Jonathon Schuster

Seriously Disruptive Innovation

Seriously Disruptive Innovation

Blogger note: I’m going to take a wild guess that if you’re reading my blog you probably aren’t an avid academic journal reader.  In the words of my father, “[Academic journals] may be interesting, but they never have any real-world practicality.”  To which I say, “Sometimes.”

If you were to read only one journal related to innovation I’d suggest reading the Journal of Product Innovation Management that comes out of the PDMA.  It’s an incredibly good journal with an eye towards the practitioner rather than just the academic.

I asked @ProfessorGary what kinds of blog posts he was interested in and one of the topics he raised is “effectuation innovation.”  For some reason over the last year that term has slipped my mind, and I don’t know why.  When I was working on my MBA it was one of my favorite topics inside of my program because at first glance it goes against everything that MBA programs like to preach: Research, research, research then use the market research that is statistically significant to determine your best next steps.  Don’t ever shoot from the hip, and do things based purely on reason and fact.

News to MBA students: Sometimes there is no way to do market research and you just have to rely on real-time market data.  This is called “effectuation innovation”.  The term was coined by Sarasvathy in a 2001 paper.  I’m not going to rehash the paper, but rather I’m going to give you the basics and apply it to how really high quality, disruptive startups work.   

The core of the idea is this: an entrepreneur or innovator doesn’t have information because the market doesn’t exist yet.  Every bit of advanced market research you’d do is going to be bunk because your potential customers have no clue why they’d buy what you’re talking about.  The answer is this: go create whatever you’re going to create and then build a framework that allows you to change whatever you’ve created in response to the free flowing data you receive via real-time customer reactions.

OK, let’s talk about this in terms of a real-life example.  I’m a food nut, so let’s talk about Grant Achatz’s new restaurant Next (which I have yet to get to, but am dying to try).  The restaurant turns the industry on its head by doing two major things differently: 1) It is not an Italian, French, Thai or any other sort of restaurant, but rather it is a specific place and time for only 3 months at a time.  So, for their opening they were Paris, 1906- so all the food was set to be from the area and what you’d get at that time.  2) You could not make traditional reservations, but rather had to buy tickets.  Ticket prices would move based on the popularity of a time- so Saturday at 7pm is more expensive than Wednesday at 9pm.

This has raised a number of innovation challenges for the team.  First, every 3 months their supply chain is totally disrupted.  They’ve had to work with suppliers to find the ingredients to meet their needs.  They’ve done this by using a wide network of suppliers from around the world.

Second, they had to develop a ticketing system that worked for a restaurant rather than for an event.  They quickly realized from customer experiences that they had to create a system that allows for ticket exchanges since sometimes plans come up that change when someone can have dinner. 

Achatz and his team couldn’t figure out what demand would be for this restaurant in advance, a restaurant like this has just never existed.  They’ve had to play it by ear and work out the kinks as it goes.  I’m sure they’ll run into new issues as time goes on, but they seem to be doing well at reacting quickly. 

The moral of this story is- if you’re going to do something new, just do it and react to the market as needed to maintain a positive orientation towards the market your serving. 

PS- Here’s one of my favorite writers (Phil Vettel) take on Next. 

Managing Away Bad Customers

This is a follow up from my last post on choosing the RIGHT customers for your company.  So, I know what you’re thinking, “Come on, I’m not really going to let revenue walk out my door.”  True, but you can turn bad customers in to the right customers with a little management.

Let’s define what a “bad” customer is.  In essence, they’re unprofitable.  They buy low margin goods and they have a pretty high cost to serve.  The keys to fixing this customer are pretty easy: get them in to higher margin products, lower the cost to serve, or do both.

Some simple solutions- if you’re not maintaining at least part of your technical/support online you should be.  With tons of great services like GetSatisfaction it’s cheaper and easier than ever to create portals online (so you know, I’m not in any way paid or related to this company).  A side plus of these kinds of portals is that you can monitor for what comes up a lot and head those issues off before they become issues.

Also, keep in mind that if you’ve got a lot of customers who are unprofitable, depending on your market, you may need to raise prices.  Those that will stay will be more profitable, though doing this is very, very tricky.  You need to be clear, open and honest with your customers about why you’re changing prices, and you need to work with them on these issues. 

A good example of how this can go very right- let’s say you’ve got an unprofitable customer who has really erratic ordering- they buy 2 products from you one month, then the next month they don’t buy, then they buy 40 products, etc.  It’s hard to match their ordering to your supply.  What they may not be telling you is that they don’t know how to manage THEIR supply chain and they really need help doing that.  This is where you can step in and work to help them understand how to smooth ordering- you’ve just made the same ordering process more profitable for you, and you’ve made their business stronger.

An example of how this can go very wrong- an online vendor (whose name I’m not going to mention here) changed their prices virtually overnight on a system that was very difficult to get out of.  They communicated the change to their customers by saying their low end customers were “freeloading” off the system and that it was simply too expensive to keep them around.  The backlash this created was enormous.  Apologies had to be made by the head of the company, customers were lost (who could have potentially been very good customers) and I suspect they lost significant market share.

So the key here is to find ways to make unprofitable customers profitable- you’ll have to think creatively and work with your customers, but working with them creates long term, valuable bonds that keeps them around (and makes them even MORE profitable!)

Acquiring the RIGHT Customers

 I’ve spent the last year working with a lot of new entrepreneurs in the Midwest.  For those that don’t know, the Midwest tends (not always) to be far more focused on revenue generating startups over technology driven startups.  (I suspect hat’s why it was far easier to get Groupon going in Chicago than it would have been in Silicon Valley).

I wanted to pass along something that keeps coming up in discussions: Acquiring the RIGHT customers.

When launching your business, or even growing an existing business it’s far too easy to take the shotgun approach:

1)   Identify a market

2)   Go find any customer in that market that is willing to buy

That’s one approach, but in my mind, it’s really not the best approach.  Here’s the problem- not all customers are created equal.  Let’s break this down as an example.

Joe owns a Bike shop.  Let’s just say for ease of simplicity sells two things- bicycles and service.  Selling a bicycle may be a high profit sale in terms of raw dollars, but in order to sell the bicycle Joe has to include a 1 year parts and maintenance warranty. 

Joe can go after his customers in a few ways- he can either target buyers of bikes or he can target users of service.  Among buyers of bikes he could go after people who are experienced bike riders or new bike riders.  What should he do?

1)   Identify what is going to make him the most money in the long run, with the least cost- is it going to be a one time bike sale, is it going to be ongoing service contracts, is it going to be one-off servicing?  These are the RIGHT customers as long as his business can support them.

Think of it this way- if Joe wants to sell to a new cyclist he may sell him or her a new bike at a nice margin, but that new cyclist may come in every single day with every little problem or concern about his bike.  That nice profit turns into a very significant loss due to the time spent dealing with the customer (unless Joe finds a way to get the new cyclist to compensate him for the time either through increased margin or through service revenue streams).  This is just one example of the tradeoffs involved in selecting the RIGHT customers.

2)   Craft the value proposition that links to that customer- that means figuring out not just what you’re selling your customer now, but what they’re going to need in the future.  I’m guessing that bike buyer may need some accessories later on, or more servicing for natural wear and tear.

3)   Figure out what your competitors offer and be different than them to give your customers a reason to keep coming back. 

4)   Talk to your customers to figure out what else you can offer them.  This is really the simplest of all of these things, but it’s frequently the least practiced item on this list.

Choosing the right customers makes all the difference between profitability and chugging along with just revenue.  Coming up soon, a post on getting rid of the WRONG customers.