Entrepreneurship Innovation May 1, 2015

The Busi­ness Before Your Business

Plan to aggre­gate cus­tomers from day zero.”

Yevgenia Nayberg

Based on insights from

Andrew J. Razeghi

Busi­ness ideas, even good ones, are a dime a dozen — the busi­ness world is filled with prod­ucts and ser­vices that solve legit­i­mate prob­lems and offer valu­able alter­na­tives. Suss­ing out the mar­ket to val­i­date that idea’s legit­i­ma­cy may mean leg­work and num­ber crunch­ing, but it does not tend to be over­ly com­pli­cat­ed. The real chal­lenge for a busi­ness comes when it has to fig­ure out how to attract customers.

For Andrew Razeghi, an adjunct lec­tur­er of mar­ket­ing at the Kel­logg School of Man­age­ment and advi­sor to sev­er­al For­tune 500 com­pa­nies, aggre­gat­ing cus­tomers is where a lot of entre­pre­neurs find them­selves stuck. They do all of this work to come up with an idea, but they don’t know what that next step is.”

Efforts dur­ing this day zero” phase — when the com­pa­ny has nei­ther sup­ply nor demand — can be daunt­ing. In order to launch, a com­pa­ny needs a plan for how to aggre­gate cus­tomers at scale. Think of it as a busi­ness before you launch your busi­ness,” Razeghi says.

Seed­ing the Market

Design­ing ways to aggre­gate cus­tomers is espe­cial­ly com­pli­cat­ed for com­pa­nies that enter two-sided mar­kets. OKCu­pid, Uber, and OpenTable all faced the chal­lenge of get­ting two sets of cus­tomers com­fort­able with their busi­ness mod­els simul­ta­ne­ous­ly. When found­ing OKCu­pid, Sam Yagan under­took a strat­e­gy of seed­ing the mar­ket,” which allowed it to engage with tar­get cus­tomers and build trust.

Before it launched its online dat­ing busi­ness, OKCu­pid sent out a sur­vey intend­ed to help peo­ple dis­cov­er the type of per­son with whom they would make the best match. The sur­vey had noth­ing to do with the dat­ing web­site per se; it was sim­ply a way for the com­pa­ny to aggre­gate peo­ple who might have an inter­est in dat­ing. Cru­cial­ly, it also gave these poten­tial future cus­tomers imme­di­ate val­ue through their sur­vey results.

It would have failed if they had launched ear­ly and then said, Hey, we have this fan­cy new web­site — please give us your email address.’ No one would have done that.”

Chuck Tem­ple­ton, founder of restau­rant reser­va­tion web­site OpenTable, took a sim­i­lar, if more expen­sive, approach to get­ting buy-in from cus­tomers — in this case restau­rants. He had to put in Inter­net con­nec­tions and ter­mi­nals at cus­tomer sites, but it helped him aggre­gate con­cen­trat­ed demand ear­ly.” The point, Razeghi says, is to launch your busi­ness around the peo­ple who raise their hands and say, I’m in your market.”

You’ve only got so many hours in the day. If you’re try­ing to build a com­pa­ny and build a prod­uct and raise cap­i­tal and attract peo­ple to join your team, who’s focused on the cus­tomer 365 days a year?”

Anoth­er strat­e­gy for seed­ing the mar­ket is to begin with a ser­vice offer­ing that has poten­tial to become a prod­uct. 37signals start­ed in 1998 as a web-design firm, then became a soft­ware com­pa­ny with the release of its Base­camp prod­uct in 2004. Razeghi says there is an obvi­ous advan­tage to start­ing out as a ser­vices com­pa­ny and evolv­ing into a prod­uct com­pa­ny. You can bill clients for val­ue that you’re cre­at­ing while you’re build­ing the product.”

Get­ting the Roles Right

Once the busi­ness is ready to launch, it is impor­tant for founders to focus inter­nal­ly to estab­lish roles with­in the orga­ni­za­tion. This can be a chal­lenge for entre­pre­neurs who are used to being the cat­a­lyst for all aspects of the com­pa­ny. After all, they are the ones who devel­oped the idea, wrote the ven­ture plan, and secured the cap­i­tal to launch the business.

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A lot of times start­up founders will wait too long to bring in a sales­per­son,” he says. You’ve only got so many hours in the day. If you’re try­ing to build a com­pa­ny and build a prod­uct and raise cap­i­tal and attract peo­ple to join your team, who’s focused on the cus­tomer 365 days a year?” Suc­cess­ful founders act ear­ly to build teams that divide roles as ear­ly as pos­si­ble — for exam­ple, by giv­ing cer­tain peo­ple more mar­ket-fac­ing, cus­tomer-fac­ing roles and hav­ing oth­ers take more inter­nal roles such as man­ag­ing investors and the team.

This can be dif­fi­cult for founders with a nat­ur­al impulse to con­trol every aspect of their busi­ness. I think what peo­ple are attract­ed to in star­tups is that you have a chance to do it all,” Razeghi says. But in the longer term, that is sim­ply not fea­si­ble. There’s only so much one per­son can do. At some point, you’ve got to draw the line.” Hav­ing one per­son exclu­sive­ly focused on win­ning cus­tomers will help ensure the busi­ness gets off the ground successfully.

Over­com­ing Fric­tion and Inertia

When lur­ing cus­tomers, new busi­ness­es should iden­ti­fy the fric­tion that exists between a cus­tomer and what that cus­tomer is try­ing to accom­plish. Hon­ing in on this fric­tion can give star­tups an oppor­tu­ni­ty to add val­ue for their cus­tomers. When Uber launched its ride ser­vice, for exam­ple, it did so by address­ing a num­ber of issues cus­tomers had with taxi ser­vices: they took too long, were often incon­sis­tent, and were expen­sive. The more you can remove that fric­tion, the more you win,” Razeghi says.

But even star­tups that pin­point instances of fric­tion between cus­tomers and their goals have to take on the greater task of over­com­ing cus­tomer iner­tia. Peo­ple gen­er­al­ly val­ue what they have by at least a fac­tor of three over the new idea,” Razeghi says. We’re used to it; that’s how it’s always been done. So if your val­ue propo­si­tion isn’t at least three times more com­pelling, peo­ple are going to deal with the fric­tion. They’ll do it the way it is.”

This means that young com­pa­nies need to be hon­est with them­selves about the sub­sti­tutes that exist for their ser­vice. If the cus­tomers come up with a workaround, that counts. There may not be a com­pa­ny that does that, but if they fig­ured out a way to solve their own prob­lem, con­sid­er that — because it might be a competitor.”

Address­ing as many cus­tomer pain points and workarounds as he could imag­ine helped Saq Nadeem guar­an­tee that his pre­mier resort for cats and dogs, Paradise4Paws, was able to attract cus­tomers. Sim­ply build­ing a huge, deluxe facil­i­ty was not com­pelling enough to attract cus­tomers. But by sys­tem­at­i­cal­ly incor­po­rat­ing solu­tions to all of the var­i­ous incon­ve­niences that a trav­el­ing pet own­er has to deal with, he reduced cus­tomer fric­tion. His com­plete val­ue propo­si­tion, includ­ing facil­i­ties locat­ed close to air­ports, on-site vet­eri­nary care, and a screen­ing process to ensure that every pet it accepts is friend­ly enough to social­ize, tipped the scales in the company’s favor.

That’s at least three times more com­pelling,” Razeghi says. He could have stopped at any point, and it might have failed.” It was the fact that he addressed all of the pain points — all of that fric­tion — that guar­an­teed his success.

Order Andrew Razeghi’s new book Bend the Curve today.

About the Writer

Fred Schmalz is the business editor of Kellogg Insight.

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