Business Optimization

HBR, 1st Feb 2015 > Business-to-business start-ups are an important segment of the entrepreneurial landscape, but many founders hamstring themselves by focusing on the wrong initial customers. They focus on large enterprises, hoping to gain legitimacy from “anchor” customers. This focus can make their path much more difficult, and dramatically reduce their chance of success. Instead, B2B entrepreneurs should focus their efforts on small businesses.

The traditional line against targeting small businesses is that they’re costly to sell to. That’s short-sighted. Selling to small businesses is a great way to start a business, and often sets the stage for selling to larger enterprises later on. In this way, the start-up that initially served only small businesses can disrupt incumbents and come to dominate the large enterprise market, too.

Several examples of this strategy have emerged over the past few years:

• Salesforce disrupted expensive on-site customer databases by offering a cloud-based solution that replaced substantial up-front expense with a low monthly subscription.
• Vistaprint disrupted local printing shops by offering web-based design and ordering and centralized production, using economies of scale to dramatically reduce costs.
• Stamps.com disrupted traditional mail-processing companies like Pitney Bowes by replacing expensive equipment purchases with an online application and monthly subscriptions.

The pattern continues today with start-ups that are in the early phases of this journey:

• Expensify is in the process of disrupting administrative assistants and office managers with an app-based expense reporting product.
• HourlyNerd (which was founded by members of my MBA class at Harvard Business School) is disrupting the consulting industry by connecting businesses with independent consultants.

To understand how small business solutions can disrupt large enterprises, I studied HourlyNerd and share here the lessons entrepreneurs can use to create disruptive B2B businesses by starting with small customers.

Because small businesses have similar needs to large businesses, a model that profitably and effectively serves them can be scaled to serve medium and large enterprises with relative ease. Small businesses are also extremely low-risk proving grounds because there are so many of them that failure with any one customer won’t lead to large reputational damage.

Better still, because small businesses desperately want these products but can’t access them, they will be happy with much less functionality than large enterprises that have many products to choose from. This gives start-ups a great entry point for a simple product that can be improved over time to appeal to more demanding customers. Gone are long pre-launch development cycles that attempt to create the optimal product for the most demanding customer. Instead, entrepreneurs can launch quickly with little capital and improve over time. In fact, HourlyNerd was started during Harvard’s FIELD program with only $5,000.

The first step to entering the small business market is to identify opportunities where incumbents are ignoring small businesses because their products are too expensive or complicated. Amazon’s Jeff Bezos recommends looking for opportunities to convert capital and fixed expenses into variable costs. So look for industries where upfront costs are high and new technology could offer similar services with little or no upfront commitment.

Next, create a minimum viable product and work closely with your initial customers to understand what goes right and wrong. For HourlyNerd, this meant individually matching each business and consultant and performing thorough interviews with each before and after the service. It’s important in this phase to temper your growth; make sure your unit economics make sense before seeking to scale.

Keep the product general. Create standardized offerings that many small customers can apply to their unique situation without expensive and time-consuming customization. Similarly, it may be tempting to categorize your customers by attributes like geography or business type, but resist this and instead organize them based on size and sophistication. This will allow you to segment your products and create simple solutions for simple needs and more complex solutions for more demanding customers. Framing your opportunity in terms of the benefits you offer and not customer demographics will help you see opportunities in ever-larger enterprises.Even once you start targeting enterprise customers, it’s possible to do so without competing directly against the bigger competitors. For example, HourlyNerd recognized that while very few people in large organizations have the money or need to hire a major consulting firm, many people have small but important problems that make perfect small consulting projects and space in their budgets to hire a consultant. Similarly, in the post-recession world, many managers have no ability to hire additional staff but have complete flexibility to hire a freelance consultant on a short-term basis. By serving these people, HourlyNerd is now growing in the enterprise space without meeting resistance from big firms, because they’re growing the category with new consumption rather than stealing existing consumption. `

Every business naturally improves its product over time. As B2B entrepreneurs improve theirs, they will find that they can meet the needs of these underserved constituencies in large organizations. The pattern of disruption continues when more demanding constituencies inside the enterprise see the results from the disruptive product and begin to consider it as an alternative to incumbent offerings. Typically incumbents will ignore the startup because they don’t feel any pain from lost sales until their best customers abandon them for the new offering. But by then it’s too late; the startup has succeeded in the disruption and is too big to defeat easily.

This strategy is not without challenges, including brand perception — remember the adage “No one ever got fired for buying IBM.” But with time this can be overcome. While initially many large enterprises may have balked at the idea of using a web start-up called Salesforce.com, no one today bats an eye at the idea, even in the largest, most sophisticated companies.

by Thomas Bartman > Harvard Business Review > 1st Feb 2015 > start up business strategy.