The First Customers

The First Customers

In a new market, you need to secure a foothold. World domination can come later.

STEPHEN WUNKER is managing director of New Markets Advisors, a Boston-based consultancy aimed at helping companies find new sources of growth. Adapted from Capturing New Markets: How Smart Companies Create Opportunities Others Don’t (McGraw-Hill). ©2011

The open-air markets in Lusaka are crowded, noisy, and chaotic. As the capital of Zambia, in southern Africa, Lusaka is the country’s commercial hub. Ancient delivery trucks pull up along dusty streets to entrepreneurs manning steel containers by the roadside, unloading goods by hand that are then picked up by vendors on bicycles. The cyclists push their creaky, overloaded bikes to stores throughout the vast townships where the city’s poorer residents live. Shoppers line up there to purchase small amounts of goods that they bring to their homes on foot.

At first glance, the poverty is inescapable. Almost all these actors in the commercial scene are struggling, and purchases typically are small simply because the buyers have little money to spend.

But then it strikes you—there is all this cash being exchanged. The delivery driver is paid in cash, as much as $4,000 in small bills for a truckload of beer. The lean men powering the bicycle delivery network might pay $50 for their loads. The women in their shops, beautifully dressed in flowing robes, can have hundreds of dollars stashed in their drawers. Consumers have large quantities of small bills—the largest-denomination note in Zambia used to be worth about $2—stuffed into their pockets.

I arrived in Lusaka in 2002, sent by Celtel, one of Africa’s largest cellular networks, to create a new business using cell phones to exchange money. We called it Celpay (imaginative branding was not our strength). We knew we wanted to replace cash with electronic commerce, but where should we begin? We had millions of subscribers on the Celtel network—should we reach out to them first? Thousands of market vendors sold our scratchcards for prepaid airtime—should we try to get them on board? What about the other firms supplying those vendors with everything from toothpaste to cement—would they be interested?

We could not target all these parties at once. We could spend a few million dollars launching the business, but our funds were not limitless. No one had tried building this kind of business in Africa before, and our parent company was not about to plunge headlong into the unknown. If we were to establish partnerships with banks, we had to pick among many competing institutions. Regulators also wanted to understand what our business was, and I could not plausibly explain that it would be all things to all people. Moreover, we had little staff and had to focus people on a clear target.

We had to make a choice. We could not just leap to the top of the mountain that we needed to climb. First, we had to find a foothold.

Footholds are critical to new markets. Firms pursuing new markets are often seeking fast growth, and their impulse can be to enter with massive strength. Counterintuitively, the quickest route to success is often through entering narrowly in a foothold segment.

The Strengths and Dangers of Vision

Companies sometimes deny the need to choose a foothold. Having spent years in the core business, where markets are well understood and competitors are quick to copy, managers are used to launching new offerings with bold moves and large scale. After all, a major virtue of being a big company is the ability to push out offerings speedily. I certainly listened to many advocates of that approach back in Celtel’s head office in Amsterdam. “Just send our subscribers a text message that offers them some free airtime to sign up—you’ll get tens of thousands to do it.” These people were right—many people would jump at that offer—but would they become loyal users of the service? Where could they spend their electronic cash? Would consumers change their long-established payment behaviors so quickly? What if we gave away millions in free airtime and six months later we had little business?

Launching into a new market is different from pumping out offerings in the core of an established company. Usually, people being honest with themselves will recognize that there is a tremendous amount they do not know. Do people really want our product? Will they use it as intended? Will they pay what we require? Did we plan our costs correctly? How will the competition evolve in a year’s time?

Only the very brave will sally confidently into such murky waters. They may be under substantial pressure from senior management and investors to get big fast. Or, in other contexts, they may have grown used to creating detailed project plans and executing them ruthlessly. Sometimes the roulette wheel comes up 32 red, and everyone celebrates the bold winner. We tend to remember those victors, such as oil wildcatters or technology seers who took huge risks and had them pay off big. These stories are exciting, and we want to believe in the power of human genius to peer confidently through the mists and find the riches.

We also remember the biggest failures, when huge sums were staked on misguided ventures. Take Motorola’s $5 billion mistake during the 1990s with Iridium, a satellite-based system that enabled people to place a call from anywhere on earth, even the middle of the ocean. While the system worked as intended, it turned out that people were unwilling to pay exorbitant sums for handsets that were truly valuable only in extreme circumstances. As one technology executive told me at the time, “This project never would have gotten off the ground if it was a $50 million effort pushed by middle management. But because it was a $5 billion project championed by senior management, it was a vision, and no one wants to argue against vision.”

The dotcom era of the late 1990s was replete with this kind of vision. Who could argue with the vision of a company selling dog food by mail with its advertising led by a sock puppet? Because no one really knew how the Internet would evolve, and because everyone was in a hurry to get big fast, companies spent billions in a vast land grab. The biggest winner out of the Internet era? Google, established at modest cost in 1998, well after the land grab was under way.

More typically, bold efforts launch with a bang, struggle, and then fade away quietly. Management hesitates to kill projects that once appeared promising, so they linger in a zombie-like state before patience ultimately runs out.

Look at General Motors’ experience with its Saturn line of cars. Launched in 1990 as a totally new brand within the GM portfolio, Saturn was touted as a “different kind of car company.” Its iconic plant in Spring Hill, Tenn., became famous for its collegial working relationships and high-quality output. Yet after a first burst of buyer enthusiasm, sales began to disappoint. Gradually, the finance people in Detroit insisted that more costs be shared with the core business. With cost-sharing came conformance. Saturn became a less expensive company to run but also turned into a near-clone of other GM badges such as Chevrolet. Car buyers saw through the tactic and began treating Saturn just like its GM brethren. GM eventually shut down the brand in 2010.

When the “visionaries” come knocking, hide. It is entirely good to have a long-term vision of what a business can become and the way in which it should act along that path. Consider Google’s vision: “to organize the world’s information and make it universally accessible and useful.” This statement pushes staff to imagine new markets and gives their efforts an overall coherence. Yet it is also wise to be humble. Google tries out dozens of new ideas as beta tests every year, and it can prune failed efforts mercilessly. As Harvard Business School professor Willy Shih is fond of telling his students, “I can tell you we’re going to California and that we’re going to drive. But I can’t tell you where we’ll stop to have lunch on Tuesday.”

The Power of Footholds

Staging growth is an element of a foothold strategy, but it is not the same thing. Companies could limit their investment in a business while spreading small bets across diffuse market segments. They could focus solely on research and development up front and defer actual product launch. By contrast, a foothold approach focuses investment on creating an offering for a very small number of market niches, and it seeks to get out into the marketplace early to obtain the sort of real-world feedback that countless hours at a whiteboard never can achieve.

Speed

While getting big fast is a hazardous proposition, new businesses do need to move quickly; the return on investment earned by a venture is a direct function of how fast profits are realized. Footholds accelerate action: By focusing money and people on a small, well-defined target, footholds enable rapid decision-making. Offerings will not accumulate hundreds of features—they just need to be good enough to appeal to initial target customers. Sales efforts can be concentrated, so early customers may sign up more quickly. If some part of the proposition does not work for a key stakeholder, the negative feedback will be loud and specific.

At Celpay, time was limited. The core telephony business was growing by over 20 percent annually, and it was hungry for capital. Skilled staff can be hard to find in a place such as Zambia, and if we did not find success quickly, others would hire away our technology and sales teams. Fast decisions were needed.

My first day on the job, I gathered with my direct reports in a musty conference room with a chalkboard of the kind I remembered from grade school (while we shared a building with the cellular network, we did not get the fancy offices). We did some simple math. What commission could we earn from a street vendor receiving cash from consumers? Maybe 4 percent. How much would the firms supplying township-based depots be willing to pay us for money received? Maybe 1 percent. And so on. Then, how big would a transaction be at each stage of that chain? What sort of penetration could we achieve in the first year?

Math can provide a wonderfully clear compass heading. We quickly concluded that a 1 percent commission on a $4,000 truckload of beer, delivered daily, could lay the foundation for a successful business. A 4 percent commission on a bottle of beer, bought occasionally, could not. We decided that Celpay’s foothold market should consist of multinational firms distributing goods to supply depots that lacked electricity and Internet access. These multinationals had substantial sales, and they were constantly in fear of fraud and theft. They had the capital to have their own fleet of trucks. But because their depots had no power or online access, they had few, if any, other options for electronically transferring funds.

Focusing on these distributors would require few sales staff and no advertising expense. It was not a slam-dunk: These customers would need to change their financial procedures, and they required some features that our software did not have. But there was no question about demand: Out of an eight-hour delivery run, distributors spent three hours counting cash. Cash was counted seven times between when it was paid and when it was banked. The companies delivering to the supply depots were desperately eager for a solution, and we could penetrate those accounts in a matter of months.

Gaining Scale

One of the iron laws of business is that firms are more profitable the larger they are relative to their competition in a given marketplace. Scale allows companies to save by purchasing more cheaply. It spreads costs such as technology, marketing, and management across a larger sales base. Scale also can enable firms to price higher because customers like to buy from a leader in the industry, and the leader can afford to create product features that followers lack.

The laws of scale apply equally to new markets, provided that scale is achieved within narrow groups of customers. The new business likely has relatively large overhead as a percentage of sales, and focusing the offering on a particular foothold enables the company to limit the complexity that drives that expense. Furthermore, when firms are pioneering new propositions, they need to get known for something. Customers are used to thinking of firms as doing specific things, not as fuzzy entities that could morph in dozens of directions. If the company can be the leader in providing something, even to a very limited market, it may be able to charge the prices it requires to make money. It also can deter would-be competitors, who may start with less recognition in that space and fewer capabilities.

At Celpay, we competed against both the ingrained habit of using cash and a planned system for interbank electronic transactions between companies. A working group of banks had been outlining such a system for two years and was starting to implement it. Aside from the hindrances of management by committee, that system suffered from lack of scale. Its mandate was to serve as a one-size-fits-all mechanism for executing transactions. As such, it could not afford to build capabilities tailored to specific markets, such as the ability to export sales records into inventory-management systems or the ability to conduct transactions via cell phones in street markets where PCs were impossible to operate. Judged as a whole, the interbank system had far more functionality than Celpay, but it was not targeted at a foothold. Celpay, on the other hand, was very good at serving the needs of a specific foothold customer set.

The Sociology of Innovation

Sociologists have long studied how innovations diffuse within a population. Starting with a landmark 1943 examination of how Iowa farmers adopted novel seed corn from 1928 to 1941, they have traced how innovations tend to take root in a small sliver of a population that is prone to consider new approaches because they are desperate for a solution, have processes to assess these offerings, or are simply intrigued by new things.

In a foothold market, customers often will know each other, even if they compete. They may hire people from rival firms, meet at industry events, or golf at the same country club. Even if they do not know each other personally, they will be keenly interested in what their competitors are doing. They will not want to be outdone by fast-moving rivals, and they will not want their bosses asking why they missed a chance to understand a competitor’s newly acquired capability.

Zambia had a small economy, with a GDP of about $3 billion at the time of these events in 2002. There were not many multinational firms to target as our foothold; however, the finance directors of these companies tended to live in Kabulonga, a leafy neighborhood of Lusaka near the presidential mansion, and they often knew each other socially. We realized that if we could get the beer company on board, we would have an excellent chance of winning the cement company’s account, and then the oil company’s, and so on.

By focusing on a foothold, a company creates reference customers. Firms or individuals who are not the first adopters of an offering can peer over the shoulders of those who have taken the plunge and can understand the relevance of that experience.

Competitive Signaling

While it is illegal in many countries for companies to collude on price, it is well-established practice to signal intent to lead a particular market. In this way, firms can limit their head-to-head, price-based competition and instead can dominate particular market segments based on their unique offerings for that customer set.

By becoming known for something, market pioneers can tell their would-be competitors, “Back off. There are many other small sets of customers that you can penetrate, but with this one you are going to be a follower.” Then the leader has some time to iterate its offering for its chosen market and to further entrench its position.

Some companies worry that they will tip off competitors to the existence of enticing markets before they have the scale to exploit them effectively. Competitive fears in new markets are frequently exaggerated. Others often have thought about a market but may have decided to pass for a host of internally focused reasons, such as lack of synergy with the core business or scarcity of funds. Conversely, if the existence of a new market truly had not occurred to them, the followers can be strongly tempted to wait and see how the entrant does before seeking to emulate it.

Hazards Within Footholds

While footholds are critical to success, firms entering new markets face several hazards.

Choosing the Wrong Foothold

Every business strategy carries a downside, and this principle extends to footholds. One significant danger is that the trailblazer will choose the wrong foothold. Given that much remains unknown at the time a foothold is picked, a firm might invest its resources in pursuit of an illusory goal. Indeed, we almost encountered this issue with Celpay. We had not thought through the entirety of the process that customers would need to follow, and we neglected to realize that it would be difficult for the supply-depot entrepreneur to put his cash in the bank—enabling the electronic transaction—if he did not have a car. While banks were not terribly far from the markets, the entrepreneur was understandably reluctant to walk through the streets carrying thousands of dollars in small bills! We solved the problem by having two trusted drivers provide a free, very low-key taxi service for this network of entrepreneurs.

Firms can help themselves avoid wrong footholds by staying wary of marquee accounts. Project sponsors often push new businesses to land prestigious initial customers so that they can convince investors to provide further funding. The problem is that marquee accounts understand their status, and they milk it. These firms are accustomed to being demanding and having their suppliers do whatever it takes to keep them happy.

Celpay required a banking partner to accept cash deposits and inform us of the amounts. Otherwise, there would be no way to get money into the electronic system. We had discussions with most of the local institutions. Large multinationals had precise specifications that did not align with how our software was configured; their technology centers were in distant countries, and working with a Zambian startup was definitely not on the priority list. So we started our business in partnership with the African Banking Corp., a small Zimbabwe-based bank that had a grand total of three branches in Zambia. ABC was not prestigious and had limited computer systems. But it was looking for some sort of advantage in the marketplace, and its processes were eminently flexible. For Celpay, it was a perfect fit.

Time Frame

Occasionally, a firm considers a foothold approach but concludes that it will take too long. Senior executives support new platforms because they need growth—in a hurry—but they typically overestimate how rapidly a get-big-fast approach will bear fruit. By throwing resources at the initiative, executives create internal bureaucracy and force more complexity into the offering so that it can generate the necessary sales. Project timelines lengthen, and customers change their minds about what they want. Rather than getting to a small customer base quickly with a limited offering, the company tackles a large set of buyers slowly with a complicated product. In uncharted waters, this is a bad idea.

Celpay took eight months—about double the anticipated time—from that day on the chalkboard to commercial launch. We encountered unforeseen technical and regulatory issues, and our lead customer had to obtain approvals from high in the organization to do something so radical. However, after these delays, the business took off. Based on our experience with the first customer, South African Breweries, we adjusted our processes and technical systems, and we won a slew of new accounts. Today, Celpay can profitably transact as much as 5 percent of Zambia’s GDP through its systems. We had this as our ultimate vision, but the company never would have gotten to that destination without a foothold strategy that allowed for focus and fast iteration to satisfy target customers’ latent needs.

Foothold strategies build on a paradox. Through focusing on small targets, the foothold approach enables more rapid penetration of big customer sets. Mastering this paradox requires considering why a foothold strategy is suited to a particular venture and determining which advantages of footholds are particularly important to attain.

Managers then can choose a foothold to maximize those advantages. Equally, they can keep perspective about how much to invest in the foothold, given that this group of customers might seem insignificant compared with the company’s ultimate aspirations. Winning in the foothold is a goal, but it is also a means to an end.