Lesson: Revenue Relationships with Steve Blank

Step #9 Market Type: Market type affects pricing

Now one other thing affects pricing and we should think about it in an existing market, if you remember our discussion about market type. We have existing markets. We resegment markets. We might have been in a new market or in a country outside the United States we might be cloning an existing business model. But if we are in an existing market, we got to kind of think about competition. Is there a monopoly? Is there a duopoly? An oligopoly? There are other dominant players that really kind of shape the pricing in our market. What we really want to understand is what's their product? What are their costs and prices? What pricing will make them feel the worst? More importantly, can we do strategies like bracket them? Can we undercut them? Can we niche or blue ocean strategy them? These are the things you want to think about if there are dominant players in an existing market. You want to actually have pricing as a strategy, not just a reaction.

The last thing I think I really want to mention and it really does belong in this lecture is the effect of market type on revenue. This is really interesting because you might have heard of startups about something called the hockey stick. The hockey stick is actually this kind of curve. Now it turns out what the hockey stick really represents are startups in a new market. Wow, that's kind of interesting. Why? Well if you think about it in a new market on year one, you have no customers and so your revenue is essentially flat. Year two, revenue still might be flat. Year three, it might be flat. Year four, oh my gosh, something changed about the market. There might be a tipping point and a fluxion point where sales literally go exponential and start to sky rocket. What happened is a market that didn't exist, all things have just come together and it's become the year on online education or it's become of the network or it's become the year of the mobile phone or smartphone.

The unfortunate part is most startups who are in the new market see something that look like this and go out of business. So what we are really hoping for is we could influence and affect this tipping point by our customer strategies, our value proposition and our get, keep and grow strategies. But the key idea is we want to hoard as much cash as we can because almost no startup in a new market can effect the diffusion of innovation by itself. Other things need to happen.

By the way, this little bump in year one, this represents the fallacy in new markets. Because in almost every new market, you could find crazy people just like you who would be happy to buy one for their lab or their home or some of them are just such early adopters, they want to have one. Startup founders look at that curve and say, look it's just going to look this and starts scaling their sales and marketing, expanding and then it all collapses again because it really was just an early adopter sign, not mainstream adoption. We want to be careful what our sales curve looks like.

Now what's really interesting is if we are an existing market and remember, in an existing market, what do we know? Well there are customers and there are competitors. What we have is by our definition a better or higher performance product I will actually say the customers have defined. Our job in an existing market is simply year after year, if we execute pristinely simply to take share away from the incumbents. Our sales curve in an existing market literally should be one of taking share.

Finally in our resegmented market, this is kind of a hybrid of both new and existing. What's happening in years one, two, three etcetera in the early days is you are actually getting revenue from the existing market, that is, people might actually kind of find you an okay substitute but really don't understand your unique value until some tipping point where they realize, oh my gosh, you are just not another vendor in the existing market, you actually solve better a set of needs for a niche or you are a low cost supplier that really makes you unique and special and revenues take off. What you have to do is husband your cash but not as much in a new market and figure out how to get you differentiated from the mainstream and existing.