Going to market when no markets exist — Enterprise notes (a16z mini moocs)

In this lecture, Martin Cadado from one of Andreesen Horowitz’s portfolio companies gave a talk on going to market when no market exists. The scope of the talk was chiefly on the enterprise market and how to manage and think about the go-to-market activities in that context. The situation of “going to market when no markets exist” is referred to as the “market category creation”. This situation is very different from the traditional market where the market is mature. And as usual, the following is a set of key points and notes from Casado’s talk.

Credit to Esther Aarts
Innovations don’t exist to the market until it is told about them

An enterprise company’s valuation is often driven by GTM — it is as important as technology. Most enterprise new product is driven by direct sales. Key decisions that impact valuation of the company that are independent of technology. The GTM activities differ based on the stage the start-up is in. If it is in the market category creation situation, the team should consider very different set of criteria.

The following defines a market category creation situation:

  1. Customers don’t understand the technical approach
  2. Customers don’t have a budget for your solution
  3. Customers may not even understand they have a problem

GTM in general

Now what’s GTM?

The 4Ps/Components of go-to market:

  1. Pricing: setting the unit price of the product or service, setting the pricing model, rules around discounting
  2. Promotion/marketing: Demand generation, sales enablement, brand
  3. Placement: Sales
  4. Positioning: Segments, horizontal/vertical customer focus

In the context of enterprise: there’s no single decision will impact the valuation of your company more than pricing. The rest of Martin’s talk focuses around the first three sets of topics: pricing, marketing and sales.

ACV: annual contract value — directly proportional to valuation. And if the prices are set too low initially, you would end up cannibalizing the entire future market. It would extremely difficult to raise prices into the future.

Pricing

How to set price when no market exists:

Common entrepreneur mistakes on pricing is assuming early distribution is more difficult than up-selling later. Entrepreneurs often think lack of traction = price is too high. Often, the problem is lack of product market fit, or customers haven’t been fully sold on value.

Don’t be afraid to think/rethink about the reason for the lack of traction.

Pricing should be driven the sales model instead of thinking about the setting a price that results in a pre-defined margin.

Inside sales is good for deals in the 10k-40k range.

Two challenges for entrepreneur in market category creation:

  1. Concept creation: initial customer development around the pain point and use cases.
  2. Attach a value to the concept created

Need to understand the natural law of physics around organizational constraints for pricing.

The higher order bit in thinking about pricing: what’s the ACV that would drive the maturity of the market.

So since pricing is so damn important, then what are pricing considerations?

  1. Simplicity goes a long way
  2. Ok to offer both Opex/Capex models
  3. Never, ever bundle with a more mature product. Bundling with a more mature product would increase revenue without actually driving the usage of the product. The value that customers seek is more towards the mature product and they don’t care about the new product.
  4. If possible, start with a single pricing option ( the highest). As the market matures, you can offer lower-end versions at a discount. But should run a market expansion vs cannibalization analysis prior.

Now if talking about pricing, for enterprise buyers, dance with the purchasing dept around discounting is always a must

  1. In the enterprise, generally discounts are expected
  2. Good to attach a specific reason: early customer, large deployment, public reference, new use case
  3. Remember, market will eventually find your lowest price point no matter how much you try to hide it

Every enterprise organization has a different buying behavior.

Marketing

Again, accounting the differences between late stage marketing programs and early stage marketing programs, the set of marketing activities differ.

So what are the early marketing programs?

  1. Product Marketing: (story that creates the concept: strategic vision, competitive, product collateral & Training the sales team)
  2. Demand Gen marketing: figuring out who to focus the sales team on
  3. Branding: powerful if accomplished successfully

Since majority of the magic of early marketing should come from the story, developing a good story is a must

  1. In early startups, often the only real currency you have (“magic beans”) — recruiting, internal moral management, investor discussions, customer sales, etc.)
  2. Tend to be part technical, part industry trend, part customer pain
  3. Initially generally developed by founder, or most senior technical business lead
  4. Must evolve with understanding of the customers need and technical landscape
  5. Simply simplify

Traditional Marketing Channels

  1. Feet on street — primary model for evangelical sale
  2. Technical engagement — open source, conferences, papers
  3. PR — Helps with fund raising, recruiting, and if you are very luck top of funnel
  4. Analysts — Analysts have marginal influence with early adopters. But much more important as you go down market, so worth engaging early. (Gartner is really important.)

A special note about early market that focuses on developers

Shift of budget to developers is changing market

  1. Very different motion (Certifications don’t work, billboards don’t work, salespeople don’t work, analysts don’t work, requires a changing approach and this is still developing.
  2. What do they care about? (Community, openness, technical correctness, in some ways starting to look more like consumers, fad driven, popularity cycle)

How to reach the developer

  1. Releasing open source/open source investment
  2. Hackathons, meetups
  3. Freemium easily consumable product lines, integrate stuff into CCDS development pipeline

Attracting developers is a very technical task and generally requires a company’s best engineers

Sales

Mature vs Early market sales

  1. Mature: customer and channel is educated, customer segmentation and pricing is known. Relationships already established
  2. Early market: only a few customers are capable of acquiring and consuming a product. Channel is uneducated and generally ineffective. Often early customers are not limited to a particular verticals and geos. Sales has very heavy education component.

What sales characteristics are appropriate for each stage?

Initiation:

  1. Renaissance rep
  2. Passionate about technology
  3. Problem solver
  4. Comfortable with ambiguity
  5. Resourceful — creates own sales tools
  6. Catalysts for communication between customers and company

Transition

Execution

  1. Hustle, pace
  2. Structured, organized
  3. Wants clarity of product value prop, target market, sales cycle, etc.
  4. Just wants to sell

Because the sales structures are different at different stage, the compensation structure should be different.

Typical early sales engagement model:

  1. Introduction first set of meetings/ figure out stake holders
  2. Proof of concept, demonstrate value
  3. Pilot, ensure product can operate in a given environment
  4. Technical close
  5. Negotiation/sale

Qualification is critical function in early sales:

  1. Large early customer have huge capacity for learning without buying
  2. May not have the organizational support to use
  3. May not have allocated budget to purchase
  4. May be operational or technical hurdles to adoption

TO PS (professional service) or not to PS:

  1. Professional services are expected by many enterprisecustomers
  2. For complicated products and complex operating environment some level of education is required
  3. PS function tend to be low marge (high variable cost) and looked down on by investors
  4. In early markets, partner ecosystem isn’t educated enough to offer professional services
  5. Generally without having an existing PS market, hard to incent partner ecosystem

Usually, these reasons apply to pre-chasm companies and products

Selling through the channel:

  1. In general, the channel has a hard time selling into a pre-chasm (push based) market
  2. Turning on the channel takes time and is worth starting discussions early but don’t expect material output
  3. Generally the channel will start by introducing you to a customer, but you will still need a salesperson in the account

Var+OEM only works in the post-chasm market

Common mistakes in early sales:

  1. Hiring the wrong sales leader. Someone successful in an incumbency position or a mature market may not be successful in market creation situations
  2. Assume the channel will carry the sale. While seductive to scale sales immediately, very rarely can channels sell something into a push based market
  3. Allow sales motion to create one-off feature commitments for early customers leading to a contract engineering relationship
  4. Focus too broadly rather than double down on the two or three well qualified opportunities

The original video is here:

https://vimeo.com/219944427

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