Monday, January 12, 2015

Strategic Planning Analogy #543: Starving Artist

I love writing music. I’ve put together 16 CDs worth of music. The problem is that I have odd tastes in music. As a result, almost nobody else likes my music.

I suppose I could write a different kind of music—in a style more popular with the masses. But that would be less satisfying to me, both from an artistic as well as creative point of view. So I continue to write my music in a way that brings me great personal pleasure, even though it means that others find it difficult to listen to.

It’s a good thing I’m not trying to earn a living with my music. Otherwise, I’d be one of those “starving artists.”

It’s one thing to get great personal pleasure from what you do. It’s quite another thing to provide great pleasure to your customers/audience. Quite often, what gives you great pleasure does nothing for your customer and vice versa. I painfully learned this lesson with my music writing.

For a hobby, that’s not such a big deal, but for a business, that can destroy you.

I know that there is a lot of writing out there about trying to make the work environment enjoyable for employees. Many go further to talk about making the work projects themselves enjoyable and satisfying for employees.

This seems particularly important when companies want to hire a lot of great engineers, for which there seems to be a perpetual shortage. For example, Google has all of its exciting “Moon Shot” projects in part as a lure to get great engineers, who want to work on cool things.

But at the end of the day, businesses must ultimately provide some sort of excitement and pleasure for their customers. If they don’t, those customers will go somewhere else. Happy employees can be a great thing, but happy employees producing unwanted stuff doesn’t get you very far.

I may be content to be a starving artist with my music writing hobby, because I’m more interested in my hobby pleasing me than pleasing others. But you don’t want to have a “starving artist” company, since starving companies eventually die.

The principle here is that long-term success in business requires receiving an income from what your company does which exceeds its costs. Ultimately, the ones who buy what you’re selling determine your income. Therefore, if you are not offing something which people want to buy, your business is in trouble.

This sounds pretty obvious and you would think it does not need to be said. However, in the January 1, 2015 edition of Fortune magazine, they quote a study by CB Insights which caught my attention on this topic. CB Insights analyzed 101 failed startup companies to determine why these firms failed. Their conclusion? The number one reason these startups failed was “no market need.”

In other words, we’ve got tons of companies out there built around a strategy to create something that people don’t want. Incredible!

How did we get to a point where companies no longer think that they have to deliver something desired by customers (or don’t do enough work to find out what they really want)? I think it boils down to three things:

1. Easy Start-Up Funding
First, there is a lot more investment capital looking for great start-ups than there are great start-ups to invest in. With all that investment capital looking for a place to invest, you get money pouring into poorly conceived business models.

Why worry about getting money from customers when you can get all the funding you need from private capital? In a sense, capitalism gets distorted to the point where the private capital funds become the “customer” of the start-up. As long as you please them, you don’t have to worry about pleasing the true end customer. I spoke more about that in an earlier blog.

Living off equity funding may work for a while, but eventually the investors want to get a return on that investment. This requires either: finding more, bigger investors (sort of like a pyramid scheme), or getting the real customers to pay up. And it is the time gap from start-up to pay-up that allows businesses to get a bit lazy about staying laser-focused on pleasing the customer.

2. Disconnect Between Payer and User
Second, a lot of the startup business models have the user pay virtually nothing to use the product. Instead, the money is to come from advertisers or a small subset of “premium” users (the “Freemium” model). By disconnecting the user from the payer, one can get confused about who the customer is and how to please them.

In the advertising model, you have to please the advertisers in order to have a winning business model. They are the ones who pay, so they are your customer. However, many firms have taken the path of Twitter, and spent so much time making the users happy that they failed to figure out how to make the real customers (the advertisers) happy. That is a losing long-term model.

In the end, you typically get what you pay for. If you pay nothing, then you are less attached in your usage. Look at all the free games out there. To survive, the game businesses need to convert many of the free gamers into premium gamers who are willing to pay extra to get tokens or weapons or powers or whatever. It appears that people get bored quickly with these free games and often switch to another free game rather than pay in order to continue in the old game.

It seems the game wasn’t as good as the developers thought. It was played because it was free, not because it was good. Without the discipline of getting the user to pay, it is easy to build something that is not satisfying enough to ultimately produce income.
3. Building what the Builders Want
The third reason why we see companies not building what the customers want is because many of these businesses are more interested in building what the builders want to build. This seems especially true in engineering-driven firms. The engineers want to work on interesting challenges, cool features, and be the first to do something that will impress other engineers. Add to that the fact that the millennial generation (who tend to be running these startups) are more interested in attaching social causes to their business aspirations (sustainability, helping the less fortunate, etc.).

As mentioned earlier, many of today’s businesses focus on pleasing the employees over pleasing the customers. As a result, we end up with a lot of interesting challenges solved, a lot of jealous engineers, and some social good—but unsatisfied customers. We need look no further than the Amazon Fire phone. It did some cool stuff, like making a 3D screen without the need for special glasses. Unfortunately, customers weren’t looking for these things, so the phone was a flop.

Just because an offering does some cool stuff does not mean it is doing stuff people are willing to pay enough for to justify the cost of the feature. Truly “cool” stuff is stuff the customer wows over, not what the engineers or geeks wow over.

I read an article recently about how many retailers were spending all of their development money on building cool apps, when what the customer really wanted was just an easier way to sort through the inventory on line and easily make a purchase. Sure, inventory and purchase don’t sound as cool to an employee as building a lot of snazzy apps, but that’s what gets the customer excited…so it should be what we focus on.

Getting Back to The Customer
So although making employees happy is a good thing, the better thing is to make the customer happy. Happy customers pay the bills that keep you in business.

Don’t fall into the trap of forgetting the customer because you have tons of investor cash, a free offering, and happy employees. Eventually, the business needs to create income and the sooner you figure that out, the better. The idea of “we’ll build the cool thing now and figure out how to monetize it later” is what leads to that earlier finding that most startups fail because “there was no market need.”

Successful businesses need a business model where the money coming in ultimately exceeds the money going out. That only happens if you are offering something so pleasing to the customer that they are willing to pay more for it than what it costs to deliver. Therefore, the key to any business strategy is to please customers enough to make this happen. If you forget to focus on pleasing customers and instead focus on pleasing investors, employees or non-paying users, you can end up with a broken business.

There may be some creative satisfaction in being the starving artist, but you’re still starving.

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