Crossing The Chasm by Geoffrey Moore

The Book in Three Sentences

The Technology Adoption Lifecycle creates a vast gap between the needs/wants of the early adopters and those of the mainstream market. To reach the mainstream market innovators and marketers need to narrow the chasm and find ways to accelerate mainstream product adoption. This book explains how to target a specific niche market, offer a whole product solution and become the market leader.

Summary

A market is:

• A set of actual or potential customers
• for a given product or service
• who have a common set of needs or wants, and
• who reference each other when making a buying decision.

If two people buy the same product for the same reason but have no way they could reference each other, they are not part of the same market.

Markets must be segmented because no meaningful marketing program can be implemented across a set of customers who do not reference each other. Without references, you have no leverage and no company can afford to pay for every marketing contact made.

Types of customers

Technology Enthusiasts: Are easy to do business with provided you: 1) have the latest and greatest technology and 2) don’t need to make much money. — Direct marketing works best for this group – think demos, webinars, tutorials but avoid the flashy image-based marketing.

Visionaries: Want to find technology that provides a significant shift forward in the value that can be provided to the market. They want to use this to help them achieve their goals. — A small direct sales force is the only way to sell to visionaries because you need someone who can understand their goals and give them confidence your company can step up to them. Ensure they have the political status and funding to achieve their visions.

Pragmatists: When pragmatists buy they care about the company they are buying from, the quality of the product they are buying, the infrastructure of supporting products, the reliability of the service. They are planning to live with their buying decision for a long time. – Pragmatists won’t buy from you until you are established in the market, but you can’t get established until they buy from you.

Value-added resellers are one way to reach pragmatists if they have a reputation of delivering high-quality work, on time and on budget. Pragmatists are price sensitive and without a differentiator, they expect the best deal. The best way to win over pragmatists is to make yourself into the obvious supplier of choice.

How to Cross the Chasm

Target a very specific niche market where you can dominate from the outset, drive competitors out this niche, and then use it as a base to expand into adjacent niches.

To capture a pragmatic customer base we must deliver a whole product, the complete set of products and services a customer needs to achieve their desired result (which should be our sales promise)

Pragmatic customers tend to delay their buying decision (creating the chasm) because they are trying to understand who the market leader will be, so we need to give reassurance that we are or will become the market leader by having other pragmatist customers we can reference. To do this we want to be a big fish in a small pond.

The key to moving beyond the initial target niche is to select a strategic target market segment, to begin with that has one or more relevant adjacent segments.

Identifying a Target Segment

The market development strategy checklist below shows all the factors to consider when planing a go-to-market strategy. You can rate a target segment against each one.

• Target Customer: Is there a single, identifiable economic buyer with an accessible sales channel we can use to reach them?
• Compelling Reason to Buy: Are the economic consequences sufficient to make a buyer anxious to fix the problem your product fixes?
• Whole Product: Can your company (with help from partners) field a complete solution to the target customers compelling reason to buy in the next three months?
• Competition: Has this problem already been addressed by other companies who already occupy the market?
• Partners & Allies: Do we have relationships with the other companies needed to fulfil the whole product?
• Distribution: Do we have a sales channel in place that can call on the target customer and can we fulfil the whole product through distribution?
• Pricing: Is the price for the whole product in line with the customers budget and will they gain value by fixing their problem?
• Positioning: Is your company credible as a provider of products in the target niche?
• Next Target Customer: If successful in dominating this niche, will these customers facilitate entry into adjacent niches?

To become a persistent entity in the market you need a market segment which will commit to you as the standard for enabling a critical business process. To become the standard you must win at least half of the new orders in the segment over the next year.

If the target segment is too small to generate half of next years sales for the new product, then you have to augment it with another segment. If there is no appropriate super-segment, you should pick another target.

The Whole Product Model

There is a gap between the marketing promise (the UVP) made to the customer and the ability of the shipped product to fulfil that promise. For that gap to be overcome, the product must be augmented with a variety of services and/or products to become the ‘whole product’. There are four levels of whole product completeness:

• Generic Product: what is shipped and covered in the contract.
• Expected Product: the product the customer thought they were buying when they bought the generic product.
• Augmented Product: The product fleshed out to provide the maximum chance of achieving the buying objective.
• Potential Product: The products room for growth as more ancillary products enter the market and customer-specific enhancements are made.

At the introduction of any disruptive innovation, the marketing battle happens at the generic product level. As the marketplace develops and we enter the mainstream, products become more alike and the battle shifts to the expected, augmented and potential layers.

Early adopters (tech enthusiasts & visionaries) will create the whole product for themselves. But to cross the chasm and reach the pragmatist you must create the whole product for them.

If you leave the customers success (to achieve their goal) to chance, you are giving up control of your own destiny.

Big companies struggle to play in small niches. From the customer perspective, if you are willing to go the extra mile for them it builds a level of long-lived loyalty.

To accelerate your path to a ‘whole product’ you can form strategic alliances with other companies to augment the functionality of your product and support your segments compelling reason to buy.

Positioning and Competiton

In the pragmatist’s domain, competition is defined by comparative evaluations of products and vendors within a common category.

For pragmatists, understanding the competition is a fundamental condition for purchase. Therefore, creating competition and positioning your product within a buying category that pragmatists understand is key.

Crossing the chasm requires a shift from technology and product based values to market and company based ones.

You develop an early market by demonstrating strong technology advantage and converting it into product credibility, and you develop a mainstream market by demonstrating market leadership advantage and converting it to company credibility.

Because pragmatists, like to buy from market leaders they need to understand the competition. Creating competition involves using two competitors as beacons so that the market can locate your companies unique value proposition. We can use two reference customers to position our product:

Market Alternative: This is the vendor that the target customer has been buying from for years. Our intent here is to help the customer identify the budget they can use to buy with.

Product Alternative: The company that is harnessing the same disruptive innovation as we are, and is positioning itself as a technology leader. Our intent here is to acknowledge their technology but differentiate through our own segment-specific focus.

If you cannot find a market or product alternative you are probably not ready to cross the chasm.

Most people resist selling but enjoy buying, By focusing on making a product easy to buy, you are focusing on what a customer really wants. This is the goal of product positioning and there are four types for each customer type:

1. Name it and frame it: Technology enthusiasts cannot buy what they can’t name, nor can they find a product unless they know what category to look.
2. Who for and what for: Visionaries will not buy something until they know who is going to use it and for what purpose.
3. Competition and differentiation: Pragmatists cannot know what to pay for a product until they can place it in a competitive context.
4. Financials and futures: Conservatives cannot be completely secure in buying a product until they know it comes from a vendor with staying power who will continue to invest in the category.

Positioning is all about the audiences state of mind, not yours.

Distribution Channels

The number one objective when crossing the chasm is to secure a distribution channel into the mainstream market. There are five types of customer to consider:

Enterprise Executives: Make big-ticket purchases, adopted across their companies. They are looking for a consultative sales experience and are best reached through relationship marketing, such as leadership events.

End Users: Make low-cost buying decisions on personal or workgroup technology. They are looking for a self-service buying experience and are best reached via promotional marketing, such as email and click-through ads.

Department Heads: Make medium-cost buying decisions for use-case-specific solutions. They are stuck between enterprise executives and end-users. Generally, the marketing approach is the same as for end-users but on upon registering interest and becoming a prospect they often referred to a human salesperson who manages the sale through, email, chat and calls.

Engineers: Make design decisions for products to be sold to their companies customers. They generally don’t like being salespeople or marketing communications. They are not generally the purchaser, but a major influencer. They are best marketed to with factual information and with samples or free-trials.

Small Business Owner-Operators: Make modest purchase decisions, that are very material to them. They are best sold to through Value-Added Resellers and reached through promotional marketing channels.

Pricing

The number one concern of pricing at this stage is to motivate the channel. There are three perspectives on pricing:

Customer-Orientated Pricing: Visionaries are relatively price insensitive, whereas conservatives want low prices. Pragmatists expect to pay a premium price for the market leader (~30%).

Vendor-Orientated Pricing: This is based on the vendor’s cost base and margin requirements. The biggest impact of this kind of pricing is the number of transactions required to create the targeted annual revenue.

The higher the volume, the more transactional the process, and the more you depend on filling the top of the funnel. The higher the price, the more relationship orientated the process, the more you focus on the bottom of the funnel.

Distribution-Orientated Pricing: Is the product priced to sell and is it worthwhile to sell?

The fundamental goal should be to set the pricing at the market leader price point, reaffirming yourself as the market leader and then build a high margin to reward the channel that will be phased out as the product becomes established in the mainstream.

After The Chasm

The post-chasm enterprise is bound by the commitments made by the pre-chasm enterprise. One of the first tasks of the post-chasm era may be to manage yourself out of these pre-chasm commitments.

In building an early market the ROI is investor risk reduction, post-chasm it is about making money.

No mainstream market can occur until the whole product is in place.

A Note on Venture CapitalUntil break-even cash flow is achieved nothing is secure, and your destiny is not under your own control. In slow-developing markets with low capitalisation, there is a strong case for adopting profitability from day one. Early customers will pay consulting fees and pre-pay to help low-capital startups.

Enterprises that are venture-funded for long-periods often fall into a ‘welfare-state’ mentality, losing their urgency and focusing on the next paycheck from a financing round, not from the market.

It can be worth taking VC money if the cost of category development and market entry is too high to fund in other ways, or the category is expected to develop so fast that you cannot afford to grow organically.

Generally, early market development efforts do not respond well to massive infusions of capital.

A Note on People
Before the chasm the organisation is dominated by pioneers, power is often held by top salespeople or product managers. By the time you enter the mainstream market, the power should be distributed more broadly among account managers and product marketing managers who are better suited to stewarding the organisation through a more settled period. This gradual dissemination of power will frustrate the pioneers, hamper the ability to make quick decisions and make them want to leave.

A Note on Compensation
Compensation should be split into two categories:

Account Development: Should reward things like the longevity of the relationship, customer satisfaction and predictability of the revenue stream. It should be spread over time and not clumped into dramatic payments.

Account Penetration: Should reward the winning of a new account. It should be provided in bulk and in recognition of a single achievement.

Equity should be reserved for people who help the company cross the chasm and contribute to the development of the whole product, not those that just contribute to the early core product.