We had the annual budget statement in the UK this week. Chancellor George Osborne focused on the macro risks which face the global economy. Continued weakness in the Eurozone. Slowing growth in China. Turmoil in many emerging markets. Wherever you live you are familiar with the narrative.
The startup world has caught the bug. Many investors believe that the so called bubble in valuation is deflating. Blogs and analysis are full of advice about how to weather the storm. Cut costs. Focus on profitability. Use your cash to survive. This routine is just as well known. I was going to count all the articles I have read with this type of advice. But I ran out of fingers and I couldn’t be bothered.
Because this is bulls**t. Sure if your business is weak a downturn will kill it. Then again if you don’t believe you are building a great business you should end it yourself. But if you do have that belief, an economic downturn is going to be the best opportunity you will ever have.
The only way to make sustainable gains in market share
First, a shrinking market is the only true time for any business to gain market share. This truth about business strategy is often lost in startups. New businesses gain market share. Or create new markets. All the time. It is part of the cycle of innovation and disruption.
However in a growing market established businesses also survive. And grow! Look around in strong sectors and the old world companies are rising. Just not as fast as new entrants.
Take a look back also into some “ancient history”. The iPhone launched in 2007. As the new device started to gain traction, the world entered its worst economic recession since the 1930’s. Much of the tech explosion was the new mobile ecosystem taking advantage of that downturn.
So now is the time to attack the established players in your market. And the biggest opportunity lies with B2B SaaS. About a year ago Tom Tunguz pointed out that legacy companies still generated 93% of revenue in the software sector. The first mobile revolution was consumer led. Now is the time to change the face of the business IT market.
Offer your customers more hope not less pain
For B2B SaaS the best way to take advantage of this opportunity is to offer your customers growth.
Every business from the leaders of the Fortune 500 to the corner shop will be hearing the same advice we are hearing in the startup ecosystem. Cut. Fire. Save. Survive. The biggest consultants are polishing cost reduction methods as we speak. The corporate finance guys are dusting down asset disposal proposals. All the experts know what to do.
But companies don’t suffer because of high costs. When the market is tough the struggle is to find customers and close sales. The cost base looms up in the management reports because revenue is squeezed.
And cutting costs is horrible. Firing people is inevitable. Letting go of cherished projects. Or eliminating positive stuff like benefits, training and that sales conference in Disneyland. Just talking about it wears management down. Another day of poring over spreadsheets. Trying to forget the people and products that lie behind those red numbers.
Don’t join the circus. Make your SaaS different from the market. Think about how your product helps grow revenue. For example, maybe your software helps your customer save time. How can the buyer use that time to increase sales? Or offer a better service to customers? Or improve their reputation in the community?
Two things will happen. Your customers will want to talk to you. An hour of positive news will be an island of joy in their schedule for the week. And they will start to buy.
SaaS is the future
SaaS is perfect for this environment. There is no upfront cash cost. Business needs to change to meet new challenges anyway. So the hidden cost and barriers are reduced. Offer a positive, revenue growth message. And use this opportunity to change the enterprise software market forever.
In the midst of chaos, there is also opportunity.
In preparing for battle I have always found that plans are useless but planning is indispensable.
This is one of my favourite quotes. It rings true the first time you read it. Why? Ike was both a great strategist and a man who delivered. That is how he became an iconic leader. Success in both strategy and delivery is also the challenge facing a SaaS startup. Creating a new business is not just about having an idea. It is about execution.
And in my mind the definition of execution is two things. Completing the multitude of tasks needed to build, sell and support your SaaS product. And making good strategic choices. The second part of this definition is the key to the Eisenhower quote. Planning is about choices. Plans are just a schedule of tasks.
(As a complete aside, this is the problem I have with all the planning and project apps out there. They are great for making lists. But useless for capturing points of decision or choice. An opportunity for someone?)
And choice is awesome when you start your startup. You have a winning idea. And there is a whole world of choices out there. So many of them look like great options. It is more like putting the first marks on a blank canvas than picking from a menu.
The Business Model Canvas
Perhaps you feel there are too many alternatives. Then you find some tools to give you a bit of structure. And make sure you don’t miss anything. There are plenty of options available. The Business Model Canvas, curated/ designed by Alex Osterwalder, may be the most popular.
Complete this picture and you have yourself a strategy. Or have you? The problem is you have not made real choices at this point. You have a list of things you want to do. Ideas to try out and see if they work. But that is not strategy.
The essence of strategy is choosing what not to do.
Don’t misunderstand me. The Business Model Canvas is an excellent tool for capturing business strategy. Working through the process is planning of the proper sort. However, in a startup that is not always enough. You will make a lot of positive choices. But miss the part where you actively opt not to do certain things.
Just picking some great strategies is a start. But you also need to challenge your thinking. And you need to ask deeper questions. To make hard choices. This brings you to real strategy. And to genuine focus. It is not just concentrating on the task in hand. Focus and strategy are a consistent set of actual choices. Collectively aimed at a clear objective.
The alternative was described in simple terms by David Maister:
Your market appeal will then come down to ‘tell us what you want us to do for you and we’ll do that. We’ll do something different for other people tomorrow!
Or as Andrew Miskin, an old friend and mentor of mine, used to put it. “You will just be doing stuff for money."
Hard choices are a thought process. So to aid that process, I offer you the Anti-BMC. Or maybe the Business Model black hole. Not as an alternative to Mr Osterwalder’s creation (although it could be). Rather it is a way of getting a different perspective. Of developing a strategy with true focus. One that clearly states what you will not do. As well as all the great things you are going to achieve.
Think of this as just 4 questions:
Which customers will you turn away?
You have picked the customer segments that you want to serve. Will you say no to others? Does your focus on SMEs mean that you will not sell to large enterprises? If you are selling in Europe will you turn down business from the US?
A different way of saying no to customers would be to avoid certain channels to market. Again it is easy to state that you will choose a channel, for example online advertising. Is it also your strategy not to invest in other channels such as direct sales? Or will you move to these channels in the future?
Which problems does your product fail to solve?
Your customers will have other problems. Similar or complementary to the one your product solves. Are you clear that your solution does not work for some things? Perhaps your competitor’s solution is better suited to certain problems.
How will you fail to achieve competitive advantage?
There are many ways in which you can gain competitive advantage. For example, quality, cost, variety, speed and design. Competing on all these factors is impossible. The classic trade off is between quality and cost. You want high quality you must pay more.
Other dimensions offer similar choices. Apple for example offers great simple designs. But a limited variety of products. Henry Ford was thinking the same way when he said “Customers can have any colour they want. So long as its black."
Some other decisions can change as your business grows. For instance, you can move into selling through different channels at a later date. When your have greater resources at your disposal. It is much harder to move from being the lowest cost competitor to a high quality focus.
Choosing which dimensions you will compete on. And where the competition might beat you. Clear thinking and tough decisions are needed. This is where you decide how your product will differentiate from the competition. Well worth thinking through.
Which activities will not be part of your business?
The other big area where you need to be able to say no is around the activities, functions and assets of your business. Will you invest in premises or work from home? Which processes will be core to your business and which will you outsource? Or avoid altogether? How much will you invest in certain activities? For example, are you prepared to offer face to face customer support.
These decisions are less fixed. As you grow you can expand the activities of your business. Making a conscious choice is still a good idea. Just doing something because you can. Or to match other businesses. These are not good reasons to add to your cost base.
Try it for size
Try this approach for your SaaS. And then step back and look at the result. Notice anything? Perhaps this example will help. This is the anti BMC as I imagine it for a B2B SaaS business I know well. It would also make a good basis for the strategy of a different type of business.
And that is the point. You are thinking about alternatives. Your strategy is actively disregarding things which could make money. Someone else could do the things you say No to and make a good business out of it. You are choosing the focus for your specific business. Not the only option in a losing game. In other words...
The opposite of strategy is strategy.
One of the challenges with metrics is that they tend to represent the business point of view. SaaS is a great industry for measuring everything and anything. Yet the standard set of SaaS numbers looks at the business only from one angle. The interests and priorities of the investors and leaders of the company.
Understanding the performance of the business is vital of course. But the two most important factors that determine SaaS (or any business) performance are your customers and your people. Learning from your people is a subject for another article. This one is about listening to the voice of your customer.
Don't drown it out
Customer interaction in SaaS and startups is focused on sales and marketing. Even customer support and customer success are often seen as tools for the SaaS sales process. Part of the onboarding experience. Or a defence against churn.
This is natural. But sales situations are not a good setting for customer voices. Whether online or face to face the balance is tilted toward the company message.
Yet your sales and support teams are also the primary touch point with your customers. The benefit you can accrue if you allow your people to engage in depth with customers is incalculable. I loved this recent post on Intercom’s excellent blog on the same general topic. The Value of Salespeople Who Don’t Just Sell.
So don’t allow your sales much to drown the voice of your customer. Make it a rule for everyone in your team to spend twice as long listening to customers as they do talking to them. And make sure they capture all those conversations.
The fundamentals - Experience and Value
Think about what you want to learn from your customers. When you are validating your business idea this is simple. What pain do they suffer? Will they pay to solve that problem?
Once you have real paying customers and a whole market of potential new customers… It is also simple: Customer Experience and Customer Value.
These are the two fundamentals. Did your customer enjoy the experience? Did your team and produce exceed expectations? Were they reactive? Or proactive, providing what the customer needed right when they needed it? The list of questions to probe customer experience is long. They are all worth asking.
Value is more concrete. And equally important. What value did your customer derive from the experience? Did this exceed the pain of adopting/ using your SaaS?
Whenever you hear the voice of your customer try to relate it to the two fundamentals. Resist the temptation to impose more structure.
Avoid the measurement mindset
Too often we equate metrics with measurement. The words just seem like natural companions. But you are not trying to measure your customers. They will measure you (back to customer value) not the other way round.
Plus measurement in early stage SaaS can be dangerous. Freud talked about the narcissism of small numbers. This is the delusion of small numbers. With 100 customers, can you draw genuine conclusions from the 2 customers who churn in a month? Compared to 1 a month before?
Your approach to the voice of your customer needs to be qualitative not quantitative. What do they do? What do they say? How do they feel? These are the questions you are trying to answer.
You are recording and analysing the voice of your customer. Not measuring against some expectation, benchmark or target.
Expand your horizons
Imagine your two critical business metrics were the voice of your customer and the voice of your team. Think about the power and insight of strategy, plans and incentive based on those two numbers. So much more real than MRR or LTV or Churn.
This dream may be impossible to achieve. It is well within your grasp to capture the voice of your customer. Through their actions and conversations. Spend time diving into those voices. Learn the lessons. Allocate resources and make decisions with the voice of your customer front of mind.
Kenny Fraser is the Director of Sunstone Communication and a personal investor in startups.