sales model, 9, 26–27
discussion guides, for customer visits, 11, 12
downstream businesses, 14
Dropbox service, 8, 29
early adopters, 3, 4, 5, 8–9, 10, 11, 13, 18–19,
31, 35
effectiveness of salespeople, 21
e-mail campaigns, 10, 20, 31, 34
endowment effect, 7, 28, 29, 35
enterprise resource planning (ERP) software,
16–17, 25
entrepreneurial selling skills, 5, 20–23
evangelists, among early adopters, 8
features, 5, 32, 35
Federal Express (FedEx Corporation), 8
feedback, from customers, 5, 7, 12
Five Whys approach, 12
focus groups, 5
Google Ads, 34
Google Alerts, 10
go-to-market system, 13, 25–26
hypotheses development, 18–19
hypotheses refinement, 18, 19
identification, of core customers, 3, 12–20, 34
identification, of early adopters, 8–9
Intuit Inc., 9
leadership teams, 15, 18
learning curve, 29, 33
letters of intent (LOIs), 5
lifetime value, 19, 20
listening skills, 22, 23
loss aversion, 7, 28, 29, 35
mainstream customers, 3, 4, 8–9, 10, 13
margin, 14–15, 18, 23, 26
8086 | Core Reading: SELLING AND MARKETING IN THE ENTREPRENEURIAL VENTURE
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marketing, 3–4, 9, 23–28
market research, 3, 8, 11
market trials, 5
metrics, for sales, 19
needs of customers, 3, 4, 7, 9, 10, 13, 17, 23,
31, 32
new product design, 7, 11
objectives, for customer visits, 10, 11
objectives, for sales calls, 21, 22
oil and gas business, 30–35
operations, in business models, 13
opportunity costs, 15
partitioning customers, 12, 15
pitches, 21, 22
planning, for customer visits, 10–11
planning, for sales calls, 22
potential customer visits, 3, 10–12, 22, 31–32
pragmatists, among early adopters, 8
preliminary hypotheses, on prospective
customers, 18–19
problems, versus products, 5–7
product design, 7, 11
product mix, 13, 14
products, versus problems, 5–7
profit formula, 13
profit margin, 14–15, 18, 23, 26
prototypes, 5, 7, 8, 10, 31
relationship buyers, 12, 16–17, 35
Rent the Runway website, 9
retail-sales model, 21, 26–27
sales alignment, with strategy, 21, 25, 26
sales calls, 11, 22, 25
sales environment, 27–28
sales funnel, 24–25, 33–34, 35
sales leads, 20, 25, 31
sales metrics, 19
sales model, 18, 19–20, 26
salespeople, boundary role of, 23, 24
salespeople, effectiveness of, 21
sales pitches, 21, 22
sales skills, entrepreneurial, 4, 20–23
sales tasks, 21, 25, 26, 27, 35
sample size, for customer visits, 11
segmenting customers, 3, 9, 12, 15, 19
selling, importance of, 3, 20–21
selling behaviors, 4, 20–21, 25, 26, 27
selling costs, 3, 14, 15, 16–17, 18, 27
SignalFire Telemetry Inc. case study, 30–35
social media, 10, 15, 21
software as a service (SaaS), 17
solution market, 16
spot market, 16
status quo bias, 4, 7–8, 9, 28, 29
strategy alignment, with sales, 21, 25, 26
surveys, 5
switching costs, 17, 28, 33
target customers, 4, 5, 18–19, 21, 25, 29
Toyota Prius brand automobiles, 29
transaction buyers, 12, 16–17, 35
transaction costs, 12, 14–15
trials, 5
uncertainty, 7, 12
upstream businesses, 14, 31
value proposition, 13, 15, 17, 31
visionaries, among early adopters, 8
visits, to potential customers, 3, 10–12, 22,
31–32
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