I’ve been very lucky over the past three weeks to have some time off from work to bond with my new son Jack (thanks to AppNexus’ generous paternity leave policy). Although not sleeping very much, he’s really doing great (and thanks to everyone who gave me baby advice following last week’s post!)
I’ve also taken some time this week to re-read one of my favorite business books – Clayton Christensen’s The Innovator’s Solution.
While reading through the book, I’ve been thinking a lot about how to successfully sell technology to business customers. It’s really one of the holy grails of the tech industry – creating a product that customers want so badly they knock down your door to buy it. Ideally that technology comes in the form of a product that you can also sell profitably, at high scale, and with low variable cost.
So how do you pull this off? What’s the magic formula that allows tech companies to succeed?
According to Christensen, the secret is really two things.
1) Focus on a product category where the current offerings in the market are “not good enough” to satisfy customer needs.
For an example of products that are “not good enough” think about desktop computers in the 1990’s. They were always too slow and never had enough storage to really satisfy the increasing demands of users. Alternatively, today you could say that electric cars are a good example of a product category where products really aren’t “good enough,” with limited driving ranges and high price tags failing to meet current customer needs.
2) Focus on something that’s a “determining performance factor” for your product category
I like to think of a determining performance factor as a performance stat that’s printed on the outside of the box. Think – processer speed, memory, and hard disk storage for desktop computers or 0-60 acceleration, top speed, and range for electric cars. Stats that differentiate one product from another inside the category and form key evaluation criteria for consumers.
According to Christensen, these two things are the most important factors when determining a successful B2B tech business. However, I would argue that these points only get you part of the way there. They are, perhaps, the most important factors to developing a product that customers will knock down your door for, but what about being able to sell that product profitably and at high scale?
The profitability and scalability of your technology really has a lot to do with the competitive environment. Are you operating in an intensely competitive market with lots of competitors and perceived parity among competitive offerings? Or are you the only provider in the market?
The more competitive your market, and the more customers perceive parity amongst your competitive set, the fewer profits you will be able to make off your tech.
There are really two approaches to solving this competitive problem.
The first is that you can double down on driving the key performance factor higher and higher (better and better), putting significant distance between your offering and that of competitors. Customers will pay for quantifiably better performance as long as you can show it clearly and consistently.
The second approach is to embrace the commoditization of the core technology, find an adjacent offering that is less competitive and bundle it. Sell the core tech at break-even pricing (staying price competitive with other providers in the crowded portion of the market) and charge a very high margin for the adjacent product.
Both of these are viable approaches, but need careful attention if you find yourself in a hotly competitive market.