Lightning effects: Being Right or Making Money

It’s that magical time of the year when brand preferences are being lodged in the consumer psyche by any means necessary, be it free online shipping offers or conventional “doorbuster” style shopper stampedes. (Plus, in an admirable show of advance conditioning, there are those sidebar Four Loko-fueled parking lot brawls.)

But the romance of the brand is a notoriously ephemeral thing, as any casual survey of thrift-store Tickle-Me Elmo and Tamagotchi displays will promptly demonstrate. To do the job right, in this as in so many other realms, we would do well to heed the example of the Germans. As Bloomberg’s Chris Reiter reports, Deutschland’s Big Three automakers—BMW, Mercedes, and Audi (now a Volkswagen property)—have long been locked into a battle for the overtaxed attention spans of the youth market.

Back in February, Audi made a dramatic bid for high-end kiddie allegiance with a $13,300 model of a 1930s roadster, evidently calculating that a Weimar-era collectible is the perfect bridge to the true sturm-und-drang of a privileged adolescence. The model comes replete with “an aluminum frame, hydraulic brakes, seven speeds, leather-clad steering wheel, and oak dashboard,” and nearly sold out of its initial 500-unit manufacturing run, Reiter notes.

The idea behind such lush toy marketing, of course, is to instill intense brand-loyalty among the market’s littlest thought leaders. "Merchandising is important not because you can make huge money with it,” Audi sales chief Peter Schwarzenbauer tells Reiter, “but because it's another means of positioning your brand.” That means that Audi isn’t confining its initiatives to pint-sized drive trains, but is branching out to other durable badges of status, such as a $17,000-plus table soccer game—the idea here, evidently, being not so much to cultivate hooligan-style soccer fandom in the plutocratic young, but rather to inculcate the more genteel and respectable habit of full-scale team ownership.

It’s true that Audi isn’t neglecting more downmarket kiddie consumers in its push, with a $60 branded teddy bear and a $400 red-plastic version of the roadster; here, the functional array of model accessories include “an adjustable rollover bar, hand brake, over-sized tires with Audi-style rims, and padded seats.” But the main event is clearly the scrum for top-line market cachet, which is why Audi’s rivals are stepping up their game. Mercedes, for instance, is planning a spring rollout for “the foot-powered SLS Bobby-Benz, featuring headlights, grill, and rear end similar to those of the company's $183,000 SLS sportscar. The toy SLS features quiet-running tires, an Ackermann steering system with tight cornering for living-room maneuverability, and a steering wheel that absorbs impact to prevent injury in the event of a collision.” The model will boast a comparatively modest $120 asking price—but that loss-leader price point is a small sacrifice when you’re grooming future six-figure auto customers. "All the products have to live up to Mercedes' standards for quality and safety—especially our toys, which are all-time favorites with the next generation of Mercedes-Benz customers," reports Christian Boucke, who heads up the Benz accessories division.

BMW, meanwhile, appears to be the most horizontally minded lifestyle competitor in the luxe-branded market, brandishing a wide panoply of gear from a $460 kid-scale version of its M3 GT2 race car to a pair of $50 rain boots. The Beamer accessories division also turns a healthy 7 percentish profit—even though its brand-keepers, too, stress their real stake is in the longer-term loyalty game. “We are first and foremost a marketing initiative, and the main objectives are to broaden the brand's presence and strengthen loyalty," says Thomas Goerdt, who directs BMW’s distinctly un-German-sounding merchandising and lifestyle unit.

Still, the great risk of too-rampant accessory branding is market saturation—which is why Michel Gabriel, a branding specialist who has advised past Audi projectS, draws the line at underwear, even though “a lot of money can be made from a product” aimed at the intimate end of the brand market.

We can’t help thinking, though, that the Grosse Drei auto barons are selling short tomorrow’s financial titans with mere miniature knockoffs of luxury rides—and not just because their British competitor, Aston Martin, still owns the highest tip of the market with a Volante Junior model fetching a cool $24,000 with a devoted consumer base of young royals—who have duly gone on to modify their fullscale Astons to run on wine.

After all, the lesson of branding the world over is that a truly consummate brand eventually eclipses its mere material referent—hence the power of the glyphlike Nike swoosh (which only cost the firm $35 when design student Carolyn Davidson submitted in in 1971), or the “i”-themed Mac brand interface. Likewise, the business model for Mercedes has involved coaxing lavish multimillion-dollar subsidies from U.S. lawmakers at the same time it’s presented itself as an above-the-fray survivor of the 2008 global auto downturn.

Likewise, BMW has briskly seen to it that influential state congressional delegations have placed its own export interests ahead of the bailed-out U.S. auto industry—while Audi’s corporate parent Volkswagen has at least been candid in soliciting U.S. bailout funds, while also putting in for homeland funds to shore up its rickety loan operation. (Needless to say, this corporate pursuit of public-sector handouts doesn’t seem to have softened VW’s stand on American union drives, since like other foreign automakers, it’s expanded operations in anti-union right-to-work states to evade higher labor costs at home.) All of which is to say that, if doting plutocratic parents are looking to instill formative brand preferences this holiday season, nothing says “heed daddy’s example” like a simple, influence-subsidized government check. And Lord knows that for the properly connected family or industry, a good government kickback is about as hard to obtain as a pair BMW rain boots.

You, valued and valuable reader, are invited to join Chris Lehmann and your other fellow rich people to celebrate the publication of Rich People Things, this Thursday, December 2nd, at Le Poisson Rouge in New York City, from 7 to 9 p.m. There will even be a brief chit-chat with Thomas Frank and Maureen "Moe" Tkacik.

What is product/market fit?

In the beginning, the entrepreneurs should be obsessively focused on finding a product/market fit, and conserving cash to allow them as much roadway as possible. Mark Andreessen describes product/market fit as “the only thing that matters,” but what is it?

Basically, a startup has product/market fit when it has:

A set of customers excited enough about your product to pay for it. Usually, that payment is cash, but sometimes it’s time. As Facebook, Twitter and Google have proven, if you can get enough customers spending time with your product, there’s usually a way to monetize it.

A customer base large enough to create a viable business.

Andreessen says:

ou can always feel product/market fit when it’s happening. The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers ….

You can always feel when product/market fit isn’t happening. The customers aren’t quite getting value out of the product, word of mouth isn’t spreading, usage isn’t growing that fast, press reviews are kind of ‘blah,’ the sales cycle takes too long, and lots of deals never close.

Lower your burn rate during the search for product/market fit

If your startup hasn’t reached product/market fit, you should obsessively focus on finding it and adjust your burn rate downwards to give yourself as much time as you need to get there.

The best way to find product/market fit is to get in front of customers and validate your assertions. Start early, and validate before you build anything. Use wireframes of the product to walk customers through your vision, then keep validating throughout product development.

Develop objective listening skills, and don’t get caught up in selling too hard. Often entrepreneurs only hear what they want to hear, a trait sometimes referred to as “happy ears.” When a customer disagrees, you’ll often hear these entrepreneurs say: “They just don’t get it.” This is a good indication the entrepreneur isn’t listening.

Also, ask yourself two questions about each of your assertions:

1. Is the problem you’re tackling important to the customer? Too often, companies chase problems that just aren’t important enough to spend money or time to solve. If the problem isn’t important enough, be prepared to drop the idea you’re currently working on and pivot to something different.

2. Do your solutions really solve the problem? Present the solution to the client, and ask them tougher questions such as:

“Is this a must-have, or a nice-to-have?”

“Would you commit to purchasing at this price if we build it?”

“Where does this fall on your list of priorities on which you’d spend money?”

At my fourth startup, Watermark Software, we got a great response when we showed our software to potential customers; our launch went well; and even the New York Times was excited enough to dedicate a half page to covering us. But while it was cool, it wasn’t a must-have, and we struggled to sell it. After two more years of hard work, we found the vertical applications that were a better fit for our product and pivoted the product into a full solution for those verticals. The business took off.

We wasted a ton of money in those two years. Had we done a better job of customer validation up front, we could have avoided that waste. I made the mistake of listening with “happy ears” instead of being objective.

Reduce your burn rate; increase your time

No one can predict how long it will take to find product/market fit. To give yourself the greatest chance of success, you need your funds to last as long as possible. In other words, you need to set your burn rate as low as possible.

The ideal startup team should be the founders, the product development team, and one or two sales people to get the founders in front of customers. That’s it. The founders are the people best suited to interacting with customers to figure out if the experiments are working and to learn from the failures. This work is the key job of the entrepreneur, and cannot easily be delegated to others.

It may also be tempting to hire a large R&D team to get to market quickly.Recognize that few products are immediately ready for broad adoption, and you’ll likely need to go through a few revisions to get to product/market fit. Set your burn rate for a marathon, not a sprint.

There can be exceptions to this spending rule when you can find things that will clearly shorten your time to product/market fit: for example, a new hire that brings in a missing but much-needed skill.

Once you have evidence of product/market fit, you can then find a repeatable and scalable sales model, which I’ll address in my next post.

David Skok has been a General Partner at Matrix Partners since 2001. He founded his first company when he was 22, and since then, founded three companies, including SilverStream Software, and done one turnaround. Skok specializes in SaaS, enterprise software and cloud computing, and blogs at forEntrepreneurs.com.

Image courtesy of Flickr user tonylanciabeta.

eric seiger do

Wednesday, December 1, 2010

Being Right or Making Money

What is product/market fit?

Lower your burn rate during the search for product/market fit

Reduce your burn rate; increase your time

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