I will admit I was guilty of the same crime myself. My first software didn't sell, and it was completely my own fault.
Thinking that something is a good idea, doesn’t make it a ‘profitable good idea'. I had not correctly narrowed down who my target market was and so had produced some high quality software that simply did not sell; but at least it was with my own money and in my own time and so I learned to think like an investor.
Once I realized I had screwed up 'I stabbed it in the crib' and started again on a new project.
The rules this time were:
- If it doesn’t have a measurable target market, it doesn’t get made.
- If it does not have a target market big enough to make me money, it doesn’t get made.
The point is losing your own money is one thing, losing other people’s money however, is entirely another matter. Directors have a legal duty of care towards their investors (read: bosses) and so making mistakes with other peoples money takes on a moral aspect; not just the financial, legal and marketing ones outlined above.
The moral aspect is at the very least ‘knowing when to quit when you’re behind’.
For example many start-ups not only fail to do their marketing home work like above, but worse once the product fails to sell, they make the even bigger mistake of creating a version 2 or 3 or 4 of the product.
If that wasn’t bad enough, the managers forget the basic product development lesson of ‘the longer you stay with a failed product, the less objective you become and the more emotionally attached you become to it’. This results in classic creeping commitment but with someone else’s money, resulting in throwing good money after bad in an attempt to improve on a product that no one wants.
Naturally having a go and failing is part of business, but continuing with a failed product is one of the most common errors seen by turnaround managers.
The love of Power Point and Excel of course adds to the problem. People turn on their software and turn off the judgment centre’s of their brains.
A case in point is to start going through managements financial and marketing projections and question the underlying assumptions.
Once you start questioning people on where these assumptions were made, you will notice many are ‘made up as we went along’ as the 'business model' was built; many without them ever being tested.
The most common errors seen are the widely optimistic growth rates for the firm and its target market.
Many firms make the mistake of using 'China statistics'.
This is thinking at its most lazy and simplistic and goes something like this:
- 'China has 1 Billion people, so that is a huge market for our product, lets invest' or
- ' China is growing at 10%, that’s the market to be in' or
- 'The Internet is going to totally change the structure of this market. Lets get a head start and start pushing this new technology now'.
This shows a classic lack of proper target marketing.
- The first reason being is that most people in China are on the poverty line, so the majority of the population may not be able to afford to buy your product.
- The second reason is the growth assumption. Just because China is growing fast does not mean your target market is growing fast. E.g ever brought a buggy-whip lately?
- The final reason is the structural change argument. When a new technology comes along, many start ups rush in thinking that the technology will cause a structural change in any existing market. Many don't. In fact the majority simply fail. The main reason is because they are e they are competing against a CHEAPER existing technology.
- Even in the ones that do succeed, many take while to gain a foot hold. Faxes for example took over 100 years - not the 5-6 most people assume. Again because the prices of fax machines had to come down to a price that was the same or less than average same-day courier costs.
- Likewise, the Internet didn't take hold until it was not only deregulated,But also that desktop computers were again cheap enough for households to be able to buy one.
As always it comes down to the cost of the new technology versus the existing low cost alternatives, and sometimes the cheaper alternative for the customer is to simply not buy.
Another 'china statistics' example is to use existing market data for a competing product to estimate the size of your products target market. All the while not realizing that your market is completely different from the one whose figures you are using e.g. using the market size of the domestic television market in the US to estimate the size of the home video projector market in the US.
These products not only compete against each other but their pricing structure is different, as is the amount of wall / floor space required by the customer.
Further in many cases, the target market is not only incorrect but the firm has not realised what industry they are actually in. This means they discount the differing economics they will experience compared to existing players.
E.g .The wire industry and the fibre optic cable industry both target the telephone infrastructure market, but their cost structure, inputs, outputs, suppliers and economic make up are totally different.
Let’s look a bit further to see what I mean.
E.g. if we were to apply this to Women's High Heel shoes (The Product), lets see what happens.
1. The cost of the shoes narrows down the market size - The Price
2. The sex of the consumer cuts the size of the market - The Position
3. If the woman in question is on a sheep farm then the market is also effected by the location - The Place
4. She is 60 years old and does not go out much, and the advertising is put in the city - The Promotion
5. Finally are their competing / alternative products - e.g. boots which may be more practical to her than high heels etc.
As we can see the good old 4 Ps of marketing start to give us an idea of how 'China statistics’ complete with generalizations and bad assumptions can really damage a start up investment. Hence any marketing, sales and revenue projections based upon them are simply rubbish. Combine this with managers creeping commitment, and you end up with multiple versions of a product that will not sell, but will be guaranteed to burn investors money every time..
By the time a turnaround manager is called in, the damage is pretty severe.
If you think your business is not delivering, do the following:
1. Write up the 4 P's on a piece of paper and hang it above your desk - using the 4P's as your guide, research what you think the target market size should be - (get outside help if you need to - it will pay for itself in no time)
2. Draw up the total investment made so far in a profit curve (see previous blog) and beside it draw / write up the current interest rate and the money you could have made if you had invested somewhere else
3. Go back to the financial projections and compare / plot these against the financial statements, note the irregularities in the projections
4. Check the target market of the marketing models against you own - just make a rough guess - chances are your target market is way smaller than the projections - you may be wrong but you have more than a 50% chance of being right because of the lousy revenue figures - note the irregularities’ in the assumptions.
5. You now have a very rough idea of few things
- Whether or not your managers have actually done their homework - or
- Whether or not, they even know how to do their homework
If they have, then you should have received notification of the updated model and updated target market numbers, plus you should have been warned of the possibility that maybe you are losing money.
If you haven't received any of this, then demand to know why.
