Hi I'm Ethan Mollick. Welcome to our discussion about how you define the focal market for your startups. Now, one of the things that is true about startups that may not be about larger companies is that as a startup, you don't have a lot of resources or a lot of time. And you often have to be very narrow in your focus of what market to go after, and what customers to approach. Because unlike a large organization, you're not going to have a lot of marketing money. You're not going to be able to explore lots of alternatives. And you have to be very focused in what you're going after. So we're going to talk about focal markets and we're going to use a perspective from Josh Gans and Scott Stern, who have written a book on entrepreneurial strategy that's quite good. And they talk about using the market s-curve as a way of figuring out who your beachhead customers are. So that's what we'll be discussing. And then I'll tell you a little bit more about how to know when to enter market based on where it is on the s-curve. So, what is this s-curve? So, the s-curve is also the market segmentation curve and you may have seen this picture before. But it tells you that over time, which is the dimension along the x-axis, that people adopt technologies at different rates. So, early on, there's a small percentage of people that adopt technology, the innovators, then the early majority, then you start to reach this large takeoff, many more customers adopt the early majority, late majority, and finally laggards. And this adoption curve is pretty universal, so we see this across almost any technology that's being adopted. This is actually a well-proven piece of social science. And the reason why people choose to adopt a new technology or a new product has to do with their own return on investment. So they're making a decision about whether it's worth spending the effort and energy to adopt this new thing. And especially early on in a startup's life, whatever your new product or service is likely not be perfect, not have all the same features and bells and whistles and customer support and packaging that a more mature product might have, so it's risky and expensive to adopt. So the people who adopt your technology early on are likely to be in the innovator, early adopter or even in the early majority segment. So let's talk a little bit about why these different market segments buy things in different kinds of ways. So this chart here kind of gives you some nice characteristics of these particular markets. In this case, we'll start with the innovators, that very small percent who are willing to buy or adopt almost anything new. For these people, what they're interested in is the status of owning something that other people don't have, or having access to something no one else has. So they'll adopt something because it's cool, because they can experiment with it, because it's something they can adapt in some sort of way. We used to think about these people sort of the technology tinkerers, but this isn't only in technology. In things like fashion, you could think about the people who want to have fashion before anyone else does, or listen to the latest music, or find the latest restaurants. These are innovators, they're adopting things because they get joy out of adopting new stuff. In fact in really interesting work that was done by Christian Cattelini and others at MIT. They actually gave everybody at MIT a couple of years ago Bitcoin, every freshman who was entering the class. And they tracked to see who actually spent Bitcoin and when they spent it. And in dorms where they gave the Bitcoins to everybody in the dorm, the innovators weren't interested in adopting it because there was no excitement in having something before everyone else. But in dorms where the innovators were allowed to get access to the Bitcoin before anyone else, they would evangelize the product to everybody. Because they it gave him some status to have their latest, newest thing. So innovators are great interesting early market to go after. But the problem with innovators is they're fickle, they're not buying your product because of its underlying characteristics or goods or services, they're buying the product because it does something new for them. So everybody is trying to compete for these influential innovators. And it's very hard to compete with them on the merits because there's lot of other products out there that give them status of doing something new. Instead, a common market to go after is the early adopters. The early adopters are buying a new product or service because it gives them some revolutionary advantage over other people in the market. So, it gives them something new and exciting that no one else has. They want to have that product before other people do. But they have some problem, that's radical enough that they're willing to look around for a solution. Or they have some need for a competitive advantage over others that's radical enough they need to look around for a solution. So you can think about in the early adopters, these are people who maybe, if you're selling business to business, these are companies that are having some financial losses, or having difficulty entering a new market. And are desperate for any potential solution that will help them be able to address this particular concern. Or it might be people who have some need no one else has and they're desperately looking for a solution to it and they're willing to by that. So early adopters are a great market to go after as a startup because they're willing to often approach products that other people wouldn't because they need some radical revolutionary change. The mass market starts with the early majority. The early majority need a demonstrated ROI. They need a proven technology that they understand why it works, how it works, and that they have all of the support and solutions available for them. So the early majority will want to see nice packaging. They'll want to see customer support. They'll want to understand, if you're a restaurant, what your calorie counts are, and what your policies are. So the early majority is looking for evolutionary advantage and not revolutionary advantage. And that later goes on to the late majority which is really adopting things in the mainstream. And eventually the laggards who are the latest to adopt a technology. But as a startup, you're interested in the innovators, the early adopters and the early majority. What's interesting about these curves is they don't just tell you about who's adopting which technology at which time, but they also suggest potential strategic challenges. Of these strategic challenges probably the most famous is called the chasm. The chasm is the gap between those early adopters and innovators and the early majority. The early adopters and early innovators, remember, want something nobody else has, either because they want revolutionary advantage over other people, or because they want to be the first to do something. And so those customers will constantly push you to add new features, to keep pushing your product in revolutionary ways. But to reach early majority, you need to change the way you do business entirely. You'll need to have a packaged solution, you might need less features, or less potential source of advantage than you would otherwise. You need better customer service, better marketing, you have entirely different distribution channels. So to reach that early majority, you need a very different product or service than you do to reach the early adopters. And many businesses fall into the chasm between these two areas. So, they keep trying to serve early adopters, but then the early majority will never adopt their technology or product or service. And so in order to be able to bridge that gap, you need to be thinking early on about how you're going to reach across from the early adopter market into the early majority market. So, Scott Stern and Josh Gans suggest that you think about these s-curves as potential markets to go after. And you want to think about who your beachhead customers are, who are the customers you want to go after in each market? And they suggest that at most a startup can test to different markets and pick one, because you just don't have the resources to go after many. So if you think your product or service might be great to many different markets, you need to focus down on the two that you think have the highest potential. And then you want to think about who the lead customers are within each market. So, where are they in the adoption curve, and then within the adoption curve which section are you going to be going for into detail. Entrepreneurial sale strategy is not just about picking a focal customer based on the s-curve, it's also about thinking about three elements that are important when you're thinking about moving from a beachhead customer to eventually expanding to the rest of your market. The first of those is whether or not this beachhead customer acts as a reference. A reference is a customer that will help you get follow on sales and other segments. So, consider something like if you have a product that's helpful for doctors, and your initial customer could be individual doctors, that's who you want to move to eventually. But you have a chance to do a deal with the American Medical Association. That would be a very good beachhead customer from a reference standpoint. Because they would be able to create connections with you both because everybody knows who the AMA is, and also because the AMA has many doctors that they're connected to. And so would act as a very good reference for future sales. Second thing you're interested in looking into is whether or not you learn from each of the segments you're selling here. So, if the segments you're going after has very idiosyncratic qualities that mean that you can't go after other markets or you're not learning something that's useful for other markets, then you might have a learning problem. So you want to make sure that the segment you're going after helps you learn about both the market as a whole, and also about the needs of future customers. So you keep adapting your product in a lean way in the right direction. Then finally, you want to make sure that your beachhead customer is coherent. What does coherence mean? It means that your beachhead customers, your focal customers, fit with the rest of your strategy. So imagine that you are making a fun camera that can be used by kids. And it has a characteristic that makes it appealing to the military. So the military approaches you and says, hey, could we be a customer for your product? So you would want to think about the coherence of this. If we're selling to the military first then we're selling to children, is that a coherent strategy could follow? Or if we're going to sell to children, can we later sell to the military? I would argue that probably that's not a coherent strategy. So you want to think about whether your customers are a good references, whether useful for learning, or they're coherent with the rest of your strategy. So the s-curve gives you other hints beyond why customers are adopting your product. It actually tells you what kind of strategy you should use to enter the market depending on where along the s-curve your customers are. To give you an example of how this works, let's look at the s-curve for technology products, in this case specifically laptop computers. So in the very early days of the laptop, the early adopter innovator segment, you have the first laptop you see there in the left. That's the Osborne which was the first portable computer. And it weighed about 40 pounds, it cost $3,098. It was very heavy, it didn't have a battery, had to plug it in, it didn't work very well, it was not very durable. So why would anyone adopt this crazy computer over a desktop, which were much more common and cheaper at that time? Well the reason people adopted it there was no alternative out there. if you needed portability, say your an oil well engineer who had to travel or a traveling salesperson with complex orders, you had no alternative other than to buy this if you wanted to travel with a computer. So, as a result, this sold to the early adopters and innovators, people who had a need no one else could solve even though the product wasn't great or hugely built out. So if you ever startup any technology that solve some need in a very deep way, but isn't fully built out, has problems associated with it. You want to seek out these innovators and early adopters. Now, the technology of the product continues to develop, in this case the laptop. And what you see there in the second picture is one of the first Compaq with a q, that was later bought by HP, laptops. It looks like a modern laptop. The screen's where you expect. The keyboard's where you expected it to be. It has a disk drive built-in. It has a built-in battery. So, who buys this? Well, now that you're in the early majority, everybody's buying this. They're buying it because they now know what a laptop looks like. You're competing with all the other laptops out there. So, if you want to compete, you want to compete because your laptop is cheaper, or better, has a better screen, has features that other people don't have, goes after some unique market segment. So early majority, you're not convincing people the product's a good idea, you're competing with a whole bunch of other people to produce the best version of the product. Now, time goes on, and technology continues to develop, it gets better and better. Laptops start to get fast, they start to be able to animate Pixar movies. They have better graphics and speed, they have higher processing capability, they have better memory. But then you think about what most people use their laptops for. And you might think about your parents or grandparents for this, and they might use their laptop just to surf the Internet, to be able send emails, to be able to watch a video. You need a very simple laptop. So what happened was ASUS came up with the Eee PC, which is the thing you see furthest to the right there. Eee PC is terrible laptop compared to the others that came out at this time. So it had a terrible screen, it has much lower processor, but because of that it has a couple advantages, it was cheap, it was light, and had long battery life, and it was the first ultrabook. And for most people, they didn't need all the stuff on the laptop that the high-end laptops of the day had, so they started to buy this product instead. And so they went after an over-served market, and you could think about tablets as doing the same set of stuff to the PC market. So tablets don't do everything that your computer does, but if you watch a video like this class on it, it's perfectly adequate. So the s-curve also suggest strategy. For a new product, you want to go after a market where you are going after the innovators and early adopters because you have some clear advantage in your focal market that lets people overlook your flaws. If you are going after the early majority, you want to improve product, get better on some dimension. And if you are going after a laggards market or a late majority market, you want to think about re-segmenting the market and creating a new products that better fits the needs of that market place. So deciding what segment to go after is complicated, think about where the segment is on the s-curve, make sure the segment's referenceable, valuable for learning and coherent. And make sure it matches the overall development of that s-curve in the market itself. And make sure that you are not being over the top in terms of your testing. Test two markets and pick one. Thank you.
