Exploring the Dangers of the Chasm
The chasm is a dangerous place. There are many dangers of the chasm that we will be looking into in this article. The chasm promises new customers, but this isn’t the case. As opportunities for early adopters become greatly soaked and with the mainstream market filled with pragmatists far away from the pragmatists’ comfort level which they need to buy, there is an ineffective market of available funds to support the firm. Competitors in the mainstream market, who till this point had paid no attention to the emerging competitors in their market, have made a new target now, experienced one or two huge losses and have positioned their sales force to take revenge. At this point, there are only a few opportunities to retreat where managers will retreat to their current major account relationships, service them in a particular manner and leverage the investment of an extra year in expanding a substantial part of the early adopter’s plan. Unfortunately, there is no extra money to sustain the market. Nor will the managers be able to retreat by continuing only to service the early market. There will still be sales opportunities by selling to other early adopters. However, each early adopter will have a different dream leading to different customization options, which will overtax a product development group already burdened. Eventually, a new entrepreneur with new technology will enter the early market. By then, your company should be across the chasm and in the mainstream market, or you’re in danger.
There is more danger ahead. Investors have funded marketing activities by formal means in the event of venture capitalists or by informal means in the event of new products built in larger companies. The investors have witnessed early successes and are waiting to see progress against the company’s business plan’s long-term revenue growth objectives. In this case, we know that seeking this type of growth in the chasm period is useless. Nevertheless, it is what was stated in the business plan, and time is running out. Undoubtedly, a predatory investor known as the vulture capitalist makes use of the chasm period and failure to humiliate the current management and decrease the equity value in the company so that in the next round of funding, the investor will try to use an opportunity to dominate the company, put up new management and become the owner of the next most prominent technology company. You must, therefore, establish your company in the mainstream market soon and develop long-term relationships with pragmatists if you want to be safe from the dangers of the chasm.
Penetrating the mainstream market
The companies who have already established connections with your target customers in the mainstream market will do anything to throw you out of the market. You should enter the mainstream market regardless of the type of resistance posed to you, as this is a life-or-death situation put forward by the dangers of the chasm. Let’s see how we can penetrate the mainstream market.
The long-term goal is to enter and dominate the mainstream market, which competitors currently control. For your product to fight against these competitors, you should join forces with other products and companies as allies. By entering this market, the immediate goal is to transition from an early market to a strategic target market segment in the mainstream market. The chasm is what separates you from your goal. You need to cross that chasm as fast as possible by focusing on an invasion directly and specifically on the point of attack, which is the D-Day. After you throw the competitors out of the target market, you can then move towards dominating the adjacent markets. This is the strategy. By following this strategy, the company can develop a sound base of references, collateral, internal procedures and documentation through a limited set of market variables. The efficiency of the marketing procedure in this instance is the “boundness” of the market segment being addressed. The tightly it’s bound, it’s easier to create and introduce messages into the market segment, and these messages will travel faster through word of mouth.
Startup companies and marketing programs with limited resources should operate in a tightly bound market to compete. If not, their super-hot marketing messages will hype down quickly, word-of-mouth marketing decreases, and the sales team is back to selling cold! This is the usual symptom of the chasm as the company leaves the latent enthusiasm of the early market. But, again, this is the consequence of a company trying to expand too quickly and broadly into a loosely bound market.
The D-Day strategy thus avoids this mistake by helping a company focus on an important goal which is:
- Easily achievable.
- Capable of being leveraged into success in the long run.
Although this D-Day strategy sounds good, most startups find it absurd, and it’s rarely put into practice. Here’s the most common situation:
Starting a fire
According to Geoffrey A. Moore, attempting to cross the chasm without taking a niche market approach is like trying to light a fire without kindling. The number of newspapers used to start a fire represents the promotional budget and the log, which is a significant market opportunity. Regardless of how much paper you put under the log, if you don’t possess any target market segments to act as kindling, the paper will be used up eventually, and the log won’t be burning anymore. Starting a fire requires discipline, although it’s easy to start one. It’s at this point where high-tech management lacks the most – discipline. Many high-tech leaders will persistently avoid making niche marketing decisions no matter what. You first need to understand this failure is done on purpose and not due to a lack of understanding. For the past 25 years, the MBA marketing curriculum has been stubborn in segmenting markets and the advantages that could be gained from it. They give lame excuses that although the niche strategy is superb, they don’t have time or cannot afford to implement it now. They are not a market-driven company but, in fact, a sales-driven company. Being a sales-driven company during the chasm period is dangerous! This is because the primary goal of a company during this point is to get a beachhead in the mainstream market by creating a pragmatist customer base that can be referenced. These people can give you access to other mainstream customer prospects. To capture this pragmatist customer base, you should ensure that your first set of customers completely fulfils their buying objectives. For this to happen, you should ensure that the customer gets the full product, that is, the complete set of products and services required to fulfil the customer’s desired result. If anything is left out from this set, the solution becomes unfinished, and the customer won’t be available as a reference. Therefore, to secure these references, which is the main goal to cross the chasm, you should provide or at least promise the provision of the full product to them.
Getting a whole product is expensive. Even if you recruit partners and friends to fulfil the product, they require resource-intensive management. Thus, the entire product commitment should be made strategically to leverage them over multiple sales. This can only happen if sales efforts are focused on one niche market. Focusing on more than one market will burn out all your primary resources, destroy the quality of your whole product and extend your stay in the chasm. Therefore, the sales-driven strategy should be avoided for an entire product commitment. Many studies have proven that in the high-tech buying process, word of mouth is the top source of information buyers use as a reference at the beginning of the sales cycle to create their so-called long lists and at the end when they are limiting the list short. Geoffrey A. Moore states that for word of mouth to develop in any marketplace, many informed individuals should always meet and exchange views to strengthen the product or company’s positioning. This is how word of mouth develops.
Seeding word of mouth is expensive, especially once you leave the early market, which can usually be reached through the press and media. On the other hand, pragmatists communicate along the industry lines or through professional associations. For example, doctors talk to doctors, lawyers talk to lawyers, and engineers talk to engineers. If you take a sales-driven process, the consequence is that securing one or two customers in ten different segments won’t create word of mouth. Your customers might talk about you, but no one will boost the hype about your product. On the other hand, securing four or five customers in one segment will produce the desired result.
Remember, the lack of word of mouth makes selling the product complex and therefore adds to the cost and the uncertainty of sales. Another reason to be niche focused when crossing the chasm is to achieve market leadership. Pragmatists want to buy from market leaders. Without their knowledge but continuously, they plan to implement some company or product as the market leader and do everything in their power to keep them there. One of the main reasons they don’t buy at the beginning of a marketplace is to help them understand who the market leader will be, as they don’t want to support the wrong one. When you cross the chasm, you won’t be a market leader, so how can you get to that state? First, you need to have the largest market share, that is, over 50% of the new sales at the beginning of a market place although it might eventually end up being 30-35%. Assume you want to generate sales in the next two years, so you double that number, which will be the market size you wish to concur. However, to be clear, that is the maximum size of the market as the calculation assumes that all your sales came from one market segment. Thus, if you want to be a market leader early and fast, the strategy is to take a “big fish, small pond” approach. This approach will also help you own the market by pragmatists installing you as the leader, and after that, they will help you be the market leader. This indicates that there are barriers for competitors to enter no matter their size and the special features they have in their products. Mainstream customers will, however, complain about your lack of product features and force you to develop them. But the truth is, mainstream customers love to be owned! It makes buying decisions easier, improves the quality and reduces the cost of whole product ownership. Although they want attention from you, they still support you.
The importance of moving beyond a niche segment is to choose a strategic target segment. That is, target a segment through its other connections, which will help you creep into one or more adjacent market segments.
We will next explore who are the reputed companies that successfully crossed the chasm.
Crossing the chasm successfully
We will be looking at Documentum, a content management database established in the early 1990s. Secondly, Salesforce.com, whose first flagship product is an end-user application, and VMware, whose flagship product runs right on top of hardware and operating systems. Why are these examples important? First, software programs at the application layer are “naturally vertical” since they directly interface with end-users, and end-users position themselves based on geography, industry and profession. This makes them easily compliant with the foot head required to cross the chasm. However, as solutions spread, a horizontal approach is more productive, but it’s a more complex challenge for an application offer to satisfy.
On the other hand, infrastructure offerings have the opposite effect. They are naturally horizontal as they interface with machines and other programs where a part of the value provides a neutral and standard interface. They don’t believe in vertical approaches as their products don’t change from niche to niche. However, pragmatists don’t always purchase any technology as a whole. Usually, these tech products are first adopted by a niche that has pressing issues. The rest of the niche is happy about this development as they get a free look at how well the technology operates without having to accept any immediate risks. The niche wins – assuming that the beachhead strategy is implemented correctly by adopting a modern fix for its previous unsolvable problem. The company wins as it gets approval from at least one segment of the pragmatists that its offering is mainstream.
Thus, according to Geoffrey A. Moore, due to the dynamics of technology adoption and not due to any niche properties in the product, innovative infrastructure companies should adopt a vertical approach to cross the chasm even though it seems weird. The good news for these companies is that, eventually, when a mass-market develops and a horizontal marketing approach is established, it’s easier to take advantage of the chance.
Documentum – where a document management application crosses the chasm
When Jeff Miller took control of Documentum in 1993, even by inheriting a wealth of document management technology for free when it spun out of Xerox, it had secured revenue of 2 million dollars for three years straight. This was an excellent performance for a company whose market was in the chasm. However, after Jeff came on board, after a year, the company went to 8 million dollars, 25 million dollars, 45 million dollars, and then 75 million dollars. So you must be wondering what Jeff and his team did to cross the chasm successfully, right?
They adopted the original edition of ‘Crossing the Chasm’ by Geoffrey A. Moore and made it their market development blueprint. By knowing that they were in the chasm and that the first step to getting out of the chasm was to choose a beachhead market segment, they examined their client experience so far and targeted a very thin niche segment which was the regulatory affairs departments in Fortune 500 pharmaceutical companies. There were nearly 40 of these globally; the largest is a few hundred people. It should be noted that when you select a niche segment to cross the chasm, the number of people doesn’t matter as it’s about the amount of pain they are causing. Thus, the pharmaceutical industry’s regulatory affairs function was causing terrible pain. This segment had to get the New Drug Approval applications successfully submitted to a hundred or so different regulatory bodies globally, and this process doesn’t begin until patents are established. The patents have a 17-year life, and while Documentum was trying to control the market, a successful patented drug gave an average revenue of 400 million dollars annually. If the drug is patentless, its economic returns drop. Each day spent in the application process is a day of patent life wasted! Pharmaceutical companies took ages to get their first application submitted and not to get it approved. This is because new drug applications are between 250,000 and 500,000 pages long and come from various sources such as clinical trials, manufacturing databases, the Patent Office, research lab notebooks, etc. This delay was costing pharmaceutical companies one million dollars each day.
Thus, to tackle this problem, Documentum ensured that it had a strongly committed customer. The commitment came from VIPs who believed that Documentum had a chance to re-engineer the entire process to a whole new level, controlled the in-house team and required their support for the new model. As a result, in a year, Documentum proved that it could solve these one million dollars per day problem and about 30 out of the top 40 pharmaceutical companies followed its solution. This drove Documentum’s sales from 8 million dollars to 25 million dollars. However, the revenue following that resulted from the bowling pin impact of niche marketing.
Documentum became the guide for document management work within drug companies. So it spread from the regulatory affairs team to the researchers and the manufacturing team. Once this reached the manufacturing team, the plant construction and maintenance contractors using document management to assemble and maintain documentation on every system and procedure in the factory understood that factories in the same process industries had the exact requirements. They, therefore, adopted the product into regulated chemicals, nonregulated chemicals and oil refineries. When the product was adopted in the oil industry, the IT people saw a product that could solve a huge issue in their upstream business: exploration and production.
This success of Documentum was acknowledged by Wall Street, who felt that the same facilities would help them control their swaps and plagiaristic businesses better. Ultimately, the financial services were Documentum’s most significant customer segment. Still, it wasn’t the correct target market for crossing the chasm because its needs were not as severe as those in the pharmaceutical industry. This is Documentum’s story of success in reaching more than 100-million-dollar revenues. There are two things to gather from this chain of events. Firstly, as Geoffrey A. Moore states, you need to knock over the headpin, take the beachhead and cross the chasm. The size of the first pin isn’t the problem but the economic value of the problem that the headpin fixes. The target niche will pull you out of the chasm faster if the problem is severe. Once you’re out of the chasm, your chances to target other niches increase because having one set of pragmatists to support you, there is less risk for other target customers to rely on other companies.
Secondly is to assemble other market segments to leverage your initial niche market solution. This enables you to reframe the financial gain in crossing the chasm. This doesn’t involve the profit you generate from the first niche but the sum of money plus the gains from other following niches. This is especially important for entrepreneurs in large companies to understand who is competing for funding against more significant and established market opportunities. If the executives cannot see the extended niche segments and only see the first niche, they won’t fund. On the other hand, if you show them a mass market, they will fund, and the market goes horizontal into hypergrowth, but they’ll fire you as you fail to generate significant income quickly.
The bowling pin model, therefore, enables you to focus on the immediate market, keep the burn rate low and target the market development effort while paying attention to the big win.
Salesforce.com – where a software-as-a-service company crosses the chasm
From the start of packaged enterprise applications, software was always delivered as a product to the data center of a client’s company, where it was installed in their computers and integrated into their storage and networking systems. The client had to therefore make considerable investments in capital equipment and operating budgets for the expert staff. Moreover, it required greater systems integration efforts which cost seven times more than the software, sometimes even ten times more. By the time the software was installed, there was always an updated release in the market, but the effort to put it in would be substantial.
When salesforce.com was established, its CEO Marc Benioff announced that there was a better way to end this problem: to “end software”. It was called software-as-a-service (SaaS), based on the idea that only one copy of the software was running at the vendor’s data center, where many customers could use it simultaneously through internet access. Each customer’s data was separated from the other, and the operation was protected by the latest technology managed by the most talented experts. Customers didn’t need a data center, no expensive staff or IT professionals and no systems integrators to operate the system. However, this was deemed a threat to an entire application ecosystem that invested time and career in the old model.
The PC ecosystem claimed that such an application was directly dependent on networks which meant unreliable response times and extra complexity above a packaged PC application running on an on-premise PC server. Unconvinced analysts felt that the idea was innovative and was thus another dot-com motion that would die. The most doubted Salesforce.com reached the chasm and crossed it, and it is now the most flourishing software company in the world, which reached 4 billion USD in sales in 2013 with 25% growth rates. How did they do this?
They didn’t go after a vertical market, but they focused their segmentation as follows:
- First, they only targeted salespeople and their managers.
- They targeted mid-market companies, which were big enough to require systems to compete with market leaders in their industry and small enough to unafford the required IT investment.
- They only focused on the USA as they wanted to stay close to home and since the USA has always been the early-adopting country in enterprise software.
- They targeted tech-savvy industries by beginning with high-tech and then to telco, pharmaceuticals and finance.
Salesforce.com was designed to help salespeople and their managers by providing them with direct visibility into their pipeline, showing each prospect’s stage and alerting them with measures they could adopt to move these prospects to the next stage. Salespeople loved this and told other salespeople about it, and adoption of it spread like a virus not because CIOs declared this was a new package but because individual teams could sign up for this package without their CIOs help or, in some instances, without the CIOs permission.
Since SaaS was used on a subscription basis, customers always used the product. Since Salesforce.com was running the product, they could see who was and wasn’t using it and pay attention to their support efforts appropriately. According to Geoffrey A. Moore, if you want to target a beachhead segment as Salesforce.com did, it should:
- Be big enough to be necessary.
- Small enough to win.
- A good fit with your crown jewels.
By limiting itself to the activities and budgets of one department, Salesforce.com was able to win more customers faster than if it had chased a suite of applications crossing sales, marketing and service, which would have required more approvals and allowed the competitors to slow down Salesforce.com’s growth.
VMware – disruptive infrastructure crosses the chasm
VMware makes software that virtualizes computers. This means that their software controls a computer to ensure two different programs can run simultaneously, each fully controlling its environment. It can also control two or more computers simultaneously.
The first case where VMware’s software was used was by techies who wanted to run both Windows and the Linux operating systems on the same computer. So, when this was done, it captured a strong position among techies. The next two applications were almost extensions of the same idea, which was still appealing to techies. The first application was to run two Windows applications on the same computer server. This led to another variation of running one application on two or more servers. The problem was that the application was being extensively used and running out of room on a single server. The typical solution was to buy a bigger server, but VMware’s solution was to use spare capacity from a second server efficiently for free! Such victories for VMware indeed.
These successes were before crossing the chasm depending on an individual implementing technical know-how to solve corner-case problems. To cross the chasm, you need a use case that continuously puts forward increasingly complex issues for the status quo solutions. In VMware’s situation, its chasm crossing use case happened in the software development life cycle testing phase. When you think about it, you develop a code semi-privately and test it for bugs on your machine. However, you need to run it in production at one point, and before doing it, you need to test it with a production load. Moreover, you need this for a short period, after which you will implement your program in production and won’t need the test bench anymore. But this “spin up and spin down” approach is costly in getting the hardware and the system correctly configured to simulate your production environment accurately, which is why VMware came to the rescue. You could not only reuse your previous hardware, but you could also save your specialized testing environment from loading it back up quickly. This meant that a single hardware farm could simulate any number of production use cases, and it was available almost close to demand. This was a massive opportunity for system administrators around the USA, and this use case enabled VMware to cross the chasm.
Once the system administrator’s needs were met, the focus shifted to the IT manager. Virtualizing their PCs was always the solution to saving money on hardware through VMware.
The three real-life examples show the idea of crossing the chasm. Thus, this article has done justice by providing our readers with a comprehensive understanding of the dangers of the chasm and how to overcome it based on the three examples above. The following articles will look at how we can implement chasm crossing.