Crossing the Chasm
Transform your B2B startup into a real, multi-million dollar company (Part 1).
So you got yourself into the IT industry, don’t you? Or maybe want to. It doesn’t matter — if you are somehow selling or planning to sell technology to enterprises, believe me when I say that you really should read Crossing the Chasm by Geoffrey Moore.
Forget about Lean Startup, it will not help you formulate an accurate business strategy for the enterprise market. By contrast, the Chasm framework is all about helping your company moving through each step of the Technology Adoption Life Cycle with being stuck in the death zones, known as “Chasm” ( which I’ve being more than once… maybe that’s why I was so fascinated about this book).
The Chasm represents the “gulf between two distinct marketplaces”, as each one is composed by a group with unique characteristics and psychographic profiles. If you get stuck in the Chasm for too long, that’s it. Your business is dead. The “High Tech Parable” exemplifies that scenario:
The High Tech Parable
In the first year — the emerging high-tech company expands its customer list to include some technology enthusiast innovators and one or two visionary early adopters (…)
In the second year — the first year of true product — the company wins over several more visionary early adopters including a handful of truly major deals. Revenue meets plan, and everyone is convinced it is time to ramp up — especially the venture capitalists who note that next year’s plan calls for a 300 percent increase in revenue. (…)
At the beginning of the third year — a major sales force expansion is undertaken, impressive sales collateral and advertising are underwritten, district offices are opened, and customer support is strengthened (…)
Halfway through the year, however, sales revenues are disappointing. A few more companies have come on board, but only after a prolonged sales struggle and significant compromise on price (…) More financing is required, with horrendous dilution for the initial cadre of investors — especially the founders and the key technical staff. One or more founders object but are shunted aside. Six months pass. Real management doesn’t do any better.
Take a deep breath. Don’t worry yet. First things first — if we want to talk about market segmentation, adoption life cycle and the Chasm itself, let’s first see Moore’s definition about market:
• set of actual or potential customers
• for a given set of products or services
• who have a common set of needs or wants, and
• who reference each other when making a buying decision.
The former is very important since it is what triggers growth and brand recognition.
“If two people buy the same product for the same reason but have no way they could reference each other, they are not part of the same market”.
That’s very simple but profound, since you can actually be generating revenues from, let’s say, ten customers, but they are not, in essence, a unique, defined market (Therefore they might require completely different approaches) and in real life it is very hard to observe that differentiation.
Keep that in mind while we go through the next subject — market segmentation. To understand the Chasm, we have to learn how it is born.
Discovering the Chasm
The Technology Adoption Life Cycle is basically divided into two big markets - The Early Markets and Mainstream Market — each one composed by a set of groups, distinguished from each other by their characteristic response to a discontinuous innovation based on a new technology.
Each group represents a unique psychographic profile-a combination of psychology and demographics that makes its marketing responses different from those of the other groups. Understanding each profile and its relationship to its neighbors is a critical component of high-tech marketing lore.
The Early Markets
“The initial customer set for a new technology product is made up primarily of innovators and early adopters”.
- The Innovators
Psychographic profile: “Innovators pursue new technology products aggressively. They sometimes seek them out even before a formal marketing program has been launched.This is because technology is a central interest in their life, regardless of what function it is performing. At root they are intrigued with any fundamental advance and often make a technology purchase simply for the pleasure of exploring the new device’s properties.”
Why they are important: “there are not very many innovators in any given market segment, but winning them over at the outset of a marketing campaign is key nonetheless, because their endorsement reassures the other players in the marketplace that the product does in fact work.”
2. Early adopters
Psychographic profile: “early adopters, like innovators, buy into new product concepts very early in their life cycle, but unlike innovators, they are not technologists. Rather they are people who find it easy to imagine, understand, and appreciate the benefits of a new technology, and to relate these potential benefits to their other concerns. Whenever they find a strong match, early adopters are willing to base their buying decisions upon it.”
Why they are important: “because early adopters do not rely on well-established references in making these buying decisions, preferring instead to rely on their own intuition and vision, they are key to opening up any high-tech market segment.”
The First, Small Chasm (The Crack)
The First gap occurs “when a hot technology product cannot be readily translated into a major new benefit”.
You need to have a “breakthrough technology product that enables a new and compelling application, a technology enthusiast who can evaluate and appreciate the superiority of the product over current alternatives” to move forward in the technology adoption life cycle.
Problems that you might face in the crack:
- The company simply has no expertise in bringing a product to market. It raises insufficient capital for the effort, hires inexperienced sales and marketing people, tries to sell the product through an inappropriate channel of distribution, promotes in the wrong places and in the wrong ways, and in general fouls things up.
- The company sells the visionary before it has the product. At best, the entrepreneurial company secures a few pilot projects, but as schedules continue to slip, the visionary’s position in the organization weakens, and support for the project is eventually withdrawn, despite a lot of customized work, with no usable customer reference gained.
- Marketing falls prey to the crack between the technology enthusiast and the visionary by failing to discover, or at least failing to articulate, the compelling application that provides the order-of-magnitude leap in benefits. A number of companies buy the product to test it out, but it never gets incorporated into a major system rollout, because the rewards never quite measure up to the risks.
“Mainstream markets in high tech look a lot like mainstream markets in anyother industry, particularly those that sell business to business. They are dominated by the early majority, who in high tech are best understood as pragmatists,who, in turn, tend to be accepted as leaders by the late majority, best thought of as conservatives, and rejected as leaders by the laggards, or skeptics”.
Let’s take dive into it.
3. The early majority
Psychographic profile: “they share some of the early adopter’s ability to relate to technology, but ultimately they are driven by a strong sense of practicality. They know that many of these newfangled inventions end up as passing fads, so they are content to wait and see how other people are making out before they buy in themselves. They want to see well-established references before investing substantially”.
Why they are important: “because there are so many people in this segment — roughly one-third of the whole adoption life cycle-winning their business is key to any substantial profits and growth.”
4. The late majority
Psychographic profile: “the late majority shares all the concerns of the early majority, plus one major additional one: Whereas people in the early majority are comfortable with their ability to handle a technology product, should they finally decide to purchase it, members of the late majority are not. As a result, they wait until something has become an established standard, and even then they want to see lots of support and tend to buy, therefore, from large, well-established companies.”
Why they are important: “like the early majority, this group comprises about one-third of the total buying population in any given segment. Courting its favor is highly profitable indeed, for while profit margins decrease as the products mature, so do the selling costs, and virtually all the R&D costs have been amortized.”
Psychographic profile: “skeptics — the group that makes up the last one-sixth of the Technology Adoption Life Cycle — do not participate in the high-tech marketplace, except to block purchases”.
Why they are important: “provide to high-tech marketers is to point continually to the discrepancies between the sales claims and the delivered product. These discrepancies, in turn, create opportunities for the customer to fail, and such failures, through word of mouth, will ultimately come back to haunt us as lost market share”.
Crossing the Chasm
The chasm is born when, after selling your product to early adopters, you reach a sales plateau where your next stage of growth is to take the product to the masses, those with very different psychographic profiles and business needs. More than that, you are entering a place dominated by previous solutions, vendors and relationships.
To enter the mainstream market is an act of aggression. The companies who have already established relationships with your target customer will resent your intrusion and do everything they can to shut you out. The customers themselves will be suspicious of you as a new and untried player in their marketplace. No one wants your presence. You are an invader. This is not a time to focus on being nice. As we have already said, the perils of the chasm make this a life-or-death situation for you. You must win entry to the mainstream, despite whatever resistance is posed.
Conclusions, for now.
Now we understand that the Chasm is created by transition between Early Markets and Mainstream Markets. That’s very challenging since you must adopt new strategies just at the time you have become most comfortable with the old ones. When you fail to move forward, you are trapped in the Chasm.
Hold on tight, fellow reader. We will come back to talk about the Chasm latter!