Launching the Invasion
In this chapter, the final parts of the D-Day strategy, such as distribution and pricing, become effective. Distribution and pricing are the only issues where marketing decisions directly contact the mainstream customer. Thus, these two have huge strategic impacts; especially with distribution, there is only one chance to get it right, which is why these two come last in the invasion planning to nail the other things first.
When crossing the chasm, the main corporate objective is to have a distribution channel in the mainstream market with which the pragmatist will be comfortable. This objective comes before profits, revenue, press and customer satisfaction. These can be fixed later only if the channel is fixed. Meanwhile, during the chasm period, the primary concern of pricing is not to keep the customers or investors satisfied but to motivate the channel. In summary, when crossing the chasm, you need to attract customer-oriented distribution with the main aim of distributed-oriented pricing.
The customer-oriented distribution channel targets five types of customers:
- Enterprise executives making expensive purchasing decisions focused on complicated systems to be widely adopted across their companies.
- End users making significant low-cost purchasing decisions focused on individual or workgroup technologies to be followed locally or internationally.
- Department heads making medium-cost purchasing decisions to use case-specific solutions that will be adopted in their organization.
- Engineers making design decisions for products to be sold to their customers.
- Small business owner operators making modest purchase decisions which are, however, highly material to them, given limited capital to spend and a strong desire to get value back.
Each of these groups has a channel of distribution that they prefer. We will be exploring them below.
Direct sales and the enterprise executives
Enterprise executives who make expensive purchases expect to pay a couple hundred or millions dollars. In that case, they look for consultative sales experience that identifies their primary needs and customizes the vendor’s offering to meet them. The marketing involved here is called relationship marketing. It usually involves thought leadership events that attract some senior executives to a forum where they can learn from experts, have discussions, and build relationships with the vendor’s senior employees. This is followed by personal contacts, which always leads to a referral down into the organization to study a possibility brought up in a previous conversation.
Once the sales motion is in progress, the usual approach is called solution selling which is a whole product tailoring job to satisfy the particular needs of a specific prospect. However, prospects might not know they have a need in the early market. This requires provocation-based selling where the vendor makes the provocative claim that the customer should change their current budget to meet an unnoticed opportunity or impending crisis. In both cases, the vendor will be providing a highly skilled executive to meet with a senior member of the prospect’s company’s management team to discover if there is a sponsorship and then with middle managers to conduct a needs analysis and build a proposal. At that point, your goal is to get approval and get the contract through purchasing, the PO signed and the work in progress.
In the delivery phase of this go-to-market approach, all the tailoring promised in the proposal needs to be delivered. This requires the vendor to build his professional services team focusing on implementing the vendor’s products. This will be supplemented mainly by a third-party systems integrator responsible for the peripheral reengineering and integration required to get the entire solution working.
Web-based self-service and end-user buyer
End-users purchasing technology for themselves expect to pay maybe hundreds of dollars for a purchase or several dollars for a month, and that is always after a free trial. Based on this, they are looking for a transactional sales experience, mainly self-service. The world wide web is good at providing this!
Web marketing is mainly promotional marketing primarily driven by a free offer or trial. It’s usually driven by click-through ads and targeted email, which is becoming greatly influential as marketers leverage behavioural targeting, machine learning and various algorithmic technologies to enhance their connection rate.
After a user clicks a link, the position of the relationship transfers to a direct response sales activity. This can culminate through first contact or mainly through a series of contacts that enables end-users to investigate before committing to a product. Through digital service offerings, there is always a trial period or a minimally configured offer that is free. This is known as the freemium model, where upselling customers make revenue to added value offerings after buying the main technology for free. However, if the offer includes a physical product instead of software bits, the sale is usually an e-commerce transaction like on Amazon and eBay. These e-commerce websites are designed to avoid personal communication, save the vendor’s money and please the customer. The least common denominator is a website with FAQs supported by an email for support queries and, for more responsive vendors, a chat service where one professional can help multiple customers simultaneously.
It’s doubtful if companies that have been successful with this model have crossed the chasm.
Sales 2.0 and the department manager buyer
Departmental buyers who make IT purchases are always slow. As they are a part of a larger business, they need sound systems. However, they don’t have the staff or money to support such acquisitions. Usually, they had to accept hasty solutions of highly variable quality given by local value-added resellers. However, the internet and the web have made a new solid sales channel alternative known as the Sales 2.0. This includes direct touch marketing, sales and service conducted mainly over digital media. The marketing looks like web-based self-service, transactional marketing for end users. The difference here is when the prospect clicks the link. Rather than going to an automated response system, the clicks make a salesperson aware, who then approaches the end-user through email, chat or voice call. Depending on the scope of the prospects’ interest, this can lead to a referral to a website, downloading related literature, invite to a webinar or a web-enabled live demo of the offer. As prospects show great engagement, the system tracks their position and alerts the salespeople to the next step in the sales cycle. This entire process is conducted through the web.
After the prospect becomes a customer, the responsibility changes from sales to delivery teams. In SaaS, vendors are more interested in keeping their promises as their customers are a click away from discontinuing their subscriptions.
The traditional two-tier distribution and the design engineer
Design engineers like demanding prospects and customers. However, they don’t like marketing communications or salespeople. Still, they need their help if they want to stay on top of the latest component technologies they might require designing for their following product. Moreover, from the vendor’s view, even with their demanding requirements, they don’t have any power to purchase bulk products. Instead, they are a serious early decision-maker as to whether the vendor should be invited to the purchasing table.
The web is a great place to communicate with design engineers. They can communicate if they want and can get a realistic viewpoint on any issue they care to research. However, eventually, they’ll need samples and most of the time this is hard to get a person to be physically present for this purpose. This is where the second tier of the distribution channel comes into play, which is usually independent manufacturers’ representatives. However, this channel doesn’t have the capital to hold inventory, so it’s supported by the first tier, the vendor-facing organization known as the distributor.
After the designer has chosen a particular component, that causes the ‘design win’. This is an invitation to negotiate with the product company’s purchasing department to fix a price, terms and conditions for several future purchases where the volume will depend on the success or failure of the new product in its market. The support during this part of the relationship shifts to the component vendor, who always fields fancy engineers to join in debugging the customer’s next-generation designs. This sales and marketing model is the oldest in high-tech history.
Value-added resellers and the small business owner
Small business owners know they need help but are not wealthy enough to satisfy consumer needs. Thus, they always look for a way to get work done for a low price. Their allies are locally value-added resellers, mostly sole proprietors who run low overhead businesses primarily searching for new customers. Most of the time, such VARs are techies who are happy to share their knowledge and get paid for it. However, they are not good at marketing and sales, which is when the product vendors must step in.
Vendors targeting small business customers should handle all the responsibility for marketing and most of the responsibility for sales. A small business customer cannot have a Sales 2.0 experience as they lack the skill to participate in it knowledgeably. However, they are looking for an agent to mediate between them and technology, which is the role of the VAR. Since VARs make a profit through post-sales services, they are hesitant to earn and keep the customer’s trust.
Distribution oriented pricing
Pricing decisions happen to be the hardest for management groups to reach an agreement on. This is because there are many perspectives on pricing. Thus, we will explore these perspectives and the practical guidelines for pricing during the chasm.
1. Customer-oriented pricing
The first perspective on pricing is based on the customers, which varies based on their psychographics. The early adopters are considerably priced insensitive. They believe immediate costs are unnecessary when compared to the outcome. They undoubtedly want to ensure that there is possibly ‘extra money in the price as they know they need special service, and they want their funders to be able to afford such a service. There is a type of reputation for purchasing the high-priced alternative. This is purely value-based pricing.
The late majority want low pricing. They have waited for too long before buying the product. They don’t benefit from any competitive advantage, but they keep their budget way down. This cost-based pricing will eventually arise in any mainstream market once all the other margin-justifying elements have been used.
The pragmatists want to support the market leader. By doing this, they’ve learnt that they can minimize their whole product costs and gain competitive leverage from the investment. Depending on the competition, they expect to pay the market leader a premium price of 30%. This is competition-based pricing. Although market leaders get a premium price, their allowed price is still subject to comparison with the other market players. They need to reverse this rule and discount if they are not the market leader.
2. Vendor oriented pricing
Vendor-oriented pricing is due to internal problems starting with the cost of goods, cost of sales, cost of overheads, cost of capital, the rate of risk-adjusted return and other factors. These factors are essential to managing a business profitably continuously. However, none of these factors has any immediate meaning in the market. They acquire meaning only if they impact other market visible problems. For example, vendor-oriented pricing usually sets the distribution channel decision by setting a price point estimate that puts the product in the direct sales, which is the web self-service or the Sales 2.0. Moreover, once the product is in the market, these factors can hugely impact if they favour a low-cost pricing advantage in a late mainstream market or favour operating margins that can fund new R&D for the following early market.
The most significant impact of vendor-oriented pricing is based on the number of transactions needed to create a particular profit. Let’s assume the target is 10 million dollars, where if it came from one beachhead segment, it’s a good revenue stream to indicate that you have successfully crossed the chasm. In an OEM model satisfied by a two-tier distribution, that could be the outcome of one or two big design wins. In a direct sales model, it’s possibly more like 20-40 transactions, with part of it coming from maybe the top 5. In a Sales 2.0 model, you would multiply that by 10, which is like 200-400 transactions. In a VAR-enabled model pursuing small businesses. Multiply by another 10 and for a consumer high volume model another 10, about 20,000-40,000 transactions, averaging around 25 dollars a month. Each of these price points will trigger a different management view on the sales funnel. The higher the volume, the more transactional the process and the more you will depend on filling the top of the funnel.
The higher the price, the more relationship-oriented the process will be and the more you will focus on the bottom of the funnel. With a Sales 2.0, you will focus more on the middle funnel, where process effectiveness and efficiency have the most significant impact. That said, vendor-oriented pricing represents the least practical basis for pricing decisions in the chasm period. This is when you must pay more attention to the new demands of the mainstream customer and the new relationship you are trying to make with a mainstream channel. Due to the main importance of securing the current means of access to the mainstream market, the latter problem should be the main factor for pricing decisions in this period.
Distribution oriented pricing
From a distribution point of view, there are two pricing issues which have a significant impact on channel motivation:
- First, is it priced to sell?
- Is it worth to sell?
Being priced to sell is indicative that the price doesn’t become a huge problem during the sales cycle. Companies who cross the chasm, being successful in the early market with early adopters, usually have their products priced too high. Price becomes a problem with pragmatists. However, when the channel feeds back prospect resistance and adopts comparable products as proof of the expected pricing, companies often argue that they don’t have much competition and that the channel doesn’t know how to sell the product correctly. However, products can also be priced too low to cross the chasm. The problem is that the price doesn’t include enough margin to reward the channel for the extra effort to introduce a disruptive innovation into their existing established relationship with the mainstream customer.
Suppose all these perspectives are put together and viewed in the context of crossing the chasm. In that case, the pricing goal should be – set the price at the market leader price point and therefore reinforce your claims to market leadership, build an unfairly high reward for the channel into the profit margin, which is a reward that will be eliminated as the product becomes established in the mainstream and competition for the right to distribute increases.
Distribution and pricing are the only issues where marketing decisions directly contact the mainstream customer. Thus, these two have huge strategic impacts; especially with distribution, there is only one chance to get it right. This is why these two come last in the invasion planning to nail the other things first.