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| Summer 2005 Newsletter | El Dorado Ventures website |  | |
 The Five Ways to Accelerate Revenue By Paul McNamara, Entrepreneur-in-Residence Entrepreneurs in early stage companies can spend many months, and sometimes years, developing a new product. For many, the moment when
the product is finally ready to go to market fosters feelings of great accomplishment and great anxiety. Can I make my sales projections? Will the company scale? Do we have what
it takes to be successful?
Ultimately, these questions boil down to one: how to accelerate revenue formation. In this article, I want to share with you five
proven revenue accelerators. But first I need to debunk one widely held myth.
Many of us with engineering backgrounds (myself included), want to believe that the world is governed by the laws of physics and
that human beings make purchasing decisions based solely on a dispassionate and rational analysis of alternatives. Give decision makers information that demonstrates the
superiority of our product, so this thinking goes, and the decision maker will logically analyze the data and output a purchase order. Simple, deterministic, rational and a
complete myth.
Recent studies of human brain function have shown that the human decision making process relies much more on that part of the brain
responsible for regulating social behavior than had previously been thought. In fact, for any decision that involves risk (in the consumer space, it could be any purchase for
more that $200, in the commercial space, it could be any purchase decision that is visible to your peers or boss) the decision maker must first process the decision through the
social behavior center of the brain before taking action.
In his landmark book, Diffusion of Innovations, Everett Rogers argues that how we adopt new technology is highly correlated to
how the new technology satisfies our needs within the context of our social system. Social considerations are expressed in different
ways depending on whether the decision maker is an early adopter or a later stage adopter, but they are present in any decision making process. For example, early adopters tend
to act in ways intended to maintain or improve their status as thought leaders, balancing their ambitions to be the first to adopt a new technology with the risk that the
technology won't catch on or is later discredited technically.
These social considerations can often trump purely rational purchasing criteria. While it is necessary to demonstrate that a product
is well positioned against its competition, product superiority alone is not sufficient to get the order.
So here now are the 5 revenue accelerators. You'll notice how strongly rooted each is in social behavior.
1. Reduce product complexity If your product is perceived as being overly complex by your intended users, then the relative rate of adoption will suffer.
Most people find complexity frustrating. They also fear looking foolish or uneducated. Complexity increases the risk of failure
for a decision maker. If they choose a complex product and users are unable to master the complexity, then the product will be scrapped and the decision maker will lose standing.
Many times I see companies make the mistake of actually trying to convince potential customers just how complex their product is.
Companies do this under the mistaken belief that they are raising the perceived value of the product in the customer's mind. In reality, the only thing they are accomplishing
is lengthening the sales cycle. Perceived value comes from solving a customer's problem in a way that increases the customer's standing in his or her social system and not
from the inherent difficulty that you had in engineering the product.
2. Increase compatibility If a new technology is perceived to be compatible with familiar methods and usage patterns, then its relative rate of adoption will be higher.
Product differentiation is usually thought of as a good thing. It allows a company to create a distinctive market position around their product. But in some cases, differentiation becomes an inhibitor to adoption. For instance, Linux has seen spectacular adoption rates among Unix customers, who judge Linux to be highly compatible with Unix (meaning it looks and feels a lot like Unix). But it has seen relatively slow adoption rates among desktop Windows users who see Linux as something very foreign and unfamiliar.
3. Make the people who use your product visible to other likely adopters Most people want to be like the people they admire. We admire people because, among other things, we perceive them to be successful at something for which we also want to be successful. Somehow, these successful people have "figured it out," and subconsciously we believe that if we follow their example or the path they've blazed, we too will find success.
We experienced this phenomenon in a dramatic way at Red Hat. On November 16th, 1995, Linus Torvalds, the creator of Linux, said in response to a flame war that had broken out on a news group, "I'll just chip in a bit for Red Hat: I actually have that installed on my university machine. It seems a valid distribution, and I like their packaging stuff, and it works fine for me (although I obviously don't really need any technical support, heh)." Almost overnight, Red Hat went from being a somewhat obscure distribution to being the big new thing in Linux. This reference had all of the right elements: it was given by a person who people in the Linux community held in the highest esteem, it was highly visible, and it was a clear endorsement.
Lots of companies develop well written, comprehensive customer case studies. These can be very effective marketing tools. But more often than not, a short, clear statement from the right person made visible to a large number of potential customers will work even better (and cost a lot less).
4. Let people try before they buy If you let people try your product before they have to commit to purchasing it, then the relative rate of adoption of your product will increase. Software companies often produce a trial version, which is easy and very inexpensive to do. Hardware companies seem less inclined to do this, for the obvious reason that a single unit of hardware can be expensive. Yet hardware companies that find creative ways to let their customers try their products are rewarded with improved adoption rates.
For example, the Nintendo computer game player was adopted by consumers at one of the highest rates ever seen for a consumer product. Introduced in 1986, Nintendo sold 50 million units in the first seven years. This success was due to many factors, but one of the things that Nintendo did brilliantly was to establish kiosks at major retailers where kids could try the new game players. From an adoption standpoint, these kiosks had two profound effects. First, they allowed the kids to experience the game players free of charge. Second, the kids and their parents would see other kids playing the games or waiting to play, so in effect, the kids were serving as reference users for even more kids in the store!
5. Use Diffusion Networks to create brand preference Broadly speaking, marketing communication is delivered through one of two primary channels: the mass communications channel and the information diffusion channel. The mass communications channel is traditionally what people think of when they think of marketing: advertising, direct mail, articles in the media. Mass communications can be a very effective way of creating awareness for your product. But awareness alone is not sufficient to drive adoption.
Information diffusion is a term that describes how information travels through a social network by word of mouth. The simple truth is that people are substantially more likely to adopt a new technology if they have heard about it through personal contact with a peer. In many cases, people will not adopt a new technology unless someone they know has recommended it.
For example, when Harley Davidson wants to create buzz around an upcoming product, they will often have their engineering staff pre-brief influential members of the Harley Owners Group (the HOGs). These thought leaders then diffuse this information among others HOG members. The resulting buzz creates a strong sense of anticipation and preference for the product even before all of the details of the product are known.
Diffusion networks are often overlooked by companies seeking to promote their products. Companies will spend an inordinate amount of resources on mass marketing communication and then rely on their direct sales force to "close the deals." Wouldn't it be great if the customer had already made the decision to purchase and had a preference for your brand before your first sales call? Activating diffusion networks can have this result. By focusing on these five drivers, you can have a profound effect on the adoption curve for your product. Too often I see organizations spending an inordinate amount of marketing resources creating classic sales tools (collateral material, TCO calculators and the like) and under investing in the things that really matter - the 5 accelerators. Paul McNamara is an entrepreneur-in-residence with El Dorado Ventures. He is charged with seeking new investment opportunities in the high-performance computing, enterprise software, open source and digital media sectors. Prior to joining El Dorado, Paul worked at Silicon Graphics Inc. (SGI), where he most recently served as Senior Vice President and General Manager of SGI's Visual Systems Group, responsible for engineering, marketing and general business management of SGI's workstations, graphics servers and graphics software product lines. Prior to SGI, Paul was vice president of business development for Red Hat Inc. and was a key figure in Red Hat's rise to prominence.
El Dorado Ventures (EDV) is a leading entrepreneur-focused, early-stage venture capital firm with a 19-year history of success. Entrepreneurs see EDV as a
trusted investment partner who shares their vision and helps them succeed by providing ongoing strategic guidance and access to a wealth of industry contacts.
With $750 million in capital under management, the firm invests across the information technology spectrum, from semiconductors and systems to communications,
software and services, targeting both consumers and the enterprise. El Dorado's early-stage investments have included Cyras Systems, EarthLink, Efficient
Networks, Novellus and NuSpeed Internet Systems. Numerous EDV portfolio companies have gone public or been acquired by major technology companies including
Ciena, Cisco Systems, nVidia, Siemens, Texas Instruments and Yahoo/Inktomi. |
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