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Selecting and understanding markets for technology innovation - continued

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In looking for such market opportunities, it is important to consider why these non-customers are not buying, so that you can develop the right solution for them. There are basically three reasons:

  • Non-customers do not know a solution is available. Non-customers may not recognize there is a solution that would meet their needs. This may be because existing offerings were not communicated to them, or may have been communicated to a different buyer in their company or household.
  • Non-customers’ needs are not being met by current offerings. Non-customers may perceive that existing offerings do not meet their needs. Most buyers typically have only two or three driving criteria in making a purchase. Currently available options may offer unnecessary benefits, and lack the two or three key benefits that this potential segment of the market needs.
  • Prices and / or risks of current offerings are too high for non-customers. Non-customers may not buy because existing offerings are beyond their price and/or risk thresholds. In many markets, there is a tidal wave of customers waiting to be unleashed by a simpler and cheaper offering.  

Identifying unmet customer needs

Once you hone in on one or more segments or potential segments in a market that appear to have unmet needs, you must explore them in detail in order to develop a profound understanding of their needs. This is not an area that you want to short-change with guesses or based on the views of just a handful of prospective customers. Understanding needs precisely and accurately is absolutely vital to the success of your business model. Many, many companies, large and small, have foundered because they did not quite understand their customers’ needs.
Given the vital importance of understanding customer needs, it is actually amazing how many new product innovations still get developed without any customer input. In case after case we have seen in both small companies and large, innovation and product development teams continue to come up with product ideas purely based on internal thinking. The “not invented here” syndrome is alive and well!

Clarify who is the customer

Understanding needs begins with clarifying exactly who is the customer. In many purchase decisions, both in the household and in business, there are a range of roles being played. These can include the champion, the influencer, the user, the purchase decision maker, and the final decision maker / provider of the funds. Each of these different players may have different needs, so to understand the “customer” in aggregate, you need to understand the needs of each of these categories of players.

Look for urgently felt needs

The goal of course is to identify deeply felt, unmet needs. Other than the early adopters (typically 5 – 15% of any market), most people are largely resistant to change. As such, they will not respond to a new offering unless it clearly helps them deal with an urgently felt problem, or helps them capture a strongly desired opportunity, for which they currently do not have a solution. Identifying and focusing on “nice to have” needs is almost never a recipe for a successful business model. A good rule of thumb is that it should be at least a “top ten”, and preferably a “top three”, need – that is, the need you address should rank amongst the top concerns of your target customer.   

Use a range of research tactics

While you can gather some information on customer needs from online research, nothing beats talking directly to prospective customers. This should be one of the earliest market development activities a new venture undertakes, and it should never end. Your past and current clients, even lost contracts, are excellent sources for researching the key needs of prospects.

The rise of social media offers a powerful new option for companies to understand customers and their needs. Paying attention to, and participating in, the ongoing conversations online about your market and product category enables you to get the pulse of your target customers quickly. 

To understand customers more rigorously, it is useful to think in terms of both qualitative and quantitative research. Start with qualitative research, typically conducted through one-to-one telephone or face-to-face interviews, or focus groups. Qualitative research is about rich conversations with customers, using discussion guides to get customers talking in-depth about their needs and options. It often doesn’t take more than five or ten in-depth interviews to uncover and begin to see the patterns in customer needs within a specific market.

Once you have developed a reasonable understanding of the range of customers and needs from the qualitative research, you can use quantitative research (surveys, typically done online) to assess how these apply across the market. This ensures your understanding reflects the actual market, and is not biased by a particularly vocal interviewee. There are a number of tools to allow you to conduct online surveys quickly and inexpensively. The challenge is to get people to respond. This requires you to think of and execute the survey like any direct marketing campaign, with a clear offer of interest to the recipient, a call to action and an incentive to respond.

For innovation, focus on what customers are trying to accomplish, not what they say they want

Identifying needs for innovation can be challenging, because it can appear that customers don’t know what they want. In many cases the technologies under discussion are so far from current customer knowledge and experience that they have difficulty talking about whether or not they would have a need for the innovation (who knew they needed a microwave oven?). Many companies have been frustrated by developing products that customers seemed interested in during research, but then failed to purchase once the product was launched.
One useful approach to help with understanding needs for technology innovation is that of the “lead user”, developed by Eric von Hippel15. The idea is to focus your customer research on those users and early adopters who are well ahead of the main market in their understanding and use of the new technologies. The feedback from these lead users can be very important in refining your offering to better meet the needs of the main market.

Another very useful stream of thinking and practice emphasizes focusing the research on what the customer wants to accomplish, not on how he or she might do so. One early proponent of this was the “voice of the customer” approach developed by Abbie Griffin and John Hauser based on the QFD (quality function deployment) methodology16. More recently, Tony Ulwick’s outcome-driven innovation approach17 applied by Clayton Christensen to his “jobs to be done” concept18 have become well recognized in the innovation community.  Similarly, ethnographic research aims to get inside the lives of customers to observe directly what they’re trying to do. Each of these approaches looks at what customers are trying to get done, not what they say they want.

Understand both “core” and “buying” needs  

Customer needs should be analyzed in two primary categories:

  • Core needs – these are the customer’s key functional needs – the core jobs the customer wants to get done. The primary focus of the product you develop will be to meet these core needs.
  • Buying needs – these needs are to do with the customer’s buying and ownership lifecycle – how the customer wants to learn about, try, purchase, install, maintain and eventually retire your product. The customer experience you design as part of your offering will be to address these buying needs.

Understanding both sets of needs is extremely important, because in most cases your offering has to meet both sets of needs in order for the customer to make a purchase decision.

It is important to bear in mind that customer needs continually change and evolve. There have been many cases where new market entrants have captured market share because incumbent suppliers had grown complacent in believing they understood their customers. You should ensure you are continually exploring your customers to identify whether needs have changed or whether there are new needs to be uncovered.  

Understanding competitors

After customers, the next category of market participants to understand is competitors. It is critically important to define your competitors from the customer’s perspective. Frequently this is an uncomfortable exercise for new venture managers, as with so much at stake in the venture, they are reluctant to recognize that customers do have other viable options to solve the problem. In many cases, though the innovation is clearly superior, other options are “good enough”. New ventures ignore a clear understanding of options from the customer’s perspective at their peril.

The first step in a competitor analysis is deciding on which competitors to focus. It is normally important to identify and analyze at least half a dozen or so direct competitors, and perhaps many more direct and indirect competitors in time.  

There are a great many things you can analyze about competitors, but for new products and ventures typically the primary focus should be on competitors’ target customers and offerings. For each competitor, focus on understanding:

  • Who is the competitor’s primary target customer?
  • What are the key benefits of the competitor’s offering when compared with the customer’s core needs?
  • What key benefits does the competitor offer to meet the customer’s buying needs?
  • What are the total costs and risks to the customer of the competitor’s offering?
  • To what extent is the competitor able or likely to respond to your offering? What are they likely to do?

Gathering competitive data can be difficult, particularly if your competitors are private companies. It is best accomplished by aggregating data from a number of sources. These include online research, particularly of the competitor’s website; reviewing the competitor’s sales literature; interviewing customers, prospects and channel partners; reviewing booths and chatting to the competitor’s salespeople at trade shows; and engaging a third party to make direct approaches to competitors to request information and product demos.
Like customer research, competitive analysis should be an ongoing activity, and competitive summaries should be regularly compiled and analyzed.

Understanding other market participants

The final element of the market component is developing an understanding of other market participants. These might include suppliers, channel partners, strategic partners, industry association executives, media contacts, industry analysts, investors and others.  Initially, identifying and speaking with a few people from these groups to gain a preliminary understanding of the market is very helpful. Over time, you will need to develop a deep understanding of each these groups in the market.

This paper has discussed the first component of Blue Mine Group’s business model framework for technology innovation – markets. By following the guidelines presented above, you will develop clear market focus and a deep understanding of your target market. This focus and understanding will be crucial to your efforts to design a successful business model for your technology innovation. 

To summarize: selecting your target market is perhaps the most critical decision in designing your business model. To do so, begin by generating and evaluating a wide range of possible markets. Then explore each short listed market in depth. Develop an understanding of the overall make up of the market – where it is on the technology adoption lifecycle, and its structure, value chain and ecosystem. Explore potential target customer groups within the market, looking for customers who are not currently fully satisfied, or who are currently non-customers. Develop a deep understanding of these customers’ needs, both core and buying, by listening for and observing what these customer are trying to accomplish, not just what they say they want. Seek and identify unmet customer needs that are urgently felt, and that customers will act on quickly once the right solution is available to them. Study all competitive options to assess their strengths in meeting these customer needs. And develop a sound understanding of all other market participants.

References

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  2. Baghai, Mehrdad, Sven Smit and S. Patrick Viguerie. The granularity of growth. McKinsey Quarterly, 2007 No 2
  3. Moore, Geoffrey A. Crossing the Chasm. New York: Harper Collins, 2002
  4. Coyne, Kevin. Enduring Ideas: The GE–McKinsey nine-box matrix. McKinsey Quarterly, September 2008.
  5. Drucker, Peter F. Managing for Results. New York: Harper & Row, 1986
  6. Bohlen, Joe M. and George M. Beal.  "The Diffusion Process", Special Report No. 18. Agriculture Extension Service, Iowa State College, May 1957
  7. Beal, George M., Everett M. Rogers, and Joe M. Bohlen "Validity of the concept of stages in the adoption process." Rural Sociology 22(2). 1957
  8. Rogers, Everett M. Diffusion of Innovations, Glencoe: Free Press, 1962
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  10. Bales, Carter F., P. C. Chatterjee, Frederick W. Gluck, Donald Gogel, Anupam Puri, and Don C. Watters. The microeconomics of industry supply. McKinsey Quarterly, June 2000
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  12. Drucker, Peter F. Innovation and Entrepreneurship. New York: Harper Collins, 1985
  13. Christensen, Clayton. The Innovators Dilemma: When New Technologies Cause Great Firms to Fail. Boston: Harvard Business School Press, 1997
  14. Kim, W. Chan, and Renee Mauborgne. Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition Irrelevant. Boston: Harvard Business School Press, 2004
  15. Von Hippel, E. Lead Users: A Source of Novel Product Concepts. Management Science 32(7), 1986
  16. Griffin, Abbie and Hauser, John. The Voice of the Customer. Marketing Science, 12(1) (Winter), 1993
  17. Ulwick, Anthony. What Customers Want: Using Outcome-Driven Innovation to Create Breakthrough Products and Services. McGraw-Hill, 2005
  18. Christensen, Clayton and Michael E Raynor. The Innovators Solution: Creating and Sustaining Successful Growth. New York : Harvard Business School Publishing, 2003

About the author
Michael Lurie is Founder and CEO of Blue Mine Group in San Diego, CA. Blue Mine Group provides courses, workshops and consulting in business model design for technology innovation.

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