Disrupting the Market

This past week, we discussed competitive analysis and market position.  For Mark’s and my venture, this is tricky.  According to Clayton Christensen, our venture would fall under the category of “new-market disruption” which targets customers who have previously unmet needs – in our case, students with loans and organizations with discrete projects that need to be completed for a modest amount.  Steve Bland says that a new market starts with the hypothesis: “we are creating something that never existed before for customers.” He suggests using the competitive analysis table (featured here: http://steveblank.com/category/market-types/) to show what customers could never have before by comparing our company to groups of products or services.

To gain some inspiration on disruptive innovation, I looked to an article called, “Here comes everybody: Why AirBnB is so disruptive.”

Here are some of the primary points from the article:

·       Businesses like AirBnB markedly lower the barriers to interaction, “to the point where it actually changes the way people behave in some fairly important and disruptive ways.”

·      The scale of the social web is a game changer

·      This isn’t just an “incremental change in human behavior, it is a fundamentally disruptive one” [1]

So, how does this apply to our venture?  Like AirBnB, we’re hoping to dramatically lower the barriers to interaction.  For the law piece of our venture, for example, we hope to provide small and mid-sized firms an opportunity to interact with (and scout) students in a way that they never have before; for students, we hope that our efforts will provide them with an opportunity to gain meaningful work opportunities and experience interacting with employers while in school.

Essentially, we’re both adapting a common brokerage business model and attempting to redefine institutional context.  Next week, we will be making a presentation to people rooted in the status quo by the nature of their jobs but who have been open-minded enough to listen to our idea.  For me, this raises the question: how do we balance getting the information we need from them to honestly consider the attractiveness of this new market while helping them believe in our vision?

[1] http://gigaom.com/2012/09/23/here-comes-everybody-why-airbnb-is-so-disruptive/

Time for Social Ventures in Mexico

This week I am going to talk about Mexico. Quite strange! This is strange, not because of the fact that I am Mexican and I love my country, but because I will try to convince you to take a look down the south border for new social ventures.

On the one hand, in recent weeks, some distinguished publications such as The Economist and the New York Times have been talking about current and future economic perspectives of Mexico. (Señores, Start Your Engines, The Economist; How Mexico Got back in the Game, The New York Times). These emphasize about the dominance that Mexico is showing compared to the BRICS, due to its stable and increasing economy, low supplies costs, and its proximity to the United States. An interesting scene for entrepreneurs is taking place in Mexico.

On the other hand, Mexico is still looking for help. As the United Nations Development Program argues, “people throughout the developing world are increasingly demanding to be heard.” The 2013 Human Development Report, which will be launched on March 14 in Mexico, will describe how global dynamics are driving to long-term implications for human development such as the provision of public goods. A clear necessity for social innovation is also happening in Mexico.

Although both scenarios, growth and need, seem to be contradictory, they represent the real situation of “fast-rising powers of the developing world.” Nonetheless, these also represent a stimulating opportunity to invest in new social ventures in Mexico. I hope this entry has accomplished its goal. Thanks for reading it.

Pricing and Distribution Strategy When Farming with Lots of Fixed Costs

Joel Salatin and his business, Polyface Farms, are my primary inspiration for starting an entrepreneurial farming enterprise.  The self-described Christian libertarian environmentalist capitalist lunatic farmer is, if you'll indulge my editorializing, a triple-bottom-line genius.  His enterprise makes money, is environmentally sustainable and builds community and social capital. 

A key tenet of his business advice to prospective farmers is to avoid sinking money into fixed assets upfront.  In contrast to the economies of scale (enabled by advancing technology along all fronts of the farming industry) that drive industrialized agriculture, he advocates starting small, avoiding upfront investments in permanent infrastructure and shiny John Deere's.  In his somewhat hyperbolic view, bootstrapping leads to prosperity; leverage to a form of modern indentured servitude, poverty and, ultimately, bankruptcy. 

His advice to prospective farmers is to start small.  Sell direct to consumers to maximize margins and harness natural symbioses to one's advantage.  If one is willing to embrace the simplicity and thriftiness of pastoral life, starting small minimizes risk and maximizes quality of life (in a rural/Christian/libertarian/environmentalist/capitalist/lunatic kind of way...seriously, Youtube this guy--he's great!  On debt-as-enslavement here). 

Anyway, I'm all for this.  Starting small and slowly increasing our production volume as we increase our capacity would be great.  The problem is that hydro/aquaponics requires the upfront investment in the greenhouse, fish tanks, pumps, etc.  Not to mention the higher price of land in the city versus in the country.  So we are locked into some significant fixed costs.  Like Prof Z says, once you are locked into doing something small, you might as well go big because the two require the same energy. 

This is where the pricing and distribution come in.  Staying small lends itself well to direct to consumer, premium prices, healthy margins, etc.  Going bigger means finding high volume consumers.  If we can do this without entering the traditional wholesale market-great.  Unlikely, though.  And once we enter the wholesale market, we lose a lot of our flexibility.  Cost-cutting becomes paramount.  At that point, we are competing with rural farmers whose fixed costs are substantially less than ours.  We are giving away our biggest competitive advantage--our physical proximity to retail markets. 

So we're in a fuzzy middle area.  The ideal would be to grow a massive direct-to-consumer distribution network.  Build a food retail business as much as build a farm business.  But when you look at trying to sell $400 bucks of lettuce a day 5 days a week, 50 weeks a year to hit just $100,000 in sales, it looks like a lot of work.  The more number crunching I do on marketing and sales, the more I'm convinced that the main barrier to urban farms isn't the factors of production--it's factors of distribution.  Did I mention that our product's shelf life is a day or two?

Again, it would be ideal to slowly ramp up production.  The fixed costs of a greenhouse, etc. mean that our production growth curve is a stepwise function, not a smooth curve.  Matching the marketing a sales aspect of our business to the production side will be a critical challenge.  We'll have to be savvy about pricing, branding (particularly if we implement a "discount" pricing scheme to help reconcile our stepwise production function and linear customer growth curve) and distribution. 

Identifying Target Market for Piloting and Sizing up the Competition

Market Segmentation

In drawing my target market,  as we saw in class, I was surprised to see how small population actually becomes.  Eek

In class we drew it as…
Total Population

                Potential Market

                                Available Market

                                                Qualified Market

                                                                Target Market

                                                                                Penetrated Market

 

Putting numbers to my market, this would be for the purposes of piloting in Pittsburgh.  Eventually the hope would be all teachers in states who have adopted common core standards.  Currently there are 40 states who have adopted the common core standards which went into effect this school year, 2013-2014. 

Total Population of students and educators 84 million (Census)

Potential Market-7.2 million educators in the US (Census)

Available Market-amount of public school teachers

Qualified Market-Teachers in public schools in the Northeast

Target Market-Teachers in public schools in PA 118,470 (NCES 2001)

Penetrated market-5,180 full-time employees and serves 29,445 (PPGazette)

Competition Analysis “If there is no competition, there is not market.”

They are good(competitors)…really good…they thought of things I didn’t…. BUT they are missing—

-a strong user base

-accreditation for teachers viewing

-variety and diversity

The major difference between my organization would be if I could actually get the site accredited.  This accredidation would make a world of difference to my comsumers (teachers).  It would offer them the flexibility to do their professional development at home, on their own time and ability to tailor it to their individual practice.

This differs from current professional development that is time comsuming, costly, and a catch all for everyone.

 

Reaction

I think since they are a small non profit the response would be "slow" to defend because of lack of financial resources.   

 

I know that I am a bad entrepreneur for saying this, but are there any great success stories that result in collaboration and/or a merger of social ventures? Or is my elementary two heads are better than one mindset creating this naïve thinking. 

 

Manufacturing Considerations

While working through our feasibility plan Adrianto and I have spent some time working on estimating the manufacturing costs for our raincoat.  This has been a bit challenging because the final design of our raincoat is still several iterations away however we have uncovered some interesting insights so far. 

First has been how manufacturing costs can vary so widely depending on what county you are buying from.  When I say this I don’t mean manufacturing costs vary depending on whether your manufacturer resides in the United States versus China, that much is obvious.  Rather I am referring to the location where you are originating as the buyer.  For example we first started our search for a raincoat manufacturer simply by typing in ‘rain suites’ into the suppliers search on Alibaba.com.  Immediately this brought back several manufacturers from all over the world.  The cheapest manufacturers were usually from China and quoting $5-$10 per rain suite.  This immediately was alarming to us because we are shooting for a $20 price point for our rain suites in Indonesia and already sending $5-$10 to the manufacturer doesn’t leave much room for an attractive margin.  Feeling a bit defeated we then decided to search for ‘jas hujan’ (Indonesian for rain coat) in the suppliers search on Alibaba and immediately we saw results again from manufacturers in China but now quoting $1-$2 per rain suite!  As interesting as it is that the price for buying the same product from China changes depending on whether you are buying from the United States or Indonesia, the good news is that the $1-$2 price range gives us something we can work with.  Sourcing directly from a supplier in Indonesia is not yet something we have fully considered however it would be our goal to partner with a local manufacturer in an effort to champion local support for our brand and save money on import tax.

Next, protecting the intellectual property for a new raincoat design has been something we have been considering.  Amber posted a very helpful article How to Defend Your Design Against Knockoffs that mentioned a couple of things I found encouraging.  One, being the first to market is a great way to protect your design.  This is exactly what we aim to be in the space for motorcyclist raincoats.  By attaching a strong brand identify to our raincoat design we will solidify our product in the minds of consumers as the first (and hopefully the best) in the space for motorcyclist raincoats.  Second the article mentions “if you have a really authentic look and feel, your brand will protect itself.”  Good design is always hard to replicate and this is something we are going to shoot for although I think it can be quite challenging. 

Last I find myself asking, realistically would anyone actually want to knockoff a raincoat for motorcyclist?  Compared to the other megabrands that one could knockoff, I’m thinking of everything from technology (Microsoft) to fashion (Louis Vuitton), which represent a much bigger market why would anyone go after a small time social venture making raincoats.  However at the end of the day even if the threat of imitators is low I think it still makes sense to plan for the worst case scenario.  

Brand Positioning: First Mover Advantages

Positioning a brand and particular product/service offerings is essential to any successful product launch. Before attending CMU for graduate school, I had the opportunity to work at a startup organization and was in charge of business development. This ambiguous title provided me with strategic marketing experience, a trait I never thought I would fully develop in my career. From what I learned with the launch of two companies in a saturated market is that brand positioning is essential at the very start of product development.

As mentioned in my previous blog entry, market segmentation and sizing can dictate the financial, operational, and marketing efforts of an organization. Narrowing down a target market is many times differentiating factor between successful startups and unsuccessful ones. However, with our Social Impact Bonds business, brand positioning is more difficult than I had anticipated. The reason being I am a bit lost as to how to position a company in an emerging and undeveloped market. Being that our venture is based on positioning an Intermediary Organization linking the government, investors, and non-profits, positioning our company to best serve all of these stakeholders is essential. This positioning is compounded by the uncertain regulatory environments of SIBs.

The six criteria useful for vetting positioning choices, as defined by Darden's Positioning: The Essence of Marketing Strategy, are:

1. Relevance
2. Clarity
3. Credibility 
4. Uniqueness
5. Attainability
6. Sustainability

I believe we are well positioned in terms of relevance, however clarity is going to be a hard selling point.  Because many investors do not necessarily understand the fundamental concepts of a SIBs, it is difficult to communicate our points of difference.

Our Company, colored in red, should be positioned with the highest growth potential and differentiation

We wish to make money on the spread of Social Impact Bonds. This spread is the difference between the Government repayment to our organization and our payment to Investors for bearing the risk of the investment.  We will create benchmarks for the non-profit to achieve and payment to investors is based on the attainment of these benchmarks. Our overhead is minimal in that the large fixed expense is derived from hiring an independent rating organization to vet the outcomes of the nonprofit.

That paragraph may be clear to Brendan and I, however it is still unclear to anyone who is hearing about SIBs for the first time. I need to figure out a good way to communicate this idea in a concise and understandable way. In my previous job, I would often times tell a quick story to help communicate our points of difference. However, since SIBs are unlike any other commonly understood financial vehicles, it is difficult for me to be clear and concise.

Credibility of our organization is premised on the attainment of top talent to set financial benchmarks for the non-profit as well as great communicators and lobbyists that have close ties to government.  Furthermore, uniqueness is tied to properly utilizing this top talent.  Because there are not too many financiers who understand how to structure these SIBs based on realistic but difficult to reach metrics, our expenditure to retain financial engineers is a large expense.

How attainable and sustainable is our solution? I think the answer to this lies in our product positioning based on our target market. If we can properly segment the SIB market and size it based on realistic metrics, I think we might have a shot of being a market disruptor in this industry. However, if we are not able to innovate with respect to the financial engineering of these SIBs, we will fail to differentiate from other Intermediary Organizations, ultimately leading to the failure of our venture.

The Marketing Prowess of...FreeCreditScore?

I was watching television the other night, and a commercial for FreeCreditScore.com came on.  The commercial, in an almost self-deprecating manner, said that viewers who had ideas for improving their company’s commercials could go to their website and either create their own commercial or simply suggest a better way to attract consumers with television commercials.  It felt like a cheap ploy to me – why are people like me doing their marketing department’s work?

The marketing literature suggests that new entrepreneurs must embrace new forms of engagement that technology enables.  Companies can gather data faster and more accurately than ever before.  New methods for targeting consumers, such as mobile/geographic-positioning capabilities, new customer engagement strategies, and better customer profiling, have redrawn the boundaries of what marketing dollars can achieve. 

Despite my first impression, it would seem as if there is a great deal of genius behind the write-your-own-commercial move.  It provides a window for the company to see into the minds of consumers outside of industry reports and demographic segmentation.  Using a consumer’s own words, a company can create a more accessible image while refining their marketing strategies to emerging tastes.  Who knows – a better television strategy could emerge as a result of such an invitation.

For my own start-up, I realized that I viewed the stories behind student debt as a burden to tell. These are very difficult stories to tell; the mother who lost her home after backing her child’s student loan would likely come off as a melodramatic way to market our social mission.  I was concerned that my company would not embrace an effective medium to tell those stories without instilling an equal degree of hopefulness for our solutions.

The readings completely changed my perspective on who and how should tell our company’s story.  Debt is a deeply personal issue, and individuals might best communicate the burdens that debt presents as well as the benefits of my company’s work.  Instead of our story being a burden, we should take a page from companies like FreeCreditScore.com, Match.com and others to give students a platform to tell their own stories. 

Are there emerging marketing strategies that may greatly benefit your business?

Source: The One Thing You Must Get Right When Building a Brand (Barwise and Meehan,

Harvard Business Review, December 2010)