What Do You Really Sell? The Master Funding Equation #5: A Winning Business Strategy (Part II)
Last post I introduced the concept of a winning business strategy as a key part of the Master Funding Equation. Part of a winning business strategy is a succinct, clear, believable business model. I left you with five questions to ponder when formulating your business model:
- What is your product or service?
- Who is your customer?
- What need does it fulfill (or what problem does it solve) for customers?
- How do you sell your product or service to them?
- How will you scale?
One of the fascinating things about the five questions above is how often entrepreneurs aren't crystal clear about them when we talk. Whether in my role as mentor, advisor or investor, I'm frequently perplexed by this lack of clarity. But then again, it makes sense. The five questions above are deceptively simple. Every entrepreneur knows what product or service they sell, right? You know exactly what need it fulfills for whom, correct? You all have a clear sales strategy to deliver that product or service to your core customer. Or do you? You've thought through what it will take to scale the business after an initial foray into the market. You could tell me that strategy in ten seconds right now couldn't you?
Well after hundreds of conversations with entrepreneurs about these core aspects of their business strategy, I've discovered that most simply can't answer these questions with the level of clarity, brevity and confidence investors want.
So what's the problem?
Let's unravel the mystery with an example. You are the CEO of Starbucks. You're tasked with raising $100 million for expansion into a new geographic market. Now you're in front of some major investors in that country. They don't know your company or your brand all that well, but they've seen your financials. They recognize your company is strong. You sit down. The lead investors say, "tell us about your product?"
Are you going to educate them about coffee? Will you begin by discussing the harvesting of beans from around the world, the process of shipping beans globally to thousands of stores, or the system by which the beans are roasted for sale by the cup or packaged for customers to take home?
Is coffee your product?
Think about this for a moment . . .
People can get a far cheaper cup of coffee in many other places where Starbucks has stores. Do they come for the coffee? Some probably do. Perhaps they have a favorite roast or blended product. But what accounts for the millions of customers who flock to Starbucks stores daily? Ask ten people on the street and most will tell you Starbucks doesn't have the best coffee.
But let's assume it is the coffee. That's what you sell. From there, you define your customer as, well, people who drink coffee. You then define the need your product fulfills for its' customers. We make coffee for people who want to drink coffee. We sell it to them in our stores with a retail model. We scale easily because we have a system used for years to know when market demand calls for another store. We know exactly what resources it takes to open another store and we have those resources. We've learned to apply them efficiently.
Now all of that is technically true.
But instinctively you recognize that isn't the real truth, the whole truth. You know that because it doesn't answer the primary business question about Starbucks: why do their customers pay a premium price for "ok" coffee when they nearly always have less expensive, tastier options?
Starbucks sells an experience. The "rent" or fee for that experience is the coffee and snacks.
They made the cool, eclectic coffee house into a scalable business. People went (and still do) to those kinds of places to meet friends, have business meetings, study and relax in a social setting. Coffee was just part of that experience. Go into a typical Starbucks and you'll notice many of the customers are "alone" with their laptops or books, and the rest are in small quiet meetings of two or three. It's not a meet market. It's a coffee-house. It sells what some called "the third space" -- the place where you go when not at work (or school) nor at home. (See https://www.linkedin.com/pulse/what-starbucks-really-selling-steven-lipton/). Starbucks has mastered the job of scaling the schemes, colors, layout, menu, and ambiance that were once only available to people at the one-off neighborhood coffee house. Starbucks sells a coffee-house experience, not coffee.
So ask yourself, "What do I sell, really?" Approach the question not from the obvious "thing" you sell, but from the context of what experience you sell. Starbucks is millions of people's "third" place. Home, work (or school) and Starbucks. When you're crystal clear about the experience you sell, you're far closer to effectively answering the questions of to whom do you sell it and why do they buy it.
Let's look at the second of our five questions. Think you know who your customer is?
Sometimes that's not so clear . . .
Steve Tobak, author of Real Leaders Don't Follow, wrote about this concept recently in Entrepreneur Magazine. In the article, Mr. Tobak uses the example of Intel Corporation in this context. Before Intel was a global powerhouse, the leading maker of semiconductor chips on the planet, it was struggling to fend off growing competition from lower-priced sellers. They needed a way to position their products as higher-quality in order to command a higher price. Said another way, the experience Intel delivered to its' customers had to justify the price they charged.
Let's think through the business model puzzle. Intel made a premium product, sold at a premium price. The customers were manufacturers of computers, phones, and other technology products. Using higher priced Intel "chips" would thus increase their unit costs. Those costs had to be passed on to consumers for their own business models to work. This, at a time when personal and business technology products/systems, were becoming ubiquitous, thus going down in price.
So what did Intel do?
They created the now famous "Intel Inside" logo and paid PC manufacturers (their direct customers) to place it on consumer products. Intel recognized that consumer demand for PC's would drive their business -- the more computers sold, the more chips sold to manufacturers. But for those chips to be Intel chips, Intel had to have a brand image itself to consumers. The message to consumers was that a PC with an Intel chip was far higher quality than one without an Intel chip. As Mr. Tobak noted in his article, this is similar to what makers of products such as NutraSweet and Teflon did with respect to their own products. It catapulted Intel to the first position in its' market, something it still holds today.
So Intel doesn't sell chips. It doesn't even sell a mix of compatibility and performance. It sells confidence.
And to win in this battle, it has to sell in-directly to the end-user customer, even though their actual direct customer is the device manufacturer.
So ask yourself who do we sell to? Who are our customers? Do we have a direct and an indirect customer? Reflect on this so that you can fully answer question two.
Once you know what you sell (as an experience to customers) and who your customers are (direct and indirect if applicable) the answer to question #3 is fairly simple to answer -- what problem do you solve for customers or what need does your product or service fulfill for customers.
Starbucks solved the need customers had for a coffee house "third place" experience that was roughly the same no matter where they were on the planet. Intel solved the need its' indirect customers had of needing confidence in the compatibility and performance of their computers
But you'd never get to those answers if you started by thinking at only the surface level, thinking that what you sold was merely coffee or that your only customers were makers of PCs.
Key Takeaway: If you want to stand out from the crowd with investors, take a deep dive into the questions of what is your product, to whom do you sell it and what need does it fulfill. Be crystal clear about these three things so you can deliver answers to those questions succinctly, directly and confidently. You'll be on your way to successfully solve the Master Funding Equation with a big investor $ sign.