The 2 Go-To-Market Strategies

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Collectedby: FlavioTosi January2013
ing.FlavioTosi Alboingg.Firenze#3581 www.businessexploration.com 2013 privileged andconfidential all rights reserved
BusinessExploration Via8marzo,22 50051Castelfiorentino (Firenze)Italy +393496482225 info@businessexploration.com www.business.exploration.com ANotetotheReader TheRoadmaptoMarket,2.0iscopyrightedbytheauthor:FlavioTosi. Itsaworkinprogressdocument,nowatits9threlease. Thisisanextraction,focusedongotomarketstrategies. Youcanduplicateitandshareit. Youcandownloadthelastreleaseatwww.businessexploration.com. Youcancopypartofit,orreproducepartofit,quotingtheauthor: FlavioTosiandthewebsite:www.businessexploration.com. Copyright2013,byFlavioTosiBusinessExploration. Allrightsreserved. Papercopiescanberequestedonthewebsiteat11each, asaprintingcontribution.
2013www.businessexploration.comallrightsreserved Ing.FlavioTosi,AlboIngg.Firenzen3581via8marzo,22Castelfiorentino50051Firenze1/83
INDEX:
Abouttheauthor:.....................................................................................................4 Prefacetothe2.0release:........................................................................................4 Foreword......................................................................................................................5 TheRoadmaptoMarket: ..............................................................................................6 PART2.HOWMANYCHANCESTHISINVENTIONHAS?................................................6 Howmanychancesthisinventionhas?....................................................................6 ClassicMarketing:whenyouknowyourCustomer..................................................7 1/4Isthesolutionappealing?..................................................................................9 AHowmuchvalueourideacreatestotheCustomer? ...........................................9 ACustomermaybein2situations:orithasaGOAL,orithasaPROBLEM..........9 WhoistheCustomer?:FromCustomersneedstoCustomersGoals.....10 Wheredoesthesolutionfit?Whatproblemitsolves?......................................11 Whichsolutiondowedeliver,andhow?(S.O.R.C.)...........................................13 HowmuchdoesCustomerneedsit?..................................................................17 Whatadvantagesgivesoursolutionvsotherssolutions?.................................18 BWhatPricewillbepaid?................................................................................... 19 Howtosetprices?.............................................................................................. 19 Howmuch?..................................................................................................... 20 Howdoesthepricechange?.............................................................................. 22 Summary:........................................................................................................... 22 CWhatadditionalcostswillbesustainedbytheCustomer?..............................22 Investments:....................................................................................................... 23 Systems:.............................................................................................................. 23 SwitchCosts:....................................................................................................... 23 DSummary:......................................................................................................... 23 2/4Doesprojecteddemandsustaintheinvestments?........................................24 AHowmanypiecescanbesoldinthesolutionslifetime?.................................25 TAMTotalAvailableMarket................................................................................ 25 RAMReachableAvailableMarket ....................................................................... 25 SASServedattractivesegments......................................................................... 26 BHowmanypiecescanwesellinthesolutionslifetime?..................................27
2013www.businessexploration.comallrightsreserved 2/83Ing.FlavioTosi,AlboIngg.Firenzen3581via8marzo,22Castelfiorentino50051Firenze
ListingCompetitors:............................................................................................ 27 ScreeningCompetitorsappeal:.......................................................................... 27 Checkingcompetitorsreach:.............................................................................. 27 PreparingtoCompetitionresponse:..................................................................27 Summary:........................................................................................................... 28 CHowordersopportunitieswillchangeinthesolutionslifetime? .....................28 ChangesofDemanddrivers:............................................................................... 28 The5forcesimpactingdemandtrends:.............................................................28 The5culturalfactorsimpactingdemandtrends:...............................................28 HowweimpactShare(Organicsensitivity):.......................................................29 DWhichopportunitiesdowereallysee?............................................................29 Summary:............................................................................................................... 29 3/4Doesthesolutionleaveunitmargins?.............................................................31 AWhicharethemaincosts?............................................................................... 31 Variablecosts: ..................................................................................................... 32 Fixedcosts:......................................................................................................... 32 Investments:....................................................................................................... 32 Synergies&Economies:...................................................................................... 32 BDowehaveaSupplyChainstrategy?...............................................................32 Conclusion:istheinvestmentworth?....................................................................... 33 Bibliography:............................................................................................................. 34 FEEDBACKS:............................................................................................................... 35
Abouttheauthor:
Since2009,FlavioTosihasbeenhelpingindependentsinnovatorstargetingtheOil& Gas,Energy,Aerospaceindustriestodevelopthepotentialoftheirbusinessideas. When they feel concerned about the risks and the best approach to use for launching a new product or service, or starting a new commercial initiative, he complements their gut and instinct bringing on the table latest methodologies and provenbestpractices. For 12 years he has been a manager of General Electric and previously for 2 years, an engineer in the R&D. Flavio was part of the team that brought to the Oil & Gas market some of the most fascinating technologies of the last decades, gaining a deep understanding of New Product Introduction, Business Process Reengineering andProjectManagementmethodologies. And became passionate of the challenges offered by this industry, having fun discoveringnewsolutionsandideasforhisClients. Youcanfindsomeofthemhere:www.businessexploration.com, oryoucancallFlavioat:+393496482225forapreliminarytalk, withoutanyobligation.
Prefacetothe2.0release:
In the last 4 years as an independent consultant I had to find solutions to my clients thatforcedmetoaddnewconceptstomyapproachtogotomarket. I was looking to something in line with my understandings, something that was capable to add to classic marketing, positioning and sales models, few concepts about markets dynamic of innovation, evolution of technology trajectories, search anddevelopingofmarkets. I found them into Prof. Christensen books, that give me a fully complementary point ofviewwithmyprinciples,bestpracticesandkeyassumptions. So I decide to take the gotomarkets key points from these new concepts and synthesizethemintotheRoadmaptoMarket2.0. IaddedaFirstPart:thatwillhelpdefinewhereyourinnovationlaysinacompetitive andevolvingcontest,anddecideifyouareinthepositiontopursueit. And a Third part: that shall give key principles about exploring for new Customers. This is not my favorite starting point, but I have to admit that sometime you may come up with an idea before to have defined who your customer is. Here you will findfewideaonhowtoexploretofindhim. The Second part: just optimizes and adds some clarification to the Roadmap to Market1.0.Soitisalmostunchanged. As usual: your comments and suggestions and questions will be really appreciated: sendthemtoflavio.tosi@businessexploration.com.Thanks!
Foreword
Ifyoujusthadabrilliantideaforyournextproductorservice,probablynowyouare askingyourselfif:
Ismynewideaworthatry?
Someonetakesthisdecisionjustbygutfeeling.Ienvythemalot.Ineverunderstand ifitispurecourage,insanemadnessorjustamatteroffaith. What I know is that, statistically, more than nine out of ten of those guys fail miserably.Andnotmanyoftheremainingcansinghurrah!asmasterofthemarkets. Probably for this reason, Companies that survive recessions, wars, and technology decay have developed guiding principles and techniques to identify and assess the variablesinvolvedinthisriskydecision. But when I started to look around for them, I found a mess of ideas and tools that confounded and embarrassed. Marketing means a lot of different things to different people, and probably for this reason is a word that has no translation in any language,evenitsown. Ineededsomethingworkable.Asyoudo.IfounditwhenIdecidedtostopsearchfor tools and methodologies capable to give answers and started concentrating on Questions. Therightones. And here they are. A list of questions that will guide you in finding all the elements you need to reduce the risk of failure of your next business venture and maximize thechancetomakeitacceptedtotherightcustomer. FollowingthisRoadmaptoMarketYoucanbecomfortabletotouchmost(ifnotall) the key points in taking the final decision. How You answer each question of the Roadmap is up to you. Can be a simple consideration taken around a coffee with a friend, or a complex statistical study commissioned to top International agencies. But I assure You (for having tested it for years in General Electric as Marketing ManagerandasaBusinessConsultantthereafter)thattheRoadmapiscompleteand lean. It will keep You on track and build the understanding of the market in order to maketherightdecision. Then,tomakethatdecision,Youwillneedabitofgut. ButthisisuptoYou. BuonLavoro! Flavio
TheRoadmaptoMarket: PART2.HOWMANYCHANCESTHISINVENTIONHAS?
Howmanychancesthisinventionhas?
The decision three in part.1, should have routed you to one of the 2 possible course ofactionswhendealingwithinnovation: Minimizerisks. Maximizeopportunities. These2seemquiteparallelpaths,applicabletoanykindofnewventure.ButItsnot so.Thesetofcircumstancesdescribedabovesolicittogofromideatomoney,using oneofthesetwomindsets,asanalternativetotheotherone. Part.2isdedicatedtothefirsttypeofpath:theonetobepursuedwitharisk avoidancemindset. Thismeansthatmostprobablyyouareinawellidentifiabletechnologytrajectory thattakesthemarketsneedsasagivenandissupportedbyawelldefinedvalue networkofconcurrentsuppliers.Thatalltheinnovationsfunneledintothis trajectoryaretargetedatawellidentifiedgroupofCustomers.thatthesecustomers (oratleastasizableandinterestingpartofthem)arestilllookingforaperformance levelthatnoneofthecompetitorscanactuallymatch.Thatthenextlevelof performancewillbeachievedinapriceperperformancesunitlowerthanthepast levelofperformancereachedandthatyouownthearchitectureofavaluechain platformthatstillrequiresagreatdealofintegrationinordertosolvethe interdependentproblemsthatarousesimultaneouslywhenbringingtogetherthe elementofthesolutionyouwanttooffertotheClient. Allthissetofcircumstancesfavortheestablishedorganization.Anorganization withthecapability,abilityandresourcestoplaythegamewiththecompetition.Its scopeistoextractthemostoutoftheexistingcustomerbaseandmaximizingprofits indoingso.Itsproblembecomestogenerate,select,evaluate,prioritizeandlaunch theinventionthatwillbeatthecompetitionandconquermarketshare. Thefollowingpagestakeforgrantedthatthisorganizationhasbeenabletogenerate therightideaforanewproductorservice,andbringyouthroughthequestionsyou shouldanswerinordertobeabletoevaluatethepotentialofyourideaandassure youdesignamarketingplanthatwillminimizetheriskoffailureinlaunchingiton themarket.
ClassicMarketing:whenyouknowyourCustomer
TheFrameworkofanalysisanddesignoutlinedinthis2ndPartcanbereferredtothe ClassicMarketing: IthasbeendevelopedbyseveralScholarslikeProf.MichaelPorter,andevenifthere aremorerecentwaystosizeamarket,Istillprefertostarthere. ClassicMarketing,ifproperlymanaged,isveryeffectivetoexplorethefurther potentialofyourB2Bbusinessmodel,itworkswelltohandlethekeydriversof establishedindustries,andtokeepcontrolofthevariablesinvolvedinSustaining innovationstrajectories. Itsaimistofilteroutanyinitiativethatistooriskyornotenoughprofitable. Iwouldrecommenditwhenyouhaveaclearunderstandingofhowyoudobusiness nowandyouhaveabsolutelyidentifiedwhoareyourCustomers,andwantto understandhowmuchbusinessyoucanfurthergainexploitingit. E.g.youmaywanttounderstand:howmuchyoubusinessyoucangainin: LENGHT:increasingtheperformancesofyourproductline WIDTH:extendingyourproductline:
1/4Isthesolutionappealing?
The nicest part of having a new great idea is that it is selfevident that it will be sold inmillionsandCustomerswillfighttograbitfromourhands. Unfortunately our bank will not see it in the same way. So, unless you are ready to betyourownmoney,wearealwaysaskedtoprovethatCustomerwillpayforit. AndthiswillhappenonlyifourideacreatesvaluefortheCustomer. Better: if creates an affordable value, and if this value is greater than the one of equallydemandingalternatives. This step of the Roadmap to Market qualifies and quantifies the value delivered to the Customer and tries to understand how much value the Customer will give in returnofthesolution. The difference between Value Generated for the Customer and Value Spent by the Customer(i.e.thePricepaid+theCostssustainedtobeabletousethesolution)is calledtheAppealofthesolution. Wearegoingtoinvestigatethesethreecomponents: Valuegenerated,PricepaidandincurredCosts.
AHowmuchvalueourideacreatestotheCustomer?
Understanding the value that the Customer gives to our idea starts with understanding who our customer is and which is the situation or the process he is involvedin. The Customer is in that situation because he wants to achieve a certain goal. If the goal is beyond his reach, this is a problem that needs a (our) solution. Any solution caries some characteristic (attribute) that has specific ability (features) that make possible to make a further step (get a benefit) towards the ultimate goal of the Customer.
ACustomermaybein2situations:orithasaGOAL,orithasaPROBLEM
1)heknowswherehewanttobeinthefuture,butdonotknowhowtogetthere 2) he has envisaged how to get there and is looking to the best way to fill a gap betweenwhereheisnowandwherehewantstobe. In the first case he is actively looking to pursue a GOAL, and need a hand to understandwhichisthebestwaytogothere. In the second case he fully understand how to go there, he knows the PROBLEM he has to solve and he just miss the right solution: piece of equipment, service or information. The second case (the PROBLEM case) is a bit tricky for a supplier, because Customer will tend to propose his vision of the solution needed. But in reality he most often
doesnothavethecompetencestodefineit. This is way collecting Voice of the Customer inputs about what the attributes he expects from the solution can lead to disaster. Even collecting his inputs about the features is not enough, cause he may describe just part of the problem (the interfaceswherethesolutionhastoplugin),whatwereallyneediswhatbenefitshe wantstoachieve:howhewillmeasurehowwellhisgoalhasbeenreached. What we really need to understand is what the Customers wants to achieve: his GOAL: which is the job that he has to be done, and how, by which variables, he measureshowwellthejobisgettingdone. Letsstartfromtheprotagonist.
WhoistheCustomer?:FromCustomersneedstoCustomersGoals
A Customer is someone that has a Goal, someone that aspire to achieve something. But he has a gap that separates him from his Goal. This gap is his need. And we as suppliersaretheonethathavethesolutiontoclearoutthatgap. To make an example think this situation: image to be an owner of a Restaurant. You getacallfromamanaskingforatablefortwo.Youmayimmediatelythinktoyour menu prices and which of your table can fit them. You are going to solve his problem,offeringasolutionforaprice.OryoucanthinkwhatistheultimateGoalof yourCustomer.Thinkingwhatheisreallysaying:Ineedacomfortableplace,abit of romance, an impeccable service, a soft music. In this case you may think to the Value you can offer, and make sure you are going to great him by name at the entrance, be attentive to the partner needs, and win over a couple for the rest of theirlifesanniversaries. YouunderstoodtheultimategoalofyourClient:aDreamfortwo.
WhatCustomerdreamsof
Customers are those that have a Goal and a problem. Suppliers are those that have solutions.Andyes:thereisabitofchickenandeggsgamehere:youneedtoknow who is the customer if you want to address his problems. But at the same time the problemandwhyCustomerneedtosolveit,arethestartingpointtoclearlyidentify anddescribetheCustomer. In B2C this may require a customer segmentation, or grouping Customers in 34 categories that can be univocally described, considering what is the ultimate goal eachindividualClientwantstoachieveandaddressingtogethertheoneswithcloser desires. In B2B, understanding who is the Customer may require to search the actors of the purchasing process. Each person involved into this process has its importance to influencethefinaldecision.Therolesintheprocessare:Initiator(whoidentifiesthe needs) Specificator (who defines what is needed) Decision maker (the one that will get the benefit) the Buyer (the one who tries to cut down your prices ) the User(theonethatwillutilizethesolution). IamhappyonlyafterIhavebeenabletolistthecustomers(ordescribethem,based on some characteristics) and group together those that have a common reason to wanttheirproblemsolved.
Wheredoesthesolutionfit?Whatproblemitsolves?
Who is the Customer is now clear. And we have even understood his ultimate goal. Thingsdonotrunsmoothlyforhim.Butwecanhelp.Atleastwethinkso.
Tobesure,Itakeacloserlookandtrytoclearlyidentifytheutilizationsituationthat makes our idea a great fit. You can always get surprises if you touch by hand instead making a guess. This is true for B2C (your pumpkin could end up in a risotto or look fabulousasaHalloweenlamp);it hasaspecial meaning inB2B,where mostof your productandservicesareinjectedintheflowofacustomersprocessandCompanies tendtojealouslykeepsecretthewaytheyreallywork. In B2C: understanding the Customer problem; what solutions did they look at and ultimately reject; why did they choose our product as the solution; how did they install our product or implement our solution; how is the customer using our productrightnowandwhatresultshavetheyattainedwithitisthepaththatmake youunderstandwhereyourproductfitsandwhy. In B2B: Understanding the customer process where the solution will be used and mappingoutitslogicalsteps,isimportanttocorrectlyunderstandtheultimategoals of the Customer. Knowing its goals makes you understand and prioritize the benefit that your solution delivers and help quantify the value of the benefits sought by the Customer. IfweareabletounderstandwhatjobtheCustomeristryingtoaccomplish,then we cangroup(segment)ourcustomerbythosetryingtodoaparticularkindofjob. WeshouldbeabletodescribethecircumstancesinwhichtheCustomeris,whenhis necessityappears,anddefinethecausaltythatmadethephenomenonoccur.Inthis wayweshouldbeabletopredictwhenandwhyCustomermayrequireourhelp. If you fail to be able to describe this causalty, your segmentation will end on being based on attributes: you are not going to describe why a customer has a need but only how he needs. So your forecasts will be based only on the past, and not will be abletobuildamodelofthefuture. At your discharge, is the fact that ther are at least 4 mighty forces that drive you to segment your customers by the attributes of your product, instead by the reason behindtheirneed:
4reasonswhyyousegmentinthewrongway:
1) Your fear that focusing your product on a customer need, you will loose the opportunity to sell to other customers, with different needs. In reality is the contrary:afocusedproductstealscustomersfromundifferentiatedproducts. 2) You (or your Boss) ask for market size (for which the IT has data ) instead of whatcustomersneedstoaccomplish(forwhichtheITdonthavedata) 3)Yourretailchannelstructureisattributebased:theyaskyoufor300strawberry milkshakestoputontheirshelf,andnotsendmemilkshakeforkidsparties 4)alltheadvertisingisCustomerbased:Young,old,females,men,andnotonthe circumstancesonwhichyouhaveajobtobedonebased:whenyouarepreparinga marathon,whenyouarecleaningahome
Asnapshotonprocessmapping:
You may find several good books about process mapping. But here are my recommendations: 1) Start with the end: i.e. any process transforms something into a product or service that is delivered to someone. Find that someone, this is the starting pointofyourprocessmap. 2) Map only the logical steps, not the activities. The distinction is that the logical steps define the change in status of the resources processed. Do not bother about how you make the change of status happen. i.e: if you have to go to Paris and You are in Rome, you change your status independently if you go to Parisbyfeet,car,trainorairplane. 3) Track the deliverables at the end of each step: not the logical step itself. Deliverables at the end of a step: have changed status. Tracking the deliverablesstatus,youtrackthelogicalstepcompletion. (Moreonprocessmappingonmysixsigmashortcourseforgreenbelts,askforit)
Whichsolutiondowedeliver,andhow?(S.O.R.C.)
Thisquestionmayseemsoffensive.Afterall,ourfantasticideaissosimple! But try to explain it to a Customer. I always need to develop very convincing arguments. This is the reason why I start describing the idea immerging it in its utilizationsituation:itbecomeseasier. Istartwithitsattributes(e.ghereisalamp),thenIdescribeitsfeatures(e.g.that gives light) and ultimately I identify the benefits achieved through them (e.g. so Youcansee). You may want to qualify the benefits delivered by each attribute. Doing so, I occasionally discover gaps versus the expected results, or opportunities to expand the product from its physical attributes to its service content. Sometime You can evenexpandittofunctionasaplatformforfurthersolutions. Agoodwaytoscrutinizeandproperlydescribeour ideaisalwaystocompareitwith what others provide to solve the same problem. A look to what the Customer has used in the past, is using now, or will going to use in the foreseeable future will help you refine what our solution actually delivers, how is really made, and if its supportedbyotherproducts,services,orsystemsasothersare. Sometime the competitive solutions go beyond solving the problem, and associate to themselves ideas, feelings, beliefs, and myths that are even stronger than the solutionitselfinreassuringthecustomerofhavingreachedhisultimategoal. So, going from attributes to features till benefits give a great opportunity to understand the ultimate goal of the customer. This will help you later on, when lookingtomakeyourideamemorabletohim. Howmuchvalueoursolutiondelivers?(inB2B)
Wemustbehonesthere.Wedonotknowhowmuchourideaisworth. Even when I think I know, I discover later on that Customer has totally different opinions. And not always its a bad surprise. More often than not, Customers are readytopayhigherpricesforouridea,thentheonewearejusthappytoask. From bad and good lessons, I learned to check with him directlyafter a bit of homework. Just not to spoil our price from the beginning. After all there are very fewMecenateoutthere,readytorecognizefullythevalueofourwork. There are countless ways that aim at identifying and measuring how much value Customer gives to our idea. And a lot is complicated by the definition of Value: classic marketing manuals can refine the meaning up to search for ultimate customer beliefs or stay a bit more comfortable in searching for the immediate benefitsandattributesthataspecificofferdelivers. Whateverthewayselected,Iproceedintwosteps:FirstIqualifythevalue,looking athowitisgenerated,thenIquantifythevalueforeachcategoryIveidentified. WhendealingwithB2C,toqualifyandquantifythevalueofanidea,Isawpeoplego very plain and just trust their personal feeling, as well as companies go for complicatedstatisticalanalysisasConjointandDesignofExperiment. Is a tough argument where I ventured only seldom. What I can say is that the American Marketers have invented the pilot testing of new ideas. And I think that is agoodmove. WhenintheB2Barena,thingsgetsimpler. Therearebasically4typesofvaluethatourideacandeliver:S.O.R.C. 1) GeneratemoreSales 2) ReduceOperatingcosts(financialcostsincluded) 3) Reduce the overall Risks associated to the business of Your Customers (startingwiththeriskofusinganunknownsupplier) 4) ReduceCapitalCosts(Capex) Each of this Values Components can be investigated, referring to the Customer processoursolutionisintendedtoimpact:
ThemoreSALESValuescomponent.
OursolutioncanhelpCustomersalesinseveralways.Butwecanclustertheminto2 bigcategories: 1) TheonesthatincreasetheNumberofgoodssoldbyCustomer.
2) TheonesthatincreasethePriceofthegoodssoldbyCustomer. For example: You may propose an office automation tool that dramatically reduce the average lead time of your customer goods. This means more pieces sold per period. Or you may introduce a software solution that dramatically enhance the satisfaction ofYourfinalcustomer,leadingtocommandbetterprices. HereisalistofplaceswheretolookformoresalesValuecomponent. performance timetofirstproduction/delivery availability reliability offdesignconditions performancedegradation services&emergencies
ThelessOPEXValuescomponent:
Again, by opening the customer balance sheet and income statement we may find clear suggestions to understand how much our idea is worth. When I look at this ValuecomponentIgivealargemeaningtoOperatingCosts:allthecoststhatchange as the Customer sales change. Check out how much manhours, direct materials, supervisorymanhours,consumablesetcoursolutioncansave. Herearesomeexample: directmaterials manhours/headcount training/professionalism/headquality fuelcosts consumablecosts underpinningcosts tax ecocosts stockslevels/inventory
ThelessRISKSValuesComponent.
This voice is a bit trickier to describe. But this is the meaning: whatever makes your customers business more risky, automatically reduces the value of the business itself. To make an example: our customer may be able to sell 100 pieces, but if his customers pay only 80% of the times, our customer sales are worth only 80 times (if
not less) the average price. Therefore Customer should appreciate any solution that reduces his business risk and makes that probable 100% a more likely realized figure. IsayshouldbecauseRiskshouldnotonlybethere,butshallevenberecognizedby the Customer. It is not always so: people have different level of risk understanding, andrisktolerance. AssumedourCustomerfeelsDamoclespain,ifourideahelpsreduceCustomerrisks, itcreatesvaluetohim. Asanexample:justthinktothelowerinsurancefeeaCustomercanpay,thanks toa newsecuritysystem. Here You may want to go creative. And Probably you will make your customer discoverrisksthathewasunderlooking. Herearesomeexample: fulltestedsupply reachability(servicelevel) KnowHowcosts returnsintechnology personalrelationship brandleveragingvstopmanagement integrity evaluationrisks financialrisks politicalimpacts
ThelessCAPEXValuescomponent
Few pages ago we have defined the situation where the Customer is in and the processes the Customer is using to achieve his goals. Now we go a level down and lookattheinfrastructuretheCustomerhascreatedtomakehisprocessdeliver. Some time a quick look at Customer Balance Sheet can give an idea of the status of his infrastructure: how much has it been used so far (depreciation), what recent investments have been done, which is the biggest infrastructure piece (where his attentionisfocused)andalike. Thenwecanthinkatdifferentwaysourideacanreducethoseinvestmentscosts. Herearesomeexample: solutionprice(thisiseasy) sparepartsprice duration/depreciation
partscommonality Terms&Conditioncosts warrantiescosts installationcosts plantinducedcosts(asimpleexample:theparkingfortheemployees) financialaids taxesandincentives upgradesandoptionscapabilities customization/standardization bundlebuy ecocompliancecosts expeditingcosts/QualityControl
Summary:
Thinkingwhere,(amongSALES,CAPEX,OPEXandRISKabatement),ourideacanhave animpact,makeseasierqualifyandquantifythevalueithasfortheCustomer. IkeeptrackofanynewtypeofimpactsIfindaslongasIidentifythem,causeinB2B the ultimate goal remains to make money and this attitude leads to common approachesindifferentindustries. And sometime cross linking this categories can help identify some unexpected value andnewwaystoconvincecustomertobuy.
HowmuchdoesCustomerneedsit?
At this point of our Roadmap we know who our Customer is, when and why he may be interested in our idea. We have articulated our idea and associated a potential valueitcandelivertoourCustomer. NeverthelessourCustomerdonotshowanysignofinterest. TheValuethatourCustomerplaceintoasolutiontoproblemdoesnotdependonly ontheamountofvalueorthesizeofthebenefititcandeliver. Itdependsalsoontheurgency,theperceivedrisk,andtheavailabilityofbudget. Forthislastreasononly,manyprefertomakebusinesswithrichpeople. To gauge the interest of a potential Customer to my idea, I find useful to use KANOs analysis,evenifKanoitself,probablywouldnotusehismodelthisway KANOsmodelclustersthefeelingtowardasolutionin4baskets: Solutionsthatcustomerfeelsas: INDIFFERENT:somethingthatdonotreallychangehislife. MUSTHAVE:issomethingcritical,andmustbeperformedinawayoranother. NICETOHAVE:somethingthatisniceandcool,butCustomercanlivewithoutit.
THE MORE THE BETTER: something that is of value and Customer will get great benefitrightnow. You may have the perfect solution, but Customer may feel solve his problem not necessary, not urgent, too risky to tackle or the problem improbable to happen, or simplynothavingthebudgettosolveit. Another way to understand the Customer purchasing intention is to test them: collecting his comments, asking him directly, looking for what are the tendencies, rumors,andfeelingsinhiscommunity. Most of the time the problem is already been tackled by the Customer. Trying to understand what solutions he used in the past, what alternative routes he took to solve the problem, what level of benefit he got till now, (assuming he had any) and the main difficulties encountered so far, are good information to understand the urgencyandtheBudgetavailability. Furthermore, listening to the Voice of the Customer (VOC) allows me to test proof much of the assumptions made and discover unexpected feedbacks and considerations.
Whatadvantagesgivesoursolutionvsotherssolutions?
NowwecancompareoursolutiontotheoneoftheCompetition. YoucangotoMichaelPorterbooksforanoverviewoftheproblem. WhatItendtodoistolookatcompetitioninrelativeterms.Ilookforgaps. Lookingatwhattheideashaveincommon,itisnotacustomersselectioncriteria. The first gap is versus the do Nothing competitor. What is the real damage of not tackling the problem? If we are so lucky that Customer has not tried anything till now, he probably is not aware of the problem often not a good sign of appreciationforthesolution. ThenIcomparewhatCustomerisdoingnowandwhathasdoneinthepast. Iespeciallytrytounderstandwhyheisunsatisfiedoftheresultsobtainedsofar. FinallyitcomesthetimeforRealCompetition:alternativeandcompetitivesolutions. Alternative solutions are more subtle: think at the difference between a vaccine and a daily cure for allergy symptoms. The two are competing, but they solve the problemindifferentways. Competitivesolutionsarethosethatcanreplaceyoursrightnow.
Porterdescribestwotypesofdifferenceincompetitivenessorrelativevalue: The first refers to those attributes that impact the Effectiveness of our solution. Our ideas carry some attribute that work better and the customer will get greater Benefits(creatingmoreValuefortheCustomer). The second refers to the Efficiency of the solution: how much value our idea takes out from Customers pockets (destroying less Customers Value), while solving the problem in a decent way. Porter refers to price competitiveness. We are going to investigateitinthesecondchapterofthissection.
Summary:
CustomerwillcomparetwosolutionsbasedonthenetValuehewillreceive. ValuegeneratedValuedestroyed.I.e.EffectivenessvsEfficiency When comparing the differences between competing solutions I tend to keep note only of the Delta: what is in one that is not in another. This forces to focus on tangibledifferences.
BWhatPricewillbepaid?
The second component of attractiveness is Price. The more we take from customer pockets, the less value we leave in his pocket. Thegreatest the value/price ratio, the highest the probability that Your product will be sold. As a first move we can check out this ratio roughly. A ratio of 25 ( i.e. customer will gain 25 times the price spent) is a good minimum threshold. Consider that when we will talk about the 3rd attractiveness component (Costs), this ratio will be reduced by the costs Customer willincurtouseoursolution.
Howtosetprices? Strategically:
Before to think to the price of a new product, I look at it from a distance. I take a moment to think to the segment, cluster or industry where my idea will be proposed. Is it wealth? Is it trendy? Is my Company brand positioned as premium or luxury? Or is it a follower? And what have been the trends of prices? Are being squeezedbythemarket,orhighdemandcancommandhighprices?Abirdeyepoint of view and a comparison with what happens in other adjacent segments or industriescanhelpalottosetadirectioninyourPricesetting.
Competitively:
The next step is to look up to the competition. A new solution and its new price has to confront with other solutions, the simple fact of add a solution/price to the Customerschoiceslisthasanimpactoneachpriceonthesamelist.
Proposing on the market the wrong price can destroy a niche or an industry, initiating an iteration of competitive moves that become easily out of control of the priceowners. Its the price/demand elasticity. And the easiest way to summarize it is: beware of crowdedmarkets.Everycompanyshouldtendtobethemonopolist.
Transactionally:
FinallyIstartthinkingaboutthenegotiationprocessthatmyproductwillgothrough when put on the market (even if You set a fixed price, actually you have pre negotiated it). The steps that the negotiation process will be made of, will actually setthefinalcashyouwillget.Thisistherealpriceyouhavetoconfrontto.
Howmuch?
HowmuchisdefinitivelytheQuestion:Priceisthemarketingvariable. Is one of the few things you can always change abruptly to achieve your sales goals. Price is your resource when you need to counteract or deploy some competitive strategy.Itseventheretoprotectsomesalesmanfrompoorsalesresults. TosetPriceforanewideaImakereferencetothree(andahalf)waystodoit. As a first option, I check if I can define a price based on the benefit (Value) my Customer will achieve using my idea (value pricing). Then I know I have to take competition into the game, so I check out how they price (market pricing). As a last resource I do the simple thing, and add a profit to my solution costs: probably not thebestwaytodoitbutatleastasafeway(costpluspricing). Sometime I appeal to an ultimate resource: an half way to set a reference price: I ask Customer to set the price. Not my preferred choice but, with a walk away option embedded in the negotiation process, You can even have some very nice surprise.
Valuepricing
If you made all the Roadmap steps till now You should already have the elements to gauge the value that your solution brings to the Customer. You can now check out the industry or competitive multiples to set the Price. You can go to similar solution offeredinotherindustryandcheckouttheratiosused.Thisisgoodpracticeanyhow, because Customer buys other stuff too. And those prices help him to build his expectedprice.
Marketpricing
As said, most of the times we are not alone on the market. Customer can have several solutions at his reach and this forces to think in terms of Price Parity: i.e. try tosetapriceinlinewiththecompetition. Itsoundsabitcollusive,butitsastartingpoint. AssumingIamabletofigureoutaPricebenchmarkamongcompetingsolutions,the nextstepistochooseamong:astrictpriceparity;sellmyideaatapremiumpriceor atdiscountedprice. In a market, often one of the competitors is the price maker. The price decision has to be taken taking his goals into account. If, for example, I want to try a discounted pricetactictoenterthemarket,Igiveclearsignstothecompetitionthatthispriceis an interim price, to try avoiding price wars. Customer get the message too, and mustbeclearthatthepriceisnotcarvedinstone,butanencouragementtoatrial.
Costpricing
Placing a markup above the purchasing cost is a common practice for distributors. Thelogicis:first:coverthecosts,oryougiveawaywealthforfree. For this reason define a price requires to have a clear idea of the cost incurred in creating the product and bring it to market. This is not an easy task, especially when huge capital costs and investments are involved and then goods are sold at small price. A trick I use in preliminary analysis, when all the costs are not clear, is to refer tothecostofsimilargoods,forwhichIhavebetterdata.Canbethepreviousrelease of the product or something that I can buy on the market and for which I have companyinformationthatcanestimateContributionMargin. Sometime selling at breakeven prices is necessary to step beyond a demand crisis, but on the long run working for free becomes challenged by moving in other business activities. So I prefer not to set a breakeven price, without considering the lifetime value of the business initiative. In other words: is not the break even of the last quarter, but the total life cycle break even of the business venture we are starting.
Transactionalpricing
Till here: theory. But sometime it happens I have to start a negotiation without having a price in mind. We always do business in a hurry and we are not always ready. In this case we may want to test proof our assumptions asking the customer tohelpussettingtheproductprice. Not my preferred strategy, but this way to set price can give nice surprises (when Customer values our idea much more than what we suppose and would be very interesting to know why) or strong delusions (when customer forward a price belowourexpectationagain:takeabetterlook).
ThisprocedureofaskingtheCustomeraPrice,canbeveryannoyingiftheCustomer has a strong competitive negotiation style. So would it would be preferably used withcustomerthatdemonstrateacooperativeattitude. Customers negotiation style shall be taken into account in price setting, because a pricecanbedefinedforeachtransaction.Thenegotiationphaseofthebusinesscan greatly affect the cash ultimately will reach our pockets. There is a decay from List price, Invoice price and Pocket price. Setting the price should mean set the tolerancesofeachphaseofthenegotiationprocess,causeeverypercentagepointof pricegained,goesdirectlyintoourProfit.
Howdoesthepricechange?
Price dont change just during negotiations, to get the order signed. It has to be modifiedtoextolthemost,indifferentsituations. NotallCustomersvalueourideainthesameway.Ifweareabletopackagetheidea differently for each Customer segment, we can try to command different prices for thesamesolution. If we are going to use different distribution channels to reach the customers, each channel may be served with a different price that takes into account the shopping convenience. Price of a product changes during product lifetime: for example high tech products have to harvest the most at the beginning of the business life, to assure fast investment recovery when competition cant copy it. While at the end of their business life cycle, price could be reduced to make it affordable to anybody. (Attentionnottocannibalizeyournextidea,tough) Pricechangesdependingonseason:saleperiods,specialeventsandanniversaries. I give a thought since the beginning to the effects of promotional or competitive tactics like discounts, trials, refund policies, customer retentions and customer satisfactionactivities. I give a look at price components too: how to breakdown downpayments, prorata andcollectionpoliciesmayhelpthebusiness.
Summary:
SettingPriceisnevereasy,especiallyfornewproducts. Yourindustry,YourCompetitors,YoursupplychainandYourCustomermayhelpyou findtherightone.AndPriceisaverystrongtooltomaneuverintothemarketarena Havingaclearunderstandingofhowfarwecanplaywithit,mayhelpalot,lateron.
CWhatadditionalcostswillbesustainedbytheCustomer?
Price is not the only thing our Customer will pay for our solution. She will sustain costs to make our product part of her world. Not only she will have to modify her
habits,orchangethewayshethinkstotheproblem,butwillneednewinvestments, new infrastructures and systems. Sometime she has been able to externalize the costs of the problem. Our solution could bring these costs back. In this case the assumedvalueofourideacanbemuchlowerthanwhatwecanthink.
Investments:
Implementing our idea inside Customer process may require several investments on her side. A part the hard Stuff capital equipment related to our product, our idea can bring into the game a change in technology standards, so causing the need of spendingtimeandattentiontomakeitfitwithherworld:herphysicalandhersocial environment. Adopting a new solution could require to our Customer to adjust her image (or brand) to the new solution adopted. For this reason I think carefully how thisnewideacanimpactherbrandorpublicreputation.
Systems:
I make a distinction between the investment needed to assure the interface of the new idea in the customer process and other costs related to services linked to the new solution. Making this distinction helps me generate more ideas for complementary product and services, thinking the way to extend the idea from its basic functionality to the services that can be sold separately, to the systems and platform could be needed and ultimately to the emotional and sensorial part of the offering. For example: Customer may need training, may need help for installing, connectingorjustsettinguptheattributesofourproduct.Shemayneedtopayfor new taxes (or get some incentives) new insurances, new licenses. Later on she may need maintenance and upgrades or modifications. The advantage of thinking from the beginning to a service plan is that when the sales will have generated a fleet of installations,applyingtheservicemodeltothisfleetwillgiveaclearindicationofthe potentialservicemarket.
SwitchCosts:
One of the annoying thing about innovation is that there is always the need to convince customer to leave her old world for the new world. Customer has (or at least she think she has) always found a way to cope with the problem: has found a partial solution, a less efficient solution or simply found a way to transfer the costs incurred for not having solved the problem. Adopting our new idea can bring back some of this costs. Making her switch to the new solution shall give an advantage not only in terms of greater value but many times the additional value shall be so greatthatcancoverthecostsalreadydigestedbythecustomer.
DSummary:
A new solution does not bring only advantages. Customer will need to pay a price and to bear some additional costs, to change her world and adopt our idea. So the
real value we can assure shall discount our Price and the new Costs. To have a chance to sell our idea, the remaining value shall be several times the value destroyed in Price and additional Costs. Gauging this ratio in other similar situation the Customer has been involved, can give a way to define the final Price we can legitimatelyask.
2/4Doesprojecteddemandsustaintheinvestments?
At this stage of the Roadmap to Market, I have collected enough information about the offering, the customer and how to match the customer to the offering, in order toinvestigatethebusinesspotentialoftheidea. What I am looking for is the number of transactions that I can possibly target, and thecontributionmarginthatIcanextractfromthem. I take 2 steps when creating a demand scenario, trying to match them will help to defineCustomerSegments.
Topdownapproach:
looking for secondary demand drivers: those parameters that are directly (better if throughamathematicalcorrelation)correlatedtotheCustomerbusiness. Fortheoilindustry,e.g.,thedrivercouldbenumberofbarrelsperday.IfIcanlink numberofbarrelstobeproducedbythecustomer,withnumberofgoodsorservice I can provide to the customer, I can have a clear picture of the potential sales in the nextfuture. The topdown approach let me check for factors that can influence the demand on the short, medium and long term. Forthcoming technologys shifts for example. Or tounderstandwhatarethemarketsegmentslesspronetocompetitionswars.
Bottomupapproach:
For those segments that are high potential, I build a refined market view. Here I start thinking more like a sales manager . I need to give as much as precise indicationstoasalesmanagerasIcan.SoItrytobuildforeachsegmentabasketof opportunities, that the sales team can then tap and transform in orders. In this phase, confronting with sales personnel and defining adequate risks parameters to describe the basket of opportunities helps a lot to establish feasible sales targets. (andavoidsalesmarketingdisputes).
AHowmanypiecescanbesoldinthesolutionslifetime?
Assumed that we have been able to quantify the possible market, its time to try quantifythepossiblebusiness.
TAMTotalAvailableMarket.
Connecting secondary demand to primary (our solution) demand, helps define the TAM or Total Available Market. I try to understand the budget of my Customers, their wallet and the share of it that they will reasonably dedicate to solve the problem that my idea is the solution for. Understanding customers priority, urgency and available resources on solving the problem we are targeting, helps understand what is in indirect competition with our idea. Looking to the whole expenditure budgetofthecustomer,canleadtonewIdeas,thatcanbeadevelopmentoropena wholeinthenewmarketspace.TheTAMisasourceofinspirationfornewventures, alliances,JointVentureordivestures.
RAMReachableAvailableMarket
Unfortunately very seldom we can afford to target all the opportunities of the TAM. More often our reach is limited. There are 3 broad category of limitations I consider whenIshrinkTAMtodefinetheRAM.
Physicalreachconstrains
Not all the places are equally easily reachable. Geography and distance have always represented the first obstacles to meet new customers. Even physical communication can be impossible or difficult: Internet is not everywhere, Phone costs can be a pain, press or media can have limited access or refuse to accept our communication. Even physical distribution can be limiting, or be possible only seasonally. Finally Customers should not only be sold but even served. And if our
customerservicecannotbepromptondemand,ourbusinesscanbeimpossible:just thinktoserveacustomerwhoisawakewhenyouaresleeping. Limitinginterfaces Even if I am able to reach the Customer I still need tocommunicate with a common language. Norms, Regulations, can limit the number of customer that can be contacted. Standards are quite more often used to limit and secure certain market segmentsthentosimplifytheacceptanceanduseofnewsolutions. Just think that there are more electric plugs design standards, than number of countries! Finally, if our solution goes into a system or needs a system or framework to operate,theownerofthesystemcanlimitouraccess(seeAppleanditsiplatform). Incumbentorganizations: Religions have a deleterious influence on buying habits. Mafia of all types can limit your access to Customers. National Regimes can stop the import of goods or being embargoedorsomeideasjustcensored. Some private organizations can put forward existing privileges on the target deal: thinktomortgageorbindingagreementswithcompetitors.
SASServedattractivesegments
Even if Customers are reachable, this does not mean you want to reach them all. Picking up the segments that have the greatest success chances optimizes the resourcesandsupportsteamsmotivation. The priority is based on two criteria: how much the customer needs it and this depends on how he is in demand: how much his market grows. And how easy is for ustoconvincehim.Andthisdependsonthelevelofthecompetition. Generallywecandoveryfewonthefirstcriteria:itssomethingthatisproperofthe Customer environment. Our weapons can be spent only to increase our distance fromcompetitionandourproximitytotheClient. There are further considerations in selecting the right segments: moving in a segmentwithtoomuchrumorcanawakethecompetition.Customerthathasbetter mean time of payment, contribution margin levels, or can enjoy a period of tax incentives or can be sheltered from competitors, may be more interesting than others. Some segments can be important as test area to check out communication or sales process effectiveness. Other may be used to spark the sales in adjacent segments. Theoldrule:startwiththelessdifficultandthegreaterreturn,isalwaysvalid.
BHowmanypiecescanwesellinthesolutionslifetime?
Going from how many can be sold to how many we can sell must bring competitionintotheequation.Customers,beforetobecomeClients,passthrougha sequenceofphases:theymustbereached,convinced,theymaywanttotryus,and onlyattheendtheysigntheorder. Competitioncandentineachofthesephasessuccesspercentage.Itrytofigureout, with some test if necessary, or comparing similar situation by means of ratios, the successpercentageineachofthephaseofthesalefunnel:percentageofcustomers reached by us, of customers being interested in us, of customer trying us, customer orderingtous.
ListingCompetitors:
You cannot gauge your success chances without measuring those of your competitors. In theory we may need to repeat the whole Roadmap to Market for each one of them. But this depends on resources, timing, and convenience. In any case before to assess them we have to identify them: to create a list of competitors, the best way is to ask the Customers to highlight how they are or they have tried to solvetheprobleminthepast.Competitorsarenotonlythosethatprovideasolution for the problem, but even those that provide shortcuts or ways to go around it. Those that provide alternatives or that can simply deroute the budget of expenses forthesolutionoftheproblemtoothermoreimpellingneeds.
ScreeningCompetitorsappeal:
Even if the full Roadmap is a great tool to screen a competitor, I tend to gauge their appeal thinking to the most critical features. The first is the amount of value they can provide: first I qualify the values components and try to identify their competitive advantage (whether of cost or differentiation) comparing alternative solutions. Then I make an estimate, quantifying the value, and subtracting Price and infrastructurecosts.
Checkingcompetitorsreach:
Not all the competitors play everywhere. Sometimes it can be worth signaling hunting territories. Search for their distribution channels can highlight white spacesorprovidegoodhintsofimpracticalmarkets. Having a clear understanding of their communication channels, and their messages, allowstochooseapositioningthatcangoroundthem.
PreparingtoCompetitionresponse:
I do not expect that competitors are lesscleaver than me. Most of the time they are smarter and with more experience in the specific market. They react to any threats. Many of them have counter measures ready to be deployed. So do I. The general
rule I use in thinking to move forward, is working as a cowboy: I do not plan specific moves and counter moves. I prefer to give the direction towards a destination. So I prepareinadvancefencingandroadblocks.
Summary:
Having a better understanding of the competition, helps us gauge the market share. Better: gauge what can be considered the share of the Served Available Market. The final figure can be estimate by ratios, DOE (design of experiment, split tests, statisticalanalysisetc.).Buttheabovescreeninggivestheelementstobeconsidered intheestimate.
CHowordersopportunitieswillchangeinthesolutionslifetime?
Understanding market dimension and how much we can win against the competition today, is not enough. Market changes for a number of reasons. The same do the opportunities we can win in the future. When trying to project a sales scenario in the next future, I check out some external and internal forces that may haveanimpact.Someonecancallthisasensitivityanalysis.
ChangesofDemanddrivers:
If I am so fortunate that I can build, borrow, buy or steal data about the secondary demand, I use them to derive my primary demand forecast. To make an example: from Oil demand projections I can derive the gas turbines demand over a period of time. What is good in this approach is that generally You can leverage secondary demand data that are built by organizations (public or private) that have a lot of knowledge, big networks and smart people to do it. So the primary demand is not only linked to my Customer Business, but is often more precise then what I can dreamtobuildbymyselfandwithasmallteam.
The5forcesimpactingdemandtrends:
Porterhastaughtthatthereare5forcesimpactingthemarket.Lookingonhowthey will evolve or change in the future leads to understand how market will change. The forces are: Customers (and we just checked them), Competitors, Substitutes, New entrants and Suppliers. How the bargaining power of the last one, suppliers, will change, could affect directly the competitors cost advantage strategy. Furthermore if you are in Partnership: check out factor that may change the partner and the partnershipitself.
The5culturalfactorsimpactingdemandtrends:
Market is a place influenced by cultural factors. General economic trends impact eachsinglemarketcomposingtheoveralleconomy.Marketscanbedepressedorare in opposite phase or neutral. Markets can behave differently depending on the
demography of their visitors: death or life rates, life expectation, regional density
and their variation in time affect market vitality. People may decide to apply new norms or regulation to a market. A market can be heavily influenced by fashion trends, political and social culture shifts. Even technology, incumbent or substitutive,orjustforcedbytheintroductionofnewstandards,change(sometimes abruptly)themarketonthefly.
HowweimpactShare(Organicsensitivity):
All of the above are exogenous forces impacting the market trend. But there are severalinternalfactorsthatcanalterthefinalsalestrend.Priceisoneofthose.Price can vary faster than offering and market. A bad pricing policy can even destroy a market.Allthemeasuresthatcanchangethecustomerperceivedrisklevelcanopen (or close) potential market space. Commercial effectiveness (in internet: Conversion Rate ) is a big player in defining the final market share. Being able to deliver what you promise is another big factor in the final sales figure: money back guarantees or scrap substitutions may dent how we are perceived and impact the final market share. Finally, fine tuning all the parts of the buying process can assure constant success rates. Making them loose, can introduce unwanted variation into business targets.
DWhichopportunitiesdowereallysee?
All the above analysis allow us to create a structured frame where to collect in a consistent way all the market information (or in other words: allows us to build the structure of a CRM database that collects just the information needed and not any kindofpossibleinformation). Furthermore we now have an idea of where to concentrate our efforts: which marketsegmentsisworthtobetterunderstandandverifyonfield. The only way to asses all our work is to verify if building the same information from thebottomallowstoreachthesameconclusionaboutmarketsizeandpotential. Withabottomupapproach,andstartingfromthemarketsegmentmorepromising, I try to build a list of opportunities. This list will validate some assumptions made in thetopdownprocess,andbuildsomeimmediatetargetsforthesalesforce. Nothing better than start with a Customer Names list. If You have a name You may qualifythepotential.Youmayseethedifferentdegreesofpenetrationandtheshare of wallet your solution will compete for. You may check the obsolescence of existing solutions.Salesforceshouldhavemoredatahere.Ifweareluckyisonlyamatterto reclustertheinformationtheyhavewithinthedatabaseweown.
Summary:
Being able to define our potential sales is a wizard work. In B2B, to look into the
future, I try to build a model of my target market, linking Customers sales to my product sales. If I can build a mathematical correlation between his sales Quantities and my sales Quantities, I use it to create a quantitative model that can be manipulated to weight future scenarios. This means check out how exogenous and endogenousfactorscanmovethequantitiesupordowninthemediumterm. From general figures that take into account the overall expenditure budget of my Client, I come down to sizing the opportunities that I can really reach. Then I factor theCompetitionin,andwhatwillbemymostprobableshare. The good thing in working with quantities, and not just with dollars value is that I can asses and verify much of my assumption building up the same model from the bottom: i.e. summing together all the real opportunities ( in quantity, not in dollars valueofcourse)thatIcanactuallysee. Generally when trying to match the assumption made from topdown ( marketing) to the tangible figures coming up from the bottom (sales) has two beneficial effects: make the assumptions on market more grounded and shared among the team, andmakevisibleactualopportunitiesmoreintothefuture. Itsawinwinsituation:marketinggetsnaileddowntorealityandSalesgetsheadup tothefuture.
3/4Doesthesolutionleaveunitmargins?
The last question I try to answer when launching a new product or entering a new marketiswhetherthebusinessisprofitable.Withthefirst3stepsoftheanalysisthe reason why the customer should choose to be served and the number of times wouldprobablybeservedbyus,hasbeendefined.Onlyprofitabilitynowisbetween usandthefinalGolivedecision. IfourIdeaisnotentirelynewtotheworld,typicalindustrymarginsare aparameter to gauge what we can reasonably expect. Contribution margin for a machinery business goes anywhere between 23 % to 15%. Contribution margin for its service divisionstayaround30%60%.Apieceofequipmentshouldbesoldatnotlessthan 3 times its costs: 1 for the costs, 1 for the Tax and 1 for me. Its service can sell 5 times:1forthecosts,2forthetaxand2forme. To understand if our idea is inside typical ratios, we need our previous data about Price, and some new data about costs. We are going to check the main cost voices andhowtheywillimpactresidualmarginonthelongrun.
dontforgetcommercializationcosts
AWhicharethemaincosts?
Following the same rule of Qualifying and Quantifying, I review the main cost sourcestocheckifallhasbeenconsidered.
Variablecosts:
I like to check if the cost structure takes into account not only classic direct materials, manhours, etc. but even the costs to be sustained for warranties, scraps and reworks (cost of quality), service and trouble shooting, revision and development, licenses and access to system platforms belonging to third parties. There are a number of other checks supply chain setting may require. Environmental, Health and Safety (EHS): can heavily impact the costs and the processes. Data management: IP rights, risk of loss of data, legal implication of misuseofpartofthesupplychain.
Fixedcosts:
Here you may take into account the main organizations costs. This could be a great moment to think creatively on how to do things differently. And offer some great ideatobreakconsolidatedmisbelievesaboutcompanysconstrains.
Investments:
Any business adventure requires investments, as a marketing manager I want to be sure there is budget for product launch, promotion and communication, supporting infrastructures (read: internet portal, market places, business intelligence operations).
Synergies&Economies:
There are not only costs but even savings to take into account: synergies, partnership, commonalities can be defined now and assured to be properly leveraged. Finally the team can learn how to make things better and with a greater efficiency. An estimate of costs, savings or economies of scale can be defined and their effect plannedwithinapricingstrategy.
BDowehaveaSupplyChainstrategy?
Oncethecostsarequalifiedandquantified,Imakeachecktoseeiftheassumptions and figures are sustainable on the long run. As per Sales and orders, even for costs (resources)isinterestingtodefineamediumtermandalongtermscenario. Iwanttobesurethatwedohavetherightteamwithasufficientmixofskills.ThenI pass through figuring out material resources availability, technology needs, possible bottlenecks.Ithinktoredundanciesandpreparationforemergencysituations. Therecouldbeachanceofsavingthroughsynergieswithotherproductlines,orthe possibilitytoreducerisks:resourcescanbedeployedinphases,accordingtoamulti generationplan.
Conclusion:istheinvestmentworth?
We have answered to a lot of questions. A financial friend could just pick up the last figuresabouttheprojectedDemand,Presumedshare,possibleContributionMargin, requiredInvestmentsandcrunchacalculationoftheNetPresentValue(NPV)andof theInternalRateofReturn(IRR)tocomparethosewiththebestalternative. Thetwo:IRRandNPVareagainqualifyingandquantifyingtheattractiveness. NPV is a measure of how much more money the initiative gives in respect to invest thesamemoneyinsomeelsesideathatrewardswithanknowninterest. IRR is the average interest that our investment gives in its lifetime. It is a qualitative measure of how well the idea generates money. Note: is not a measure of how much: the investment (and the return) can return small figures, but be very effectiveinrewardingtheinvestment.ItsameasureofHowWell. IliketomakeNPVcalculationweightingthecashflowsbytheirsuccessrisk.Itforces toaskyourselfifyourorganizationisreallycapabletodeliveryourbusinesscase. Your organizations typical success rates in assuring your solution is built and sold to theCustomer,iswhatmakeyouconfidentinyournewbusiness.
takingyourorganizationsuccessrateintotheaccount
Before starting the adventure, a final check could be made. All figures are on the table, lined up along the investment periods. It could be worth to think if the cash will be there when the business plan will ask for it. So check out what happens to your cash flows in the future, and prepare to adjust the expenditure (or the borrowing)accordingly.
I hope this short list of questions may help you bring your best ideas on the market andsellthemforthevaluetheycanbringtotheCustomer. Anyfeedbackiswelcomed.Thisisaworkinprogresscollectionofpracticalhintsthat iscontinuouslyupdated.TobeinformedofnextreleasesjoinmeonLinkedin. Andhaveanicework,becausewelovetoseenewideaswalktheworld!
FlavioTosi
Ifyoulikedthisbook,tellittoyourfriends,onyourpreferredsocialnetworkandto whomyouthinkcanbehelpedbyitsreading. Do not forget to send me a note and any feedback, comment, suggestion and encouragement,Iwillreallyappreciate. Write to: flavio.tosi@businessexploration.com, I will do my best to answer promptly.
Bibliography:
HeresomeofthebooksfromwhichIstolenplentyhands:tryingtoputtheir teachingatserviceoftheinnovationsGoToMarket. UnderstandingglobalculturesGannon nexusscienceofnetworksBuchanan "theArtofstrategyDixit,Nalebuff theinnovatorsdilemmaChristensen PositioningTrout RealityinAdvertisingReeves thecopywriterhandbookBly UltimateguidetoPPCadvetsingStokes TopDogSalesSecretsJohnson Hopetheywillnotsueme
FEEDBACKS: Pleasesendanykindoffeedbackandsuggestionto: flavio.tosi@businessexploration.com Iwillreallyappreciate.

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