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Product Life Cycle
12 minute read

The Challenges of Initial Market Entry

Allan has over 25 years of experience in financial services, pharma, cyber-security, telecommunications, mobile apps, and biotech.

Nearly all great ideas begin as a small seed of possibility. Often, the idea arises because someone has enough knowledge about a particular domain that they spot an opportunity. For example, every organization in market X must utilize a clunky old legacy system because company A sewed up that market decades ago and has stagnated. The legacy system no longer meets current needs and is expensive.

Logically, it would seem that there’s an opportunity for a new company to enter and use new technology to deliver a better solution at a lower total cost. Upon its release, many customers in the market will switch to the new product. However, entering that market is much easier said than done, and many companies make critical mistakes even before the first line of code is written.

Identifying the Viability of the Opportunity

As many have noted, the hardest place to be stuck in is the middle of the value curve, also known as the “danger zone”:

Value curve for products

A high-end, big-ticket product can support a direct sales force and a lengthy sales cycle. This is the domain of Oracle and SAP. A SaaS offering with a low initial entry cost can thrive, without incurring the cost of a sales force because marketing can gain traction. But a mid-range enterprise SaaS product with a rich feature set and a somewhat demanding implementation cycle is difficult because the price is too low to sustain a direct sales force but too high for a low-cost-of-entry SaaS approach like Salesforce and Slack.

If the idea is stuck in the middle, it’s worthwhile to re-evaluate some assumptions and see whether there are ways to provide low-risk and low-cost entry models for prospective customers.

After that, in order to find out if there’s a real opportunity present in the marketplace, the opportunity must be validated in terms of the available market.

Validating the Opportunity

The first step is simply to determine the size of the potential available market. While such estimates are always best-guess, at least they provide an indicator of viability. If there are only three potential customers and each would be willing to spend $1 million per year, that’s not much of an opportunity. Conversely, if there are 100 thousand potential customers and each would be willing to spend $100,000 per year, that’s an interesting market opportunity indeed.

The available market is always smaller than the total market. To illustrate why, imagine selling shoes. There are 7.4 billion people on the planet and, in theory, they all need shoes. So, that’s a theoretical minimum total market of at least 14.8 billion shoes per year (assuming the average person buys one pair of shoes per year).

These assumptions aren’t correct. In the affluent West, people may buy several pairs of shoes per year, while in developing nations, the annual purchase is likely far lower. Then come trade barriers—many nations won’t let others sell shoes. After that come religious issues—some nations ban shoes made from leather (India) or pigskin (Islamic countries). Then comes the fact that the market for shoes is highly fragmented, with high-end players like Ferragamo and Louboutin, mid-range players like Clarkes and Nike, and low-end off-brands.

By the time the entry segments are clear, the total available market will be a fraction of the total overall market. So the question is whether the total available market is large enough to provide a good opportunity.

Understanding the Sales Process

Next, an understanding of the purchase decision is necessary. If it’s an individual purchase, how are individuals to be moved through awareness, desire, and the decision to buy? In a B2B context, it is important to figure out the gatekeepers, influencers, and final decision-makers. How are budgets allocated? When is the ideal time to present the product during the prospect’s budget cycle? How will the necessary people be persuaded? Will there be a dependency on intermediaries or partners? What lock-in does the present incumbent have that would make it difficult for prospects to switch, even if they love it?

Lastly, what is the total cost of adopting the solution? Total cost is the sum of the costs of the product or service, its implementation, lost productivity as the staff learns their way around the new system, and integration with third-party elements. If this total cost is too high, the solution won’t be attractive to most prospects.

It’s essential to be realistic when thinking about the opportunity space. There are segments that seem to present great opportunities but which, on closer inspection, turn out to have some fundamental reason that will make it difficult, or impossible, to sell to them.

By way of example, the religious organization segment in the USA would appear to have many needs that can be met by appropriate technology. This segment, however, is highly fragmented. There are thousands of small churches, so a direct sales approach won’t be economically viable. Reaching them via social media or other mass-marketing channels may not be effective. Larger religious organizations such as mega-churches and associations may be more attractive, but reaching the right people within those organizations is a significant challenge.

Furthermore, such organizations tend to be reluctant to utilize unknown products, have no formal internal decision-making processes, and often have constrained budgets for administrative operations. So, what initially seems like a compelling segment can turn out to be time-consuming and costly to penetrate.

Market Dynamic Matrix

Understanding market dynamics is key. Often, there may be market entry strategies that enable a new entrant to overcome challenges, but first, these challenges must be known precisely.

So, it’s worth creating a Market Dynamics Matrix to identify the various structural characteristics of the desired initial market and explicitly identify sources of friction.

Market Dynamics Matrix

Seeing the various dynamics in the marketplace can help prioritize tasks and budget for the likely required effort, as well as identify critical risks and potential mitigations. This will become the basis for the market entry strategy.

Determining Essential Functionality

The next step is to redefine precisely what functionality is essential to target organizations. It’s likely the original concept of the Minimum Viable Product (MVP) needs to be adjusted based on information from market validation activities.

MVP has to focus on mission-critical functionality. If mission-critical requirements can’t be met, then no nice-to-have features will be enough to succeed. These elements, while interesting to the development team, won’t be meaningful in influencing a purchasing decision.

Sometimes, mission-critical functionality is obscure, or far more complex than it appears at first.

By way of example, several years ago, I helped a startup that was looking at the medical records space. As existing solutions were antiquated, expensive, and difficult to use, it seemed, on an a priori basis, that the segment was ripe for a new entrant to breeze in with a superior solution at a lower price-point.

But, as we dug into the details by visiting clinics and medical group practices, we discovered a lot of unexpected complexity regarding interaction with external third-party systems. Insurance claims processing was one such dependency. The legacy product had connectors for the four main companies that perform patient claims processing, and each one required a specialist interface. Datatype identification, data cleansing, and data mapping were different for each of the four connectors. Without replicating all of this capability, no new product could hope to gain market traction. The founding team hadn’t identified this issue as a potential challenge early on.

Once the magnitude of the technical challenge was properly understood, the team was able to recalibrate its development time, budget, and overall development roadmap. Had we discovered this issue later, it would have been costly and difficult to rectify through the product development process.

Adoption Frictions

One difficulty that sometimes arises when trying to displace a legacy system is the fact that people find it difficult to adapt to something new even when the new thing is better and easier to use. Technologists often underestimate this built-in resistance because they’re personally used to embracing new technology. Ordinary people, however, need to focus on their core job and often resent the effort required to switch from the familiar to the unfamiliar, even if they’ve been complaining about their old system for years.

Sometimes, it’s necessary to find ways to bridge the gap between the old and the new in order to ease adoption, even if that requires a solution that’s not as optimal as a pure blue-sky implementation.

Want vs. Need

Steve Jobs famously said that people don’t know what they want until you give it to them. While this is often the case for consumer products, it’s conversely the case that, with business-oriented products, people often have a lot of wants but don’t properly understand their needs.

One example I encountered was when helping to implement a SaaS accounting system to replace an old client-server system. The client-server system had been built to minimize the number of pages required to complete certain process flows, which resulted in cluttered pages. A survey of the user group showed that people wanted separate pages for each sub-component of the overall process flow. The consultant thus configured the system to deliver what was wanted.

Unfortunately, this resulted in a system that had dozens and dozens of pages instead of the previous six pages. People got confused as they went from page to page, not least because the process flow sometimes required them to return to a previous page (and not necessarily the most recent previous page either). Using dozens of open browser tabs to enable back-and-forth solved their wants but only created a new problem.

What they needed was a series of pages based around the overall process flow. Reconfiguring the application resulted in nine pages in total, less cluttered than the old client-server system but no longer confusing because every required component per flow element was contained within a single page.

Focusing on Essential Features

Product managers need to be laser-focused on elements essential to the MVP. Each feature needs to be ranked in terms of customer value. If a feature doesn’t help close a deal, why is it in the development plan? As the MVP comes close to the finish line, there will be pressure to add new features. Each one must be rigorously evaluated in terms of whether it is essential for success. If two prospects say that they’d use the product if only X were added, this may not be sufficient justification. Do the vast majority of prospects need X?

Answering the question “what would we be willing to cut from the product in order to accommodate this new feature?” leads to better prioritization. If more and more things are simply added to the product backlog, no one is helped and the risk of execution failure increases.

Once there is a product offering that delivers the core requirements a segment needs and that is easy to use and implement, the next challenge is getting someone to buy it.

Impediments to the Customer Purchase Decision

The first problem many startups face is that new entrants aren’t universally regarded as a safe bet. Sure, the demo looks great, but prospects have all seen great demos that turn out to be terrible products in use. Sure, the price-point sounds compelling, but there will undoubtedly be a learning curve during which time productivity will drop and staff frustration will rise. And besides, they’re familiar with what they have, even if they complain about it endlessly.

And how does the prospect know the company will still be around in a year or two? This is particularly pertinent for SaaS offerings because, even if there is an offer to escrow the code, the customer knows they probably don’t have the inhouse skills, time, or money to create their own service on which to run the escrowed codebase.

The next problem is political. Organizations rarely make purchasing decisions on rational grounds alone. There are always influencers who have particular biases, and these people need to be identified early and persuaded. It’s difficult to make a purchasing decision, but it’s easy to decide not to buy.

If the end user is reached via a channel partner, life becomes still more complicated. Although partners have a vested interest in generating revenue and it’s possible to align incentives, people do strange things in reality. It’s not unheard of for channel partners to be insufficiently active to close deals, fail to present solutions properly, or fail to involve the other side in critical meetings. Don’t assume that a channel partner will follow through on their initial promises. If at all possible, channel partners and appropriate people from one’s own company should attend all client presentations and be in the loop for followup action items.

Qualifying Potential Clients

Early-stage companies are often so excited about their product and closing deals that they don’t qualify prospects thoroughly enough. Unfortunately, if the prospect pool is not qualified and reduced, precious time will be burned that could have been spent on more likely candidates.

Therefore, qualifying prospects early in the sales cycle is essential. We must be ruthless, not sentimental or overly optimistic. If a clear path to closing the deal can’t be seen, that is telling us something important we shouldn’t ignore.

Total Risk Analysis

Every new opportunity will have a certain amount of inevitable friction: challenges of creating the product, crucial relationships with channel partners, prospect reluctance to purchase, and so forth. In my experience, the more early friction, the lower the probability of success.

Yes, sometimes, there is a company that overcomes an Everest-size mountain of challenges and ultimately succeeds. But for every one of these, there are thousands that fail.

Total Risk Analysis lays out in black-and-white all the things that have to go right for success.

Critical Dependencies

Let’s begin with product development. If the product is reliant on someone else’s technology—still under development or unstable—that’s a huge risk. Similarly, if the development is new, then the unknown risks are potentially enormous.

There’s also the risk of misunderstanding market requirements. If there is little in-depth market research (e.g., meeting with and learning about prospects’ businesses until completely familiar with the dynamics involved), there is a large potential risk.

Other risks include:

  • Absolute dependence on one or more channels to reach target customers
  • A small team with irreplaceable members
  • Limited capital in the face of requiring much more to reach breakeven or some significant funding milestone
  • Many competitors in the target segment
  • Friction within the executive team
  • Dependencies on third-party technologies
Risk analysis for market entry strategy

Once potential risks are identified, a judgment can be made whether the total risk is simply too great or whether the number of risk factors can be reduced by rethinking certain elements of the business strategy and addressing internal issues quickly and appropriately. Efforts can be focused on a small number of unavoidable risks and their mitigation.

Achieving Reliable Growth

In the old days of enterprise sales, there was a simple model whereby early adoption was thanks to helpful technology enthusiasts who reveled in taking the latest and greatest tech and dragging it kicking and screaming into their organizations. The idea was that the new company would then parlay these early successes into credibility that could be used to close some deals among what were known as the “early majority” adopters. The early majority folk weren’t prepared to take a risk on untried products but did want to adopt products and technology once it seemed safe enough to do so.

The problem, as identified in books such as Crossing the Chasm, was that product development based on input from enthusiastic early adopters often wasn’t appropriate to meet the needs of the early majority folk. And so, companies would tumble into the chasm. Worse yet was the fate of companies that tried to develop new features and functionality based on whatever conversations the salespeople most recently reported from the field. This would invariably lead to enormous backlogs and incoherent product roadmaps, leading ultimately to massive development costs and confusing marketing messages.

Fewer Chasms But a Much More Crowded World

Today, things are a little different. Smartphone apps live and die on celebrity endorsements. SaaS products can attempt entry via freemium models, ad-supported models, direct sales for high-value offerings, viral marketing, monetizing user data, and perhaps half a dozen other ways.

Today, the challenge isn’t crossing a functionality chasm but simply gaining sufficient attention in a crowded and always-changing marketplace.

In one way, this is positive because the potential for developing inappropriate features is greatly reduced as there is much less risk of being influenced by a small group of unrepresentative early adopters; right from the beginning, the MVP is aiming at the needs of the entire segment. In another way, it’s a huge problem because rising above the noise can be the difference between success and failure.

While it’s always true that products will grow and mature based on evolving market requirements, it’s also true that the concept of Minimum Viable Product is as important today as it has ever been, not least because there aren’t many situations in which the classic Early Adopter model still holds true. Today, if the attention of the target segment isn’t piqued by a product that’s fit for purpose out of the box and ready to scale, it’s difficult to survive long enough to fix the underlying issues.

Which takes us right back to the early market entry analysis. Do this right, do it in-depth, and establish relationships during the process, and the chances of developing a solid MVP are good. Leverage those early relationships, and the chances of closing early sales are good.

With credibility established and customers willing to be references, and with a sales model that matches the typical deal value, there’s a reasonable chance to scale up and—after several years of hard effort—become an overnight success.

Understanding the basics

How do you develop a market entry strategy?

To develop a market entry strategy, you have to figure out customer needs, determine essential functionality, research competitor offerings, analyze risks, and create a minimum viable product.

What is a new market entry?

A new market entry can mean two things: a) A company might be creating a new product and entering an existing market; b) A company might be scaling their existing product to new geographic markets.

What do you mean by a minimum viable product?

A minimum viable product is the smallest arrangement of features enough for a given product to function and provide some benefit for the end user. It is usually developed to validate market assumptions.

Why is a minimum viable product important?

A minimum viable product is important to get feedback from customers and validate assumptions before investing too much into product development and ending up with a product that is not financially viable.

What is a risk analysis?

Risk analysis is a process of identifying internal and external risks that could jeopardize the market entry strategy.