How early is too early: knowing when to engage your customer

“But we need to develop 3 phases of prototypes, go through accelerated life testing, and get 10 patents granted”. Or so go the usual protestations against early market engagement. The value of bringing partners and customers into the conversation at an early stage is often trumped by fear. “They’ll steal my technology”. “It isn’t advanced enough”. “They won’t understand it”.

There is only one thing that you need in order to commercially engage with companies; a proposition. Something to spark their interest. Let’s say you live in a very rainy country and I’ve invented the umbrella (which for some reason, no one else has figured out). If I approach you and tell you that I’ve got a solution to the downpours that blight your every day, do you think you’d be interested in talking to me? You bet you would.

What happens next? I find out what size umbrella you would like, what colour, and how much you are willing to pay. Because there’s no point in me spending 6 months and spending all my savings on an umbrella that is pink, made of wood, and costs £100 when what you wanted was red, plastic, and costs £50. No, the smartest thing I can do is make sure that I am developing the desired solution to a real problem, before I invest a significant amount of resource in doing so. Moreover, customers may be more open about the value of a solution when they’re encouraging you to create one (as opposed to negotiating over price).

Now, I don’t mean to downplay the importance of solid IP protection or reliable performance data. My point is that these are not prerequisites for starting a conversation with the company which will eventually use or distribute your technology.

These early conversations can significantly reduce market risk for emerging companies and their investors. They validate that a valuable problem is being solved. They help to shape the technology development path so that solutions are compatible with supply chains. They demonstrate demand for what you will ultimately be selling or licensing. All of this helps to avoid uncommercial development, something critical for young companies with short runways looking to maintain a competitive advantage.

Closing

Closing any deal is an event created by a process. The event itself involves getting the deal over the completion line. It is no more than the summation of a process that starts once a degree of mutual trust and interest have been established. Opening is a fluid mix of sparking interest (i.e. potential but still unsubstantiated fit and benefit) and relationship building. Relationships matter as they create access and provide the agency that gets things done and the medium through which information and insight is channelled and processed. Importantly, they also allow us to understand first hand what is important to an individual and an organisation. That is where empathy starts. In dealmaking, to deal is to empathise; to be able to imagine things from your counterpart’s point of view. Empathy is not simply a matter of adding another invaluable perspective, it is that soft intelligence that can lubricate the process, help smooth the bumps, and resolve the thorniest of issues. While creating ‘an opening’ is a prerequisite to selling, it is not in my book selling. It is a skill apart and a high value one at that when there is a significant degree of complexity and multiple players involved.

Determining the degree of fit, and the business case that may emanate from it, is a critical stage. The more thorough the work here the greater the probability that subsequent activities will progress smoothly. This is an evidence-based stage characterised by information sharing. The more structured this process, the better. Have a plan of what to share, with whom, and importantly, when to share. Building the business case – the ultimate measure of fit – in particular should never be presented as a fait accompli. Rather it is a very deliberate process. Agreeing a methodology (i.e. how value can be evaluated) is important because sellers are often guilty of presenting benefit cases that underestimate adoption costs while buyers may try and inflate them. The best form of persuasion (i.e. selling) are ‘facts’ messaged and presented in a manner that is compelling by virtue of being irrefutable. That is the subtle art of ascribing meaning to facts.

The basis of all sales is arbitrage: the buyer pays x for something potentially worth a multiple of x.  For the buyer that is the difference between cost and value.  This is where IP based propositions that are a multiple better than the incumbent technologies should be at a major advantage. The higher the multiple the greater and more transformative the potential value. Of course, the imperative here is transparency. Indeed ’radical transparency’, to borrow an acquired phrase, makes absolute sense. No bullshit required. Just detailed hard proof that for many of the companies RIG works with can only come through a period of collaboration. To fall short of ‘showing the value’ is to sell your technology short. Falling back on persuasion, however articulate and passionate the advocate, is a poor substitute for empirical, substantiated, indisputable, shared and accepted evidence of value. In this stage at least, the best way to sell is simply not to.

Beyond the core challenge of agreeing a methodology for establishing value, there is always an extensive list of associated ‘issues’ (not least those related to IP) that must be worked through before a closing event becomes a possibility. Failure to identify or anticipate an issue will delay ‘the close’ or lead to premature attempts to close a deal that is not yet closable. An apt metaphor might be borrowed from my boyhood:  compare this final stretch to building a model airplane of the type that predate the machines that you can order on Amazon and that are ready to fly straight out of the box. For the plane to fly the build had to be completed to spec and the little engine perfectly calibrated. Everything had to be just right, which took a fair amount of checking and tinkering, otherwise the plane failed to take off or crashed shortly after take-off. The most important tool was a comprehensive checklist.

The critical challenge of agreeing commercial terms is the penultimate activity before ‘the closing event’. This essentially involves trade-offs between cost and anticipated value. The buyside argues cost (and if procurement gets involved it will almost inevitably try to divorce cost from value as is their brief) while the sellside must stick to the language of value. To fall immediately into a pricing dialogue dominated by arguments around cost is to be seduced by the dark side. Instead frame your arguments using the language of value. How challenging this negotiation is primarily a function of how well you have executed the preceding stages. Though you will be frequently told otherwise, there is little in truth that cannot be anticipated or established before the negotiation to ratify final terms. An agreed methodology to evaluate value will at the very least enclose the discussion within parameters that make reaching agreement easier. The result we get may in part be down to our planning and negotiation skills but in much greater part it is down to leverage. Leverage is power and that power is found, created, built, adjusted, and understood as the process unfolds from first contact. In sum, the most skillful closers are those who know how to create leverage and use it to shape their counterpart’s decision-making, so that they seek in their own interest, terms that closely resemble the ones the closer set out to achieve in the first place.

 

Negotiation Tools

Successful commercialisation requires a great technology with differentiated IP, a sound strategy with clear execution, and a little bit of unexpected foresight.

Case in point, a RIG client had a market-leading technology, a clear but simple strategy that resonated with its customers, partners and employees, and a strong execution-focused team that collaborated closely across the different functions of R&D, production, marketing, sales and support. This put the company in a winning position. However, an unexpectedly genius bit of negotiation led to the first few years of growth and sales being far smoother than previously imagined.

The technology had been incubated in university and was godfathered by one of the world’s largest energy companies who had provided clear technical specs, some development funding, and some of their business units to act as field trial partners until a commercial version of the technology was available. The quid pro quo from our client was that the energy company had exclusive access to the technology for a period of time. In order for the technology and the company to be viable and valuable, it had to unshackle itself from its customer and prove that it had worldwide application within its target market.

We had prepped and planned the negotiation for weeks on ends mapping out the various stakeholders and persons of interest within the energy company. Over a several month negotiating cycle we managed to secure a removal of their exclusivity on the technology without any change in shareholding. The key concessions were royalties over time and a Most Favoured Nation (MFN) pricing structure for the energy company. Little did we know the second thing, which we saw as a necessary evil, became one of our client’s most powerful negotiation tools.

As we started commercialising the technology out in the global energy market we discovered that there was real interest in the problem our client was solving, and a real differentiation in how they solved it. The market was keen to adopt the technology and we were able to get through the technical qualification process and identify significant problems that we could solve so that budget could be secured for initial uses of the technology. While this process wasn’t rapid, reflecting the sales cycles in the energy industry, it was smooth progress. We believed that we’d hit rough waters when it came to procurement especially as we were selling this across the world and we believed that different geographies would have different spending thresholds. Sure enough, during negotiations, having agreed all the terms and conditions, and just before producing an order, procurement teams would invariably ask for discounts saying that the budget secured was only for a certain round figure. However we knew that the problem was significant, and that our client’s technology could solve the problem best, so we stuck to our guns. However the argument we used every time, and with significant credibility, was the MFN pricing. The conversation normally lasted as long as this:

Potential customer: We’d like a 20-30% discount on the unit price of your technology. Our budget is only x. Our internal customers (the operational and technology team) want to use your technology but you have to work with us to fit the budget.

Us: I’m sorry we can’t do that. Energy Company Y has a MFN pricing agreement with us where they get 5% less than the lowest price in the market. So if we discount you by 20-25% we’d have to do the same for them and given that their volumes are an order of magnitude higher than yours, we can’t afford to do that.

Potential customer: Ok understood. We’ll prepare the order in the next day.

As you’ll note, the conversation was never about your price versus your competitors because our sales process ensured that we had identified that the problem we were solving was significant and had established in the users’ minds that our technology was best equipped to solve it. As a result, it was never a competitive scenario so the lever the customer had was at best made of rubber while ours was made of steel. It was never a lever that we had ever remotely imagined we’d have to use.

We probably trotted that line out to 30 different customers in 15 different geographies during the first couple of years of commercialisation. It worked with everyone but one: a family-owned energy company in India from who we decided to walk away from after two years of discussions and negotiations. Speaking for my countrymen, despite us seeing the value and understanding the logic, we just can’t live without a discount!

Fifteen Thousand Pounds – The Cost to Dig Your Own Hole

“Fifteen thousand pounds”

 

That’s the point I knew the client had lost the deal.  And with the deal, the long term viability of the company.

 

One of the most fundamental tenets of a successful growth company is ‘making yourself easy to do business with’.  I think sheer greed got in the way here, or perhaps a total misreading of the strategic situation.  It was explained to me post-meeting: that development work would be costly, so something would need to be charged to the client.

 

Rewind.

 

I’d started working with the client two or three years earlier.  They were selling services, charging an annual subscription fee on a headcount basis, into the people management space.  Human resources has plenty of critics (/administrators), so I will not repeat them here – but to make matters worse, the client was disorganised and emotional, but worst of all it learned slowly and was subscale.

 

I cannot even remember quite how they got into the situation, but one of the major UK water companies was brought round to the idea of doing a pilot of the service.    They certainly needed it – the management systems ‘human resources’ had in place were poorly implemented, and the Head of People knew it.  The client’s service offered the opportunity to solve the problem, and in order to get well embedded (knowing such a service would always go to public tender), it was manoeuvred into a three month limited-headcount pilot.
Remember I said the client was slow learning?  It must have been obvious to the water company throughout the pilot that the client was learning on the job.  This is not necessarily a bad thing – learning together, which certainly needed to happen, can build bonds between a company and its customers.  Quite why I was directing the learning was never clear – but I knew someone had to grip the situation, because the opportunity was too important.

 

Remember I said the client was subscale?  Getting the water company on-board probably would have trebled the ‘people under management’, which was the key metric for this particular client.  The investment in the technology and outsourced relationships needed to deliver the service was a leveraged investment – and they were short of break even.  Trebling the numbers, almost at any price point, would have been enough to put the company into that happy space where bills were covered, cash was being generated, and everyone would be able to sit down and think about what to do long-term now the company was ‘washing its face’.

 

Pilot was completed, a big thumbs up for the concept from the water company, and then to public tender.  Everyone knew three people would be pitching at the final round, and despite the obvious learning going on during the pilot, as an ‘incumbent’ (in the loosest possible use of the term), one would expect to be at that pitch.  And the client was.

 

Now as I said before, it didn’t matter what the price point was (within reason) – all that mattered was trebling the number of people under management.  So basically, unless the water company decided to totally reframe the tender at the last month, all the client needed to do was ease into pole position (with a three month head start) and they were good to go on a three year contract.  On to thinking about the business and how to develop it now faces were being washed…..

 

Water company: “So one of your competitors, being open with you, is offering us a set of metrics over and above those which you are currently providing.  Can you produce the same set of metrics?”

 

The data set was identical – same information going into the database, so:

 

Client: “Of course, not a problem …. But, er…… there will be a cost – that’s out of scope.”

 

(hold on, we prepared for this meeting – I don’t remember any additional costs being discussed)

 

Water company: “Oh …. right …. Er, how much?”

 

Client: “Er …… er ….. fifteen thousand pounds”

 

Talk about dropping the ball.  This was a knock on by the wing, once it had run round the opposition’s tardy back line, and was clear through for a try.

 

I was asked to speak to the water company’s procurement people to get feedback, once the client had received notification that the pilot was over and the tender was lost.  Apparently, and of course unsurprisingly, the water company hadn’t wanted to switch the client out – too much effort – but fifteen thousand pounds was not in the budget, and the other company was levying no extra charge.

 

I was on the team that put that company into administration a couple of years later.

 

The fifteen thousand?  That would have been made in margin in year two; the client CEO, for whatever reason, justified the unilateral action to themselves at the time and came out with it.  The company never ceased to be subscale.

 

The moral of this story?  Focus on what’s important (your company’s key metric); don’t get greedy; be easy to do business with.

When should I start commercialisation?

The lean approach to software creation has brought market testing much earlier in the life cycle of a product.  Its aim is to try to find market acceptance as soon as possible so that companies minimise the risk of building products that turn out to be not sufficiently compelling.

How does this translate for non-software technology products?

If a product is based on new IP, it’s likely to have quite a long period before a first trial version is market ready. So how early should you start your commercialisation?

There is a concern that ramping up commercialisation efforts too far in advance of production readiness could lead to a loss of any momentum that has been built with potential customers and go-to-market partners. There is a temptation to think that it is better to put your head down and focus on getting to a production-ready model.

However, it’s important to remember that engaging the market serves a number of purposes:

  • There are often multiple parties that will be involved in the sales, implementation, operation and maintenance of a technology. Engaging with them is essential to understand what is required for each of them to adopt the technology. This will be central to the go-to-market strategy

 

  • Working with these parties will give a clearer sense of where the orders for the product will come from in the first 12 to 24 months post-launch. This is a period where sales velocity must be built. Only when they are prepared to shape up distribution or sales deals will it become clear that there is product-market fit. Confirming in advance where the actual orders are likely to come from will help mitigate commercial risk for investors and support valuation

 

  • Understanding why and how these parties will engage and buy is key to structuring a go-to-market strategy and sales process

 

  • In the process of verifying the needs of the market, it is quite possible that information will emerge that will result in changes to the product development path.

 

If market engagement is left too late, this information may not be uncovered. The cost of this in terms of lost time and missing targets will be considerable.

Don’t try harder, iterate faster

Trying harder while generally doing the same thing is not the recipe for finding product market fit or finding early traction. It is a recipe for running out of runway. It is also a very human reaction.

Take a competent sales person from an established company selling an established product with an established proposition. Put them in an early stage company with an unproven product. Give them a target market and a proposition based on best current assumptions. S/he starts to fail. No traction. Their manager should say ‘well done, move on, no market there, please fail faster next time’.

But, of course, it doesn’t happen. Failure is perceived not as the route to success but rather as its opposite. The competent sales person is pushed to succeed. Confidence dips. The disillusion is that it is now the formerly competent sales person who is now deemed incompetent or not trying hard enough. S/he works harder because that’s what worked so well in their previous job. More failure. The sales person gets fired. Wrong horse wrong course.

And yet the truth is simple enough: if a competent sales person gets little or no traction within a reasonable time frame, then there is no market. Iterate the proposition or move on.

An introduction to building a startup [VIDEO]

RIG consultants David Gates, Jessica Tayenjam, and Simon Jackson presented at Escape the City’s workshop, ‘An Introduction to Building a Startup’ on Saturday 9 March at The Hub Westminster.

View the video for select highlights of their session.

Please email jessica@rapidinnovation.co.uk with any questions related to the presentation or RIG workshops.

Strategy Fundamentals for B2B Startups [SLIDES]

RIG consultants David Gates, Jessica Tayenjam and Ffion Rolph led a class on ‘Strategy Fundamentals for B2B Startups’ at General Assembly London on 11 July 2013.

The slides from the class are available to view below.

Please email jessica@rapidinnovation.co.uk with any questions related to the presentation or RIG workshops.