February 2004

Expand Into New Markets

The current political season is once again revealing the wisdom in PT Barnum’s old adage that you can’t fool all of the people all of the time. Certainly, most emerging company executives have figured this out in their own businesses — no matter how good the product or technology, you can’t sell it everywhere. Typically, companies first find a market where they gain some traction, often after a bit of trial and error, and then move forward into other attractive markets over time.

Two key questions many young growth company CEOs struggle with these days are: when should I move into new markets and which ones? This has been much less at issue during the last three years of tight growth capital and a down economy. And while resources continue to be managed very tightly, the economic recovery requires you to have clear plans in place to enter new markets over the next 18 months to expand revenue and reach or grow profitability.

The decision when it is time to move into new markets is important and often self-evident. Usually, you’ve had a good take-off with your initial offering into an attractive first market and can begin to see that it will soon reach its maximum revenue altitude. In the worst cases, fleets of unexpected and unfriendly aircraft appear for the first time on your radar screen when you approach higher altitudes. You may be able to fly under their canopy for a while, but eventually you will have to find another, less-crowded airspace to take your company and investors to a liquidity event.

When should we enter new markets and which ones?

The best scenario arises when you get up in the air, you see things more clearly than you had back in the hangar, and you realize that the aircraft you’ve built is capable of taking you higher (more revenue in your current market) and to multiple new destinations (new revenues in new markets). The decision about which new markets to enter is neither trivial nor self-evident. You must take three actions if you expect your investors to fuel your expansion into new markets.

• Define Need-Segments — to sufficiently focus precious time and resources, your current markets and potential new markets must be precisely defined or “segmented” based on common customer needs rather than industry vertical, company size or geographic classifications. These needs must represent tangible pain points that have financial impact for a set of customers.

  If your company has primarily sold to one or two industries or sectors within an industry, it is worthwhile examining whether other industries have needs similar to those you have already been able to serve. Selling your current offering in new markets with the same need-segments is usually a far more efficient use of time and investor dollars than developing new offerings to go after additional needs in industries that you already serve.

• Define Value Propositions — Once the need-segment you serve is clear, you must succinctly define the value you bring to the segment. Value propositions need to appeal to the emotional buying side of any transaction as in, “we stop network operators from inadvertently crashing your system,” as well as the rational and financial issue, as in “we can alleviate at least $50,000 per month of lost orders.” As you move between sectors within an industry or between industries, real work must go into customizing both the qualitative and quantitative aspects of the value proposition to explain how you will meet the customer needs of each new market.

• Define Offerings — What follows next is a tuning of the offering to the value proposition for the new markets. Since most emerging life sciences, information technology and communications companies can’t afford to go back into a new product development cycle to enter each new market, this step should really be a limited, customizing one.

  Jim Gilmore and Joe Pine, who authored the original articles and books on mass customization, wrote about four types of offering customization used successfully by many companies¹. Pursuing segments with value propositions that require only “cosmetic” or “adaptive” customization require little or no change in how the product is represented and no change in the product itself. These customization approaches are most attractive for emerging businesses as they require limited time and capital to make the offering ready for new markets.

With these steps done, you can move forward to establish marketing and account strategies, revise ongoing product development priorities, identify new channel partners, determine investment requirements, and advance your company wide strategies.

The best emerging companies have learned that in expanding into new markets, just like flying higher and into new airspaces, its best to define in advance and with as much rigor as possible where you will be going and how you intend to get there before leaving the ground. For both CEOs and pilots, this will improve the chances that you will arrive there on a timely basis with enough fuel to make the whole trip.