When We Misunderstand the Signals

I have been involved in a variety of engagements with automotive companies over the past three decades.  These companies’ abilities to understand marketplace desires 3-4 years in advance is a key element of success.  There are several compelling examples of getting this right and numerous instances of getting it wrong.

Beyond uncertainties about customers’ future desires, these companies also face considerable uncertainties associated with competitors’ likely decisions and plans.  I have encountered a variety of instances of automotive competitors announcing major investments that they have no intent to pursue.  The companies with whom I was working entertained making comparable investments, later learning they misunderstood the market signals.

Many years ago, I was engaged by the South African Foundation for Research and Development to provide a keynote talk on innovation and then facilitate discussion among the 100 plus workshop participants on their issues and concerns related to launching their ventures.  The top concern was the availability of venture funds to get started.  We had expected this.

The next morning, we announced a venture fund that would provide $50,000 seed money based on a one-page proposal.  We asked participants if we could help them to complete and submit their proposals that day.  There were no volunteers.  The discussion shifted to the question of what was holding them back.  Everyone felt forming a company was much too risky.

We pressed them on this.  Why were they in the workshop if this was not a top aspiration?  They responded that forming a company seemed like what they should do since their first choice was unavailable.  What was that, we asked?  A secure lifetime position in a government agency or institute.  We had misunderstood their signals about venture formation and investment funds.  This was actually their second choice.

For many years, I was very active in the Atlanta technology community, attending many events and occasionally giving talks on my latest book.  I was able to chat with a variety of highly successful entrepreneurs.  I recall asking one high profile CEO, “How did you come up with such a great (software) idea?”  He responded, “We didn’t. It took our customers a couple of years to convince us of what they really wanted.”

At the time, I was CEO of Enterprise Support Systems (ESS), Inc. a spin-off of Search Technology, Inc., of which I was the founding CEO.  ESS developed and sold a suite of software tools and related consulting and training services.  Roughly 80% of our sales were to Fortune 100 technology companies, all well-known name brands.  Our dominant strategy was to move from division to division of these companies with one division vice president opening a door to another.

Our vision of being a product company like Microsoft with its MS Office Products caused significantly delayed recognition of the demand for and value of our services.  We eventually realized that we thought our customers primarily wanted software tools when they really wanted expert users of these tools to help them succeed.

A senior executive at one of our major clients put it succinctly, “I am not at all concerned with the cost of your software or your services.  I am concerned with the overall cost of success.  Your tools, and especially your services, greatly enhance our chances of success.  You may make better profit margins on your software tools, but without your services, your tools are much less valuable.”

We validated this message with other clients.  It was unanimous.  This created an opportunity and a problem.  We found that we needed sophisticated tools for customers to feel the pricing of software and services was justified.  Sophistication for this customer based meant solid mathematical foundations, references to key publications, and abilities to teach users about these underpinnings.  We succeeded with this for two of the four tools in our Advisor Series portfolio of tools.

The problem this created related to the sophistication of our staff.  We hired, in succession, two senior sales executives.  They had rich experience bases and great expertise, but they both lacked a deep understanding about what we were selling.  Put simply, when your primary clients are PhD electrical engineers and computer scientists, you have to be able to approach them in their comfort zones.

These two senior sales executives expanded our customer base to include companies we would not have imagined buying our software and services, but the new customers could not relate to the key elements of our value proposition.  Follow-on sales were limited.  We parted ways with these senior sales executives on good terms.  We all realized our game was different.

We recruited resellers of our software tools in over 20 countries.  Some were very successful, but many were not.  All of them leveraged our software tools to sell a modest amount of software and large service projects.  Our branded tools gave them competitive advantages to sell services.  Their profit margins on the software were respectable but small compared to the service revenues.  All of these relationships were eventually not worth the costs of maintaining them.

Another conundrum involved customers requesting ideas, and perhaps proposals, for how to solve problems of importance to them, but then buying the actual solution from other vendors with lower service prices.  We gained revenue and profits from our ideas, but it did not seem that these modest returns were sufficient to justify investing scarce talents in such marginal returns.

We explored dramatically reducing prices for our software tools – from $10,000 for a corporate license for 20 copies to a license for $99 per copy.  This turned out to be a terrible idea.  The cost of the box and manual was much greater than the cost of software.  Major corporations purchased one $99 license and then wanted substantial support services, which we already provided — but they wanted these services for free for their $99 purchase.

Understanding market signals is very complicated.  You want to provide customers what you are ready to provide but, of course, that is in your interests and not necessarily theirs.  The market may have completely unrealistic expectations – for example the current AI hype cycle – that do not make sense for you or anyone to attempt to serve.  Yet, it seems that the market is demanding it.

Addressing this dilemma involves finding the signal in the noise.  This can be facilitated by systematically combing the evidence.  What evidence?  For example, one of the functions on our Curis Meditor research portal enables reviewing 50,000 global English-language news articles – per day!  Digital assistance helps this process enormously.

This could help you to determine, for instance, that your competitor’s announced investment does not make sense and must be a ruse.  Thus, there are possibilities of making sense of external market signals.  The prospects of internal market assumptions being wrong is a more difficult challenge, as illustrated earlier. 

A good starting point is to make these assumptions explicit and then seek evidence that supports or refutes them.  Talking to your current and prospective clients and customers is one of the best available means to make such assessments.  Perhaps they will eventually convince you of what they really want.

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