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Synopsis

How can the most cutting-edge start-ups fail? Start-ups fall to their death in the deep chasm that separates early tech adopters and the pragmatic mainstream followers. They are two different markets with entirely different customer profiles and purchase requirements.

Crossing the Chasm by Geoffrey Moore is widely considered "the bible" for entrepreneurial marketing. Master how you choose your target segment. Craft your market position, and leverage it to become the undisputed market leader.

Top 20 insights

  1. To market a discontinuous innovation that demands a shift in consumer behavior, the customer's attitude to technology adoption becomes central. Since start-ups specialize in discontinuous innovations, the technology adoption life cycle model becomes central to marketing efforts.
  2. Technology is absorbed in a community in stages based on the demographic and psychological profiles of various segments. The technology adoption life cycle model, which is a sociological model that describes the adoption or acceptance of a new product or innovation, reflects this as a bell-curve with five segments: innovators, early adopters, early majority, late majority and laggards.
  3. The high-tech marketing model focuses on moving segment by segment from innovators to early adopters. At each stage, marketers must tailor their approach to the segment's unique psychographics. Done right, it can lead a start-up to technology leadership and high-profit margins in a new market. If the start-up loses momentum before winning the early majority, competitors can overtake it.
  4. To create an early market, the start-up offers early copies of its disruptive product to technology enthusiasts. It leverages this by inviting visionaries to engage with technology enthusiasts to secure a technology buy-in. When the visionary is convinced about the technology offering a strategic leap forward, the market unfolds.
  5. A start-up's greatest danger is crossing the wide chasm between the visionary and pragmatist markets. While technology-driven visionary seeks disruptive transformation for strategic advantage, the risk-averse pragmatist wants an incremental improvement. Pragmatists buy from established market leaders based on extensive references from other pragmatists. Start-ups are forced to enter the pragmatist market without references and market leadership.
  6. Failing to cross the chasm is fatal as revenues dry up, market leaders perceive the start-up as competition, investors demand returns, and newer start-ups threaten to overtake the organization. The start-up has to break into the pragmatist market fast or go bankrupt.
  7. Crossing the chasm requires a bowling pin approach. The first step is to dominate a strategically chosen market segment to create a foothold in the pragmatist market. The second step is to line up other market segments where the niche solution created can be leveraged, creating the bowling pin effect.
  8. The key to expanding beyond the niche is to target a strategically valuable segment. Apple Macintosh targeted the graphics departments of Fortune 500 companies and solved the problem of creating high-quality presentations for executives and marketing professionals. Securing this niche, it expanded into marketing and sales departments, and finally, into external advertising agencies and publishers.
  9. Crossing the chasm is easier with applications as end-users champion them. For platforms, the decision-maker is the IT department, which emphasizes reliability over disruption. Though platforms are multi-purpose, its important to tie them directly to a single application for marketing purposes. While this may seem unnatural and difficult, platforms scale faster when the mass-market emerges.
  10. Choosing the right segment is a difficult decision. It carries the high-risk of enterprise failure, and there is little reliable market data. Previous assumptions from marketing to visionaries don't hold, and the pragmatists market has not seen similar products. Leaders have to acknowledge the low-data situation and make decisions based on informed intuition instead of analytical reason.
  11. Target-customer characterization is a technique to tap into the team's informed intuition. The team generates multiple use-case scenarios, each with a target customer and product application. Every member scores them against must-have factors and finally against good-to-have factors. The top scenarios are discussed, and a single target segment is decisively chosen.
  12. To cross the chasm, winning the target segment chosen matters more than choosing the most optimal segment. It is important to choose a segment large enough to meet revenue targets and small enough to establish the market leadership necessary to attract pragmatists.
  13. To bridge the gap between the promise made to the customer, and the actual product shipped, the start-up must assemble an ecosystem of products and services. This is called the "whole product." While the early market is willing to tolerate the actual product shipped, the mainstream market demands that the whole product be available from the beginning. Pragmatists evaluate and buy whole products.
  14. A relentless focus on the whole product and creating strong tactical alliances to speed up its development ensures that the customer's compelling need is fully met. Companies that execute this competently gain positive word-of-mouth and a strong foothold in the mainstream market.
  15. Delivering anything less than the whole product signals that the product doesn't solve the customer's compelling reason to buy. This results in customer dissatisfaction and poor word of mouth. The start-up must create the minimum whole product required for a single target segment. Every additional customer profile adds many new demands on the whole product.
  16. Pragmatists base purchase decisions on a comparative evaluation of products and vendors within a category. Therefore, start-ups must define their competition by locating themselves within a buying category populated with reasonable buying choices. The product must appear to be the indisputable buying choice.
  17. From a marketing perspective, crossing the chasm is a move from the early market visionaries who care about the product to the mainstream market pragmatists who care about the market. The organization must shift from marketing using product-centric attributes like speed, configuration and functionality to marketing based on market-centric values like market leadership and third-party support.
  18. Market-positioning has the single largest influence on the purchase decision. Customers hate being sold to but love buying. The key is to make the product easy to buy, not easy to sell. Instead of marketing many selling points, focus on making the product the obvious choice for a particular pain-point.
  19. Start-ups can create optimal market positioning by using two reference competitors to triangulate their unique value proposition. The market alternative is the de-facto market standard and represents the enterprise budget the organization is targeting. The product alternative represents a product with a discontinuous innovation but without commitment to the chosen target segment.
  20. The goal during distribution is to find a suitable sales channel based on the target customer profile. The product has to be priced as a market leader while ensuring a premium margin for the distributor as the company is leveraging the channel's existing relationships with pragmatists.

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Summary

Every innovative product starts as a great idea that attracts visionaries and innovators. This creates an early market. Then comes a wide chasm where the market waits to see if a value proposition for a targeted set of customers can be discovered. If a start-up succeeds in finding this product-market fit, then a mainstream market rapidly emerges. Therefore, crossing the chasm is a do-or-die proposition, which requires the attention of the entire team. Marketing takes the driver's seat during this period.

The technology adoption life cycle

Discontinuous innovations demand a change in consumer behavior. The technology adoption life cycle model describes stages of market penetration of discontinuous innovation. Based on their response to discontinuous innovation, customers fall into a bell-curve with five segments with unique psychological and demographic profiles.

1. Innovators: the technology enthusiasts

They are deeply engaged technologists who purchase new innovations for the joy of exploration. Winning them at the beginning is essential because their recommendation carries credibility in the market place. They give excellent product feedback and influence other buyers when convinced. While innovators do not make up a big market, their references are essential to winning visionaries over.

2. Early adopters: the visionaries

Visionaries are c-suite executives who can match breakthrough technologies with strategic opportunities and have the charisma to make the organization commit to a high-visibility, high-risk project. They have access to multi-million dollar budgets and are the least price-sensitive segment. The key to marketing to visionaries is to understand their dream for a strategic leap forward. Visionaries are highly visible references, drawing both press coverage and further customer leads. This makes them central to opening up the rest of the market. Visionaries are easy to sell to but difficult to please. They typically work in a "project mode" and expect personalization. They also exert pressure on deadlines. Therefore, the start-up has to design the milestones for each phase, such that:

  • It is realistically accomplishable
  • Its deliverables give rise to a marketable product
  • It convinces the visionary that is a concrete step forward

To get the market started, the start-up with a breakthrough technology product seeds the technology enthusiast company with early copies and then invites visionaries to interact with technology enthusiasts to verify feasibility. When the visionary is convinced, and the start-up agrees to significant product modifications, the market unfolds. Technology enthusiasts and visionaries constitute the early market.

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3. Early market pragmatists

Pragmatists wait for a technology to establish itself and seek substantial references before investing. Pragmatists seek productivity improvements without risk. They buy from proven market leaders to ensure an ecosystem of supporting products and reliable support. Since they form one-third of the overall market, they are the gateway to growth and profitability. They are hard to win over but are highly loyal once convinced. Many even make the product a technology standard in their company, leading to significant volume sales. Marketing to pragmatists requires attending industry-specific conferences, being mentioned in industry magazines, and being installed in other companies. Penetrating this market requires time and investment. But the advantage in winning them over is that it wins the conservatives as well.

4. Late majority: the conservatives

Conservatives are not comfortable with high tech and invest only when the product has become an established standard. They don't have high aspirations and usually buy preassembled packages at discounts. Marketing to conservatives requires selling complete solution packages through a low-overhead distribution channel. The pragmatists and conservatives constitute the mainstream market.

5. Laggards

They do not participate in the high-tech marketplace except to block decisions. The role of high-tech marketing is to neutralize their influence.

High-tech marketing moves segment by segment from early adopters to laggards using the previous segment customers as a reference base. If done right, it propels a start-up to a virtual monopoly with substantial profit margins. But if a start-up loses momentum in reaching the early majority, it could be overtaken by a competitor.

"Two cracks" and a chasm

The Technology Adoption Life Cycle has some gaps between psychographic profiles of two succeeding segments.

"First crack"

The "first crack" lies between the innovators and early adopters. If a start-up cannot show how its technology creates a strategic leap forward, then early adapters are not interested.

"Second crack"

The "second crack" lies between the early majority and the late majority. While the early majority is technologically competent, the new majority requires that the technology be made easy to adopt.

The chasm

The most dangerous transition is the vast chasm between the early adopters and the early majority. Customer expectations are radically different. The visionary champions new technology to gain an advantage over his competition. They are willing to tolerate fresh products with glitches. The early majority, however, seeks productivity improvement and wants technology to be easy to adopt. To guarantee this, the early majority seeks references from other companies in the same group. Early adopter references don't work because they are seen as a disruptive influence. When a start-up transitions from visionary early adopters to the pragmatist early majority, they are operating without a reference base and a support base in a market that highly reliant on both.

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The dangers of the chasm

Failure to cross the chasm can be fatal. With the visionary market saturating and the early majority not buying, market and revenue can shrink rapidly. Mainstream competitors will notice the start-up. Newer start-ups will be catching up fast. Finally, investors will expect bigger returns. The start-up has to break into the early majority fast to ensure survival.

Entering the mainstream market is an act of aggression. The dominant player will try to block entry, and customers will be suspicious of a new player. To cross the chasm, start-ups must focus their entire efforts on a niche market to secure a foothold and use it as a base for further expansion. The narrower the market niche, the easier it is to focus on marketing efforts, deliver superior service, secure a pragmatist customer base, and collect references.

Choosing the point of attack

The fate of the start-up lies in selecting the right market segment to target. But there is little hard data available to start-up teams base decisions on. The assumptions from selling to visionaries won't hold, and the pragmatist market has not seen a similar discontinuous innovation.

In the absence of data, segmentation efforts must focus on finding target customer images instead of finding the target market. Target-customer characterization is a process by which multiple target-customer scenarios, each with a customer profile and use-case, are created that represent characteristic market behaviors. Usually, this exercise is attempted with about 10 customer-facing members to generate around fifty scenarios.

A one-page target-customer scenario template would include customer details, a use case before the start-up's technology implemented, and a use-case after the start-up's technology implemented. Each use case documents what the customer is attempting to do, the approach taken, interfering/enabling factors, and the economic consequences/rewards.

Each scenario is rated by each participant on a scale of one to five against four show-stopper issues:

  • Is there a single identifiable buyer who is well-funded?
  • Is there a compelling reason to buy?
  • Can the enterprise, with the help of partners, deliver a complete solution within three months?
  • Has this problem already been addressed by another company?

Low scoring scenarios are eliminated. The surviving scenarios are scored against five more factors:

  • Does the organization have relationships with other companies to fulfill the whole product?
  • Are the sales and distribution channels in place?
  • Is the pricing consistent with the target customer's budget and magnitude of the issue?
  • Does the organization have credibility in the target niche?
  • Does the niche have good potential to enable easy growth into other niches?

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The highest-scoring scenarios are discussed until the team narrows down on one target segment. It's best to make a quick decision and double down hard behind the same. What is crucial is not choosing the optimum niche but winning the selected niche. To dominate a niche market and generate word-of-mouth, the market segment must be big enough to meet minimum revenue targets and small enough to be able to win half the orders.

Crafting the whole product

To create a compelling reason to buy, the organization needs to understand the whole product and organize the marketplace to provide that whole product.

The whole product model

There is a gap between the customer's compelling value proposition and the shipped product's ability to fulfill that promise. To overcome this, the product requires a range of ancillary products and services to become the whole product.

For the early market, the generic product is sufficient. However, mainstream market pragmatists evaluate and buy whole products. They prefer established vendors because of whole product availability, including books, seminars, support and pre-trained workers. Therefore, the enterprise must focus on creating the minimum whole product that fulfills the target segment's compelling need to buy. Anything less than a 100% solution leads to customer dissatisfaction and negative word of mouth. To hasten whole product creation, the start-up must create tactical alliances to jointly co-develop and market the whole product and ensure that all organizations win.

Every additional customer profile will put a large number of other requirements on the whole product. So the organization must focus exclusively on serving one segment.

Case study: Savi

Savi, a small start-up, created an entire market for Radio Frequency ID (RFID) based inventory control. In 1992, the company won a Pentagon contract for an RFID-based inventory control system. With the rise of "Just in Time" inventory management, efficient inventory management became mission-critical. To capitalize on this opportunity, Savi built the following whole product plan:

Savi products

  • "Gate Tracker" to capture tag information from fleet vehicles entering or exiting the yard
  • "Yardmaster" systems to connect yard workers to dispatch functions
  • "Dockmaster" to read trailers arriving at dock doors
  • RFID tags for each trailer
  • RFID handheld terminals for vehicles and yard workers
  • "Asset Management" software

Non-savi products

  • A server operable with standard Windows Intel PCs
  • Inventory management systems
  • Business process reengineering to adopt to RFID-based management
  • Training
  • Sales and services

This commitment to creating the whole product made Savi reach out to allies and partners to develop a comprehensive solution. This enabled it to gain enough pragmatist customers to cross the chasm.

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Define your market

Creating one's competition is the most crucial marketing decision for entering the mainstream market. This is done by locating their product within an existing buying category populated with other reasonable choices. The goal is to authentically position the product as the indisputable choice.

The competitive-positioning compass

In the early market dominated by specialists, the key-value domains for technology enthusiasts and visionaries are the technology and product respectively. In the mainstream market dominated by generalists, the value domains for pragmatists and conservatives are market and company. The value domain must influence the marketing strategy adopted at each stage.

The early market can be won by winning the skeptical technology enthusiasts with strong technology advantage and converting it into product credibility. In contrast, the mainstream market is developed by convincing the skeptical pragmatists through market leadership advantage and translating it into company credibility. Crossing the chasm is a transition from marketing to supportive specialist visionaries who care about the product, to marketing to skeptical generalist pragmatists who care about the market. Marketing must shift from an exclusive focus on product-centric attributes to market-centric values supplemented by product-centric values.

Create your competition

A product's unique positioning can be highlighted by choosing a market alternative, and a product alternative. The market alternative is the de-facto standard product in the market segment. The organization's product targets this budget by leveraging a discontinuous innovation to overcome that product's limitation. The product alternative is a discontinuous innovation that does not have the same commitment to this customer segment. The product alternative signals that its time to embrace change while the niche commitment sets the organization's product apart from the product alternative.

Case study: Box

With the rise of cloud computing, Dropbox emerged as an easy to use file-sharing utility. Given its customer focus, it did not invest as heavily on enterprise features. Enterprises continued to prefer Sharepoint, which did not have Dropbox's ease of use. Box exploited this gap by positioning itself as Dropbox for enterprises. Sharepoint was the market alternative and the enterprise budget it was targeting, while Dropbox was the product alternative that represented its disruptive ease of use.

The subtle art of positioning

Product positioning has the single largest influence on the purchase decision. But positioning ultimately exists in people's minds. The most effective positioning strategies are ones that demand the least amount of change. The goal is to make the product easier to buy by positioning it as the best buy for a problem solution. Positioning is a communications process with four components:

  • The Claim: A two-line statement of undisputable market leadership in a particular segment. The position must be defined based on the target segment and value proposition.
  • The Evidence: To make the claim uncontestable. The most compelling evidence for pragmatists is market share. In its absence, they look for the quality and number of partners and their commitment to your product.
  • Communications: Identify and address the right audience with the right message.
  • Feedback and Adjustment: When competitors poke holes in the initial effort.

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Securing distribution

Securing the right distribution channel and creating a pricing model that rewards the channel is central to cracking the early majority market.

Customer profiles for distribution

There are five customer profiles, each requiring a different marketing approach.

  • Enterprise Executives – They can make big-ticket purchases of company-wide systems. Executives expect a consultative sales experience that identifies their needs and customizes the vendor's offering.
  • End Users – Low-cost purchases for individual or small-group use. The freemium model, where customers get a free limited version and revenue is generated by upselling value-added offerings, is ideal.
  • Department Heads – Medium-cost purchases for specific organizational use cases. A sales 2.0 model where a web-based lead is handled by a human salesperson leading them deeper into the sales funnel works best.
  • Engineers – Engineers are demanding customers who make design decisions for products or services sold to their company's customers. Reaching out to them through the web, followed by a deeper engagement with a manufacturer's representative, works well.
  • Small Business Owners – They make modest purchase decisions. To target this channel, vendors must do the marketing end-to-end and partner with a Value Added Reseller (VAR) for post-sales support.

The entrepreneur has to choose the channel that best fits the company's target customer profile.

Pricing models

There are three broad pricing models:

  • Customer-Oriented Pricing – Pragmatists will buy from the market leader to keep the whole product costs low. They are willing to pay a premium of nearly 30% over competition for this. Therefore, a suitable pricing strategy is to price the product above the price of the two reference competitors chosen.
  • Vendor-Oriented Pricing – Vendor-Oriented pricing is based on the cost incurred from goods to sales. However, while crossing the chasm, this is not a sound pricing strategy.
  • Distribution-Oriented Pricing – Companies must price their products in a way that is not too high for a distributor to sell. Ensure that high rewards are built-in for the distributor to make it worthwhile to sell a disruptive innovation to their existing customers.

The chasm not only separates the early and mainstream markets but separates the companies that serve them. The organization itself transitions from being pioneers who push the technological edge to becoming settlers who are predictable, systematic, and market-oriented. This is the transition from being a start-up to becoming a market leader.

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