Where’s The Mango Market?

Run through this thought experiment with me.

  • How many mangos are sold in your city? It doesn’t matter how wrong your answer is – a guess will do.
  • How much does a mango sell for?
  • So what the mango market worth? This isn’t a trick question, just multiply the previous two answer together
  • Where is the mango market?

Ok, the last one is a trick question. This is because there is no mango market. There is a fruit and vegetable market.

Mangos sales aren’t significant enough and compete so directly with alternatives that they don’t have their own market. The price and availability of alternative fruit is almost as significant to the volume of mangos sold as the price of the mangos themselves.

Who cares whether there’s a mango market or not? Well, no one reading this. However every entrepreneur should care whether their product or service has its own market or if it is just one small part of a much larger market.  It is a common mistake to assume that just because there is a demand or need for a product that the product automatically creates its own market.

This is important because it is not possible to have a go-to-market strategy without recognising the market that you are in. The market dictates where your customers gather, what websites they visit, what conferences they go to, who they buy from, how they buy, the terminology they use, etc..

As a general rule if your ‘market’ doesn’t have an industry conference or any independent trade publication you should be asking if it exists in its own right or is just a part of another market.

Example: There is no flavoured water market – there is a soft drinks market. If you want to buy a bottle of flavoured water you go to the chiller cabinet in your convenience store. The flavoured water competes with all soft drinks for shelf space. If the flavoured water you want is out of stock or too expensive you will buy some other soft drink.

While there may be a demand for flavoured water there is no market independent of soft drinks. If you were the CEO of a flavoured water brand, realizing that you compete directly against bottled water, juice and sugary drinks in their market faces up to reality and allows you to create a credible go-to-market strategy. Thinking that you’ve got your own market is self-delusional.

If there are lots of alternatives that you haven’t included in your market then the chances are you are fooling yourself. There is no point trying to sell to this market because there are no customers there – they are all at the soft drinks cabinet.

  • There is no firewall market – there’s a digital corporate security market.
  • There is no invoice reconciliation software market – but there is a financial software market.
  • There is no wooden puzzle market – however there is a games and puzzles market.
  • There is no SMS market – there is a messaging market.


Parking One Side of a Marketplace

Building a marketplace is hard. It’s difficult because you’ve got two different customers: buyers and sellers who are typically two different people (exceptions include classified ads and dating apps).  Two different customers implies:

  • Two different value propositions
  • Two different routes to market
  • Two different products
  • Two different support structures
  • Two different EVERYTHING!

Marketplaces are two businesses running simultaneously and both have to succeed for the overall operation to prosper.  This results in marketplace failure rates that are much worse than a normal startup, however they have the benefit of being able to scale wildly if they are successful.

I’ve dealt with a lot of marketplaces over the last year. Everything from a private tutoring market in the Middle East, rental accommodation in Ireland to dog boarding in Europe. After ten years in WhatClinic, people think I’m some sort of expert. I don’t have any secret sauce, however I do know a lot of the pitfalls.

The first pitfall is trying to build both sides of the marketplace before you have sufficient resources / team. Even in a successful marketplace with teams supporting both sides of the business, it’s hard for the CEO to wear two hats; it’s nearly impossible when resources are very limited. Focus your resources on one side of the market first.

Recognise who your primary customer is. In general, this is the side that has fewer problems finding the other party . This is the side of the market that you have to crack. It’s where the real risk is in the business – if you can crack this side of the market, the other side is simple in comparison.  

So for WhatClinic the primary customer was the consumer not the clinic, for Google Ad Network it’s the advertiser not the partner website, for Amazon it’s the consumer not the seller. Uber, HostelWord, Hotels.com & Opentable all built supply first, parking the consumer side until they were ready [Note some edits made here from original posting thanks to comments from Ronan Percival)

  • If Amazon has has loads of consumers it is safe to assume they’ll be able to sign up vendors
  • If Google Ad network has loads of advertisers then partner websites will flock to them.
  • Uber reckoned that if they sort out supply that demand would exist

But it’s a chicken/egg (horse/cart) problem. It’s difficult to build one side without the other because no value is being delivered. What’s the answer? Try and park away the second side of the marketplace by directly addressing the primary side’s value proposition without building a market on the other side. 

Can you park away one side of the market?

  1. Offer the service directly yourself. So if you are an online babysitting marketplace you can directly hire a few babysitters in your first city. Once you have proven the value proposition for the parent and have more demand than supply, you can switch your attention to building the other side of the market, targeting the sitters.  Amazon was an online store before it became a marketplace.
  2. Seed the market. Get one prestigious name on the secondary market that will drive large volumes from the primary market. For example if you are a jobs board then a job for Ferrari or Dolce & Gabbana can drive tens of thousands of CVs.
  3. Build the supply without the relationships. For example if you are a real estate marketplace you can simply list properties without developing the paying relationships with the real estate agents. Once you have the primary audience you can start to build the relationships
  4. Build the primary audience for a directly related informational need. If you are an investment real estate marketplace you could build your primary customer audience by publishing research information before building the market.

My final thought is try and recognise when the marketplace exists because of a customer need for a market or because of internal business requirements. Uber’s riders & drivers don’t want a market (the rider just want a ride and the driver a fare) but Uber does. They don’t want the hassle and legal liability with directly employing drivers. However the consumer clearly wants a marketplace for homes to buy as they want to compare lots of options.  Having clarity on exactly who the marketplace serves should give you insight on how to get it started.

Increase your Pricing to Increase Your Sales Volume

Spoiler: Because you can spend dramatically more on Sales and Marketing

As I explored in the previous post – very frequently your price is only a very small aspect of the total cost to your customer. For many IT solution is can be as little as 10%. Therefore a increase in your price may not make a noticeable effect on your customer’s cost and therefore the Law of Demand may have a negligible effect in reducing demand for your product, however it can have a dramatic positive impact on your business.

Worked Example

Startup AAA is selling a product for €10,000 and makes 5 sales a month. Startup AAA has a sales and marketing budget of €3,000 for each sale – so they can spend €15,000 a month on acquiring new customers. Startup AAA’s price is 20% of the total cost of ownership for the customer.

If Startup AAA increase their price by a modest 20% to €12,000. This only increases the total cost to the customer by 4% (since price is only 20% of the cost). While unlikely, this small increase in cost may impact on minorly on demand, however the impact of this extra funds has on sales and marketing can be dramatic. In this example the amount spent on sales and marketing can be as much doubled to €6,000 per sale. With the additional resources that this spend allows, sales and marketing should easily be able to increase the total volume of sales.

So price increases disproportionately positively affect your sales and marketing budget (or alternatively profit) while disproportionately minimally impacts on the total cost for your customer.

It should go without saying that price increases like this only apply if your competitive advantage is not price, but then again if you are a startup competing on price then you’ve got bigger problems.

Monthly SAAS Contracts Suck

The appeal is obvious – anything that lowers the barrier for a potential customer to sign up has to be a good thing, right? It’s attractive when you are scrambling for sales, any sales, that month to month subscription without a long term contract has become the default business model for young B2B SAAS businesses.  Unfortunately it’s the wrong model for nearly all of them.  Personally I blame the Signal 37 guys at Basecamp for embedding this in start-up culture, but that’s another story.

Why is it such a Bad Model?

  • No upfront cash means as sales scale so does the level of investment required to fund the sales channel
  • Lack of customer validation creates an onboarding bottleneck and high early churn rates
  • The customer is not invested in your mutual success leading to more failed customers
  • Commission modelling and payment become messy leading to salesperson disatisfaction
  • Revenue modelling is more uncertain meaning that financing becomes more difficult especially debt

Caveat – Month to month contracts can work well if there is a purely automated sales channel.

Fund the Sales Channel with Sales or Investment

Imagine it costs you €1,200 to make a sale, i.e. it costs you €1,200 to find a potential customer and complete a sale. Now imagine that you only have €1,200 and your monthly subscription is €100. On Day 1 you spend your €1,200 and make your first sale. When do you make your second sale?

You make your second sale in Month 13, when you have collected the €1,200 to fund it from your first sale

Now think about the exactly the same scenario, except this time you charge a €1,200 annual subscription upfront. On Day 1 you spend your €1,200 to make your first sale. When do you make your second sale?

You make your second sale on Day 2 using the subscription collected on your Day 1 sale. By the time month 13 rolls along you’ve made about 230 sales – a 23,000% improvement over the first example.

I accept this is contrived, however the core message is valid – you either finance your sales channel with investment cash or your customers’ cash and it’s nearly always preferable to do it with your customers’. After all, earning money from customers should be your company’s core competence, not getting investment.

Lack of Customer Validation

If a salesperson closes a month to month subscription, then what exactly have they sold? Maybe they sold a three year revenue stream or maybe just one month’s fee that won’t even pay the sales person comp.  The only thing that’s definitely validated is that the customer is willing to pay for the first month. Should you even regard them as a customer at all? Maybe it would be best to think of them as being on a trial until they have paid a certain number of invoices and are actively using the product. This makes a difference because your customer success and onboarding teams will get frustrated and will rightfully demand that they not be handed half completed sales.

The Customer is not Invested in your Mutual Success

Okay, I’ll admit that getting a months subscription off of a customer isn’t nothing. It’s a lot better than a free trial. But what proof do you have that they are committed to your mutual success? The first month fee is a trivial amount and there is no long term commitment.  No wonder your onboarding team have difficulty getting them on the phone and engagement is weak.

Contrast this to the customer that signed up to a one, two or three year contract – there’s a committed customer. There’s a customer that will call you angry when things aren’t working. There’s a customer that will fight to make sure they receive value. There’s a customer that you want.  

Comp Models Become Messy

What are you going to comp a salesperson selling month to month subs on and what money are your going to use to pay them their comp? If you comp them just on the month’s sub then you’re incentivising them to find customers who are willing to pay a one month sub – not customers that will be with you for the long term.  If you comp them on revenue from the customer as it comes in then the reward is disconnected from the actions you want to incentivise. If you advance comp on the basis of future revenue you create a cash flow issue and de-motivational claw backs when the customer cancels.

Comping on an annual contract is easy, and paying the comp is easy if the customer pays upfront.

Revenue Models and Investment Become Difficult

Month to month contracts have no committed revenue stream by definition. Revenue models have to use average churn rates to calculate the following month’s revenue with ever increasing levels of uncertainty the further out you go. In contrast annual contract business only have to use average churn rates for revenue a year out. Having this contracted revenue stream makes financing, especially debt financing, easy when compared to month to month contract. This is all the more important as month to month contracting needs more financing to fund the sales channel.

So why do start-ups almost invariably opt for the month to month sub? Its because they are afraid to ask for the sale, so they attempt to minimise it. They don’t charge what they’re worth (more on this in a later blog post) and then they split the sale into the smallest segment possible in an attempt to make their pricing irrelevant to the customer – I’ve even seen companies split it into a weekly fee.

What if customers won’t sign up for an annual contract?

If you’re a B2B company with a manual sales process then there is a good chance that you just have to accept that you’ve got a longer sales cycle than you think you have. If you are sure that your potential customer will only sign up to month to month then accept that this is a trial period and after the trial period ends they move onto an annual plan. This division makes it very clear that during the trial period the sales process is still ongoing and you don’t count the client as a customer until they sign up to the annual plan. In this way your customer numbers stay clean and responsibility for the sales cycle is clearly defined.   

Usual disclaimer: Context is king, actual results may vary, etc.

Only Hire ‘A’ Players

“Only Hire A Players” said the immensely successful woman on stage.  I was at the Web Summit, a few years ago – back when it was still in Dublin. But this wasn’t the first time I’d heard the advice. It had become so standard in the tech industry that it was the mantra of everyone who’d exited for north of €100 Million.

This advice just serves to show how far these CEOs have travelled. The advice is so lacking in empathy with the typical startup that it can only be described as out of touch and useless.

This isn’t surprising. In general successful CEOs who have managed to exit their company have come a long way. The early years are a blur of endlessly retold, self serving narratives that makes the reality of those years elusive even for the most grounded of CEOs. That’s why the best advice from other CEOs comes from people who are at the next stage of growth to you – the memory of where you are is still fresh.

Back to the main theme – why is ‘Only Hire A Players’ such bad advice?

  • A Players don’t want to work for most startups. We represent high risk, low immediate reward and long hours and to top it all of  the history of successful Irish exits making employees rich is less than stellar.
  • Startups are in a hurry. We can’t spend forever hiring – sometimes the right person to hire is the only one that’s in front of us. Unfortunately, it’s frequently better to do the job now moderately well than brilliantly in 6 months – because if we don’t do it now …. We’re dead!
  • Finally, if your company requires A Players to be successful then you’ve built a shit company.

It is your job as CEO to build a company that brings the best out of B and heaven forbid C Players (whoever those unfortunate souls are) so the overall performance is at the top of your field. Of course, this is difficult and it’d be a lot easier if you just had A Players – but that’s dreaming.

We’ve all seen great talent destroyed by poisonous working conditions and similarly seen mediocre talent shine brighter than the brightest lights when incentives, opportunity, culture and support is aligned. We want everybody to have the right culture and ‘can do’ attitude but that is at least as much a factor of the culture that you create as of their core personality or skills.

There are no extraordinary people out there – there are only people that do extraordinary things. If you put in place the right environment you’ll be surprised how many people can do extraordinary things.

A huge win for startups can be deliberately targeting B Players that have obvious failings that make them unattractive to companies looking for A Players and bringing out the very best in them.  The challenge then becomes “How many of my B and C Players can I make A Players?”.

What can Startups do?

  • Hire the best you can in a reasonable time frame
  • Provide a working environment and create a culture that brings out the best in people
  • Zero tolerance for negativity and undermining

When you’ve done that then maybe one day you’ll be on stage saying you only hired A Players. Then you’ll have made all of your employees feel special – after all, that’s a much simpler narrative..