Why Virtual Is Real: It's About the Jobs

Bill Gurley has a great post about monetizing social networks. He analyzes TenCent, a Chinese IM company, and uses virtual world examples to demonstrate how social networks could monetize their huge base of users. The model has a few different names: freemium, digital item, micropayments. The New York TImes also has an recent article on digital goods.

Bill writes: 

It is my perception that most U.S. executives have trouble conceiving and believing in the digital item model. For starters, they simply think it’s strange. “Why would someone buy clothes for their virtual avatar? That’s weird.” What they fail to realize is that U.S. consumers pay for “virtual” things all the time.

And he gives a good example of consumers buying brands that are basically virtual, i.e. non-functional. For example, the willingness-to-pay for a pair of Channel sunglasses drops significantly if the Channel logo is removed. "People are buying an image" because they "care greatly about how they want to be perceived."

So yes, customers do by products that project an image about themselves in both the virtual and real worlds. In other words, they have emotional jobs that they want to get done in both worlds (and these jobs can be personal or social). 

The crucial distinction is between the functional and the emotional jobs, not the physical and the virtual worlds. In both worlds customers will need to get functional jobs done to accomplish goals and complete tasks, and they will need to get emotional jobs done (personal jobs to improve how they feel about themselves and social jobs to improve how they are perceived by others). 

If social networks want to analyze the opportunities for monetization, they need to focus on the functional jobs for two reasons. First, because these are the jobs that customers are more likely to have a willingness-to-pay for, and second, because it is much harder to consistently build solutions to satisfy emotional jobs (think about how fast brands and trends come and go).

It would be interesting to look at all the virtual products that have been sold by TenCent, Second Life, and ChangYou and divide the revenue and margins into functional and emotional job buckets (i.e. how much revenue has been generated by functional jobs vs. emotional jobs). 
 
I suspect that the opportunity for solutions to functional jobs is much higher than that for emotional jobs. 

The Elevator Pitch

A colleague of mine just sent me this HBS Elevator Pitch Generator. It is a nice tool, focused on "explaining yourself, your business, your goals and your passions." 

If you do an elevator pitch, I think it should be focused on three things: the size of the market, the job-to-be-done you are targeting (i.e. your customer's problem), and how you get the done done better (i.e. your solution). 
 
If you can quickly explain your customer's job and why it is difficult, frustrating, and time-consuming to execute, you will likely get your audience's attention. 
 
 

Top 12 Product Management Mistakes

I was introduced to Martin Cagan, the head of the Silicon Valley Product Group. Martin has an impressive track record and is an expert in product management. And he seems like a really nice guy. I was told his article "The Top 12 Product Management Mistakes - And How To Avoid Them" is a legend in the valley. And his collection of writings is impressive. I am making my way through them all. 

I thought I would post some comments about each of the 12 mistakes that Marty has identified and add solutions based on jobs-to-be-done. The ODI method, language, and quantitative tools are very helpful in addressing each of these problems. My analysis of the first two mistakes is below (the others will follow soon). 
 
First, a quick review of some definitions in jobs-to-be-done. A market is a job that the customer is trying to get done, i.e. the task or goal the customer is trying to accomplish (for example, develop code, restore blood flow, communicate while mobile, etc.). Every job has between 50-150 needs, or metrics, that relate to performing the job quickly and accurately. The job executor is the customer who actually performs the job. 
 
The value chain includes all the payers who help make, distribute, or service the solution, and each of these players have their own set of jobs to accomplish that are separate from the job executor. Purchase decisions are sometimes made by the job executor and sometimes by people in an organization who have different jobs to accomplish than the job executor. Jobs can be separated into functional jobs, emotional jobs, and consumption chainjobs. Functional jobs are the actual tasks that need to be performed. Emotional jobs can be personal (jobs that make you feel better about yourself) or social (jobs that make other people perceive you as a better person). Consumption jobs related to using a product (they include purchase, receive, install, set-up, learn-to-use, interface, etc.) Consumption  jobs are separate from the functional job because no customer buys a product to install it or interface with it - they buy the product to get the functional job done. 

So let's review the 12 product management mistakes and add some jobs-to-be-done solutions.

1. Confusing customer requirements with product requirements.

Marty identifies three problems with letting marketing or sales or the customer define the product to be built. Let's look at each in detail.

First, he states that "customers don't necessarily know what they want." Marty is correct in the sense that customers don't know what solution they want. But they certainly do know what job it is that they are trying to get done. For example, customers didn't know they wanted a microwave, but they certainly knew they wanted to prepared food quicker. This is why innovation has to focus on the job the customer is trying to get done, not on the the solution (the product or service). If the job is the unit of analysis, the value of a solution can be quantified and predicted with much greater accuracy without having to build it. 

This is also why there is no such thing as a "latent need." When people use the term "latent need", they are usually referring to the solution, not the need. In other words, customers didn't know they needed a microwave, so they must have had a latent need for a microwave. But there are no latent needs because customers always know perfectly well what job they are trying to get done. The certainly knew they had to prepare food quicker (a need) and the microwave (a solution) addressed that need well. 

Second, Marty states that "customers don't know what's possible." What he means is that customers don't know what solutions are possible. This is definitely true and I agree completely. Creating a solution is the role of the company, not the customer. Customers should not be asked what solutions they want - they should be asked what job they are trying to accomplish, regardless of the current solution they may be using or they may think they want. Product requirements should be generated by domain and technical experts only after all the customer needs (in the job) are known and all the needs have been quantified based on importance to the customer and customer satisfaction. 

Third, Marty writes that "customers aren't in a position to see the wide range of needs and opportunities" and that they don't "have the time to learn about others in the market and how their needs may be similar or different." This is true, but there is a solution. The needs are the same for all job executors because the job is universal - it has job steps and 50 to 150 needs. In other words, in a market all the customers (the job executors) are trying to execute the same job. So their needs are the same. What is essential is knowing which of these needs (of the 50 to 150) is satisfied and how large (in dollars) is the opportunity. 

Product managers should begin the product development process with an innovation step. Innovation entails identifying the customer needs, quantifying the needs, calculating the addressable and securable market opportunities, generating a solution (platform, business model, and feature set), and validating the solution with a statistically significant customer sample.

2. Confusing innovation with value. 

Marty writes, "Innovation without a clear purpose is simply technology looking for a problem to solve." What he seems to be saying here is that "technology R&D without knowing the customer needs is simply an idea looking for a need to fill." And I agree with this. It is why jobs-to-be-done defines innovation without any reference to technology. Innovation is creating a solution  (regardless of the technology to implement it) that satisfies customer needs. 
 
In jobs-to-be-done, a "problem to solve" is the job and its important but poorly satisfied needs. This definition aligns the interests of everyone in the company: the board, the executives, the product manager, the engineers, the marketers, the sales team, etc. It solves the confusion problem by "providing a clear vision and product strategy," in Marty's terms, or in jobs-to-be-done terms: by providing a complete map of all the customer needs and a way to quantify the opportunities and validate the solutions before any development. 

Marty also states that "innovation needs to be in support of providing true customer value." Which is, of course, true. So what is true customer value? Jobs-to-be-done defines value from the customer's perspective: enabling the customer to get the job done better. This is the goal of innovation. And it is accomplished by increasing the satisfaction levels of the 50-150 outcomes that customers use to measure the success of getting the job done quickly and accurately. And because each need in the job is a metric, each is knowable, measurable, and actionable. So true customer value can be calculated as a percentage between 0 and 100%.

 

"Heavy" Startups

I was with a good friend and great entrepreneur this weekend who has recently become a venture investor. He is exceptionally talented and I have a great deal of respect for him. He said something that made me think about startups and the innovation process. I was walking him through the details of jobs-to-be-done and he said, "that's heavy."

What he meant was that JTBD might be too detailed for a nimble startup financed with seed capital. But let's look at what any startup will confront, regardless of the model used to innovate. 

Of course, every startup has to ship a product or service that meets customer needs. That's a given no matter what the market. But a startup also exists within a value chain of suppliers, distributors, competitors, OEMs, etc. What this means is that the product or service not only has to meet the needs of the customer (the job executor) but also of the other players in the market who either help create the product or help distribute it. And each one of these players has needs that need to be met as well (i.e. they have jobs to get done). 
 
If every job has 50-150 customer needs, and every job executor has multiple jobs to get done, and every value chain has multiple players, the number of needs that need to be known and quantified upfront is certainly "heavy".  
 
A startup doesn't get to avoid these metrics simply because the cost of development has decreased. It can choose a "fail fast" strategy with lower levels of funding to try to satisfy needs. But this doesn't mean the needs are less "heavy", it just means that the startup is lighter. 
 
And there is more evidence today that the light and fast version does not work any better than traditional methods.

Thoughts on Reid's Rules

Reid Hoffman, the Founder and CEO of LinkedIn is a very successful entrepreneur and investor. I am a big fan of LinkedIn and support Reid's efforts to encourage entrepreneurship.  But let's look at his three rules for investing closely in order to make them useful for entrepreneurs.

His rules, in order, are: 1. reach a mass audience, 2. have a unique value proposition, and 3. be capital efficient. All good rules, but the question is how do you actually accomplish these goals? Reid's view (and the view of most venture investors I know) is that an entrepreneur has to figure out how to reach these goals.

I have always found it curious that venture investors will openly tell anyone that what they do is "pattern recognition". They look for similar patterns in opportunities and solutions that have worked in the past in order to predict success in the future. And this is true with Reid's rules: he is looking for distribution patterns, value proposition patterns, and capital efficiency patterns.

But if venture investors are good at pattern recognition (even if 63% of all their investments return less than 1x), wouldn't it be better to explicitly state what those successful patterns are and then (i) devise ways to acquire the data about the patterns and (ii) a objective, quantitative system to validate the patterns? Then entrepreneurs wouldn't waste time guessing about the patterns (e.g. "do we have a good value proposition") and investors would reduce their failure rate.

Let's look at the most important pattern: the value proposition. Without a value proposition distribution and capital efficiency don't matter (so I think Reid should have put value proposition first in his rules).  Of course, every company needs to have a unique value proposition. But what is "value"?  Reid states that "a product needs to be sufficiently innovative to distinguish itself from the pack, but not so forward thinking as to alienate the user." What does that mean? What quantitative criteria can be used to determine if a product is "sufficiently innovative" and "not so forward thinking"? And what is "innovation that is categorically distinct"?  Without a rigorous definiton of what these terms mean, they are almost useless to the entrepreneur.

Here's an example of the confusion: Reid states that Facebook used a "University-centric approach" to be successful. You might call this strategy "Friendster, but for college students". And yet, Reid criticizes "pitches that sound like 'It's a dating site, but for senior citizens.'" Without rigorous definitions for "sufficiently innovative" and "categorically distinct" it is almost impossible to see a priori what is different about "Freindster for college students" and "dating for seniors". How is an entrepreneur supposed to tell the difference?

What is needed is a definition of value from the perspective of the customer, i.e. the job-to-be-done. What is a customer need and how do you know if the need is satisfied or not - this is the pattern that matters.  All products must meet customer needs to be successful, and "sufficiently innovative" means that a product meets customer needs better than the existing solutions. So customer needs must by rigorously defined and quantifiable in order to be useful for the enterpreneur. The "pattern" (the customer needs) must be explicit and knowable in advance.

If the customer needs are defined, solutions can be generated to meet customer needs and the value of the solution (from the customer's perspective) can be quantified. If the solution does create enough value for the customer (and the value chain), it is much easier to figure out if you can reach a mass audience and if the business model will be capital efficient.

Cheap is too expensive

Josh Quittner has an article in Time on a new type of startup he calls LILOs for "a little in, a lot out". The essence of the article is that starting a new business now is easy and cheap. The cheap part might be true, but the easy part, not so much.

The article serves as a lesson in what is wrong with venture and startups today. Let's start with Josh's assumption that "It almost goes without saying that many more start-ups fail than succeed." This is very problematic thinking: authors, entrepreneurs, and investors just assume that this is the way startups work: the vast majority will fail so investors should spread capital across lots of companies in order to find one that might succeed.

This type of thinking ends up encouraging failure and risk. And it is why venture returns are highly variable and often underperform

For example, Josh writes (quoting Joi Ito): "'The cost of failure is cheap. It's so low, you can swing the bat way more times.' In a bad economy, no one really notices or cares about more failure. That creates a better environment for risk-taking, which is the only way innovation occurs." [emphasis added] 
 
So according to Josh and Joi: entrepreneurs should take lots of risk in an environment where they can fail again and again and again, until maybe they succeed. This is the standard way to think about innovation: start with tons of big ideas, build stuff fast and cheap to filter out the bad ideas and see which ones work. 

But let's say we thought about the innovation problem differently. Wouldn't it be better to focus on the cause of all these failures? Suppose instead that entrepreneurs were encouraged to mitigate as much risk as possible before any product development in order to succeed consistently. 

What's crazy is that this very logical idea (mitigate risk to succeed consistently) seems crazy at all.

Josh does causally identify the problem to be solved: "All that's required is a great idea for a product that will fill a need in the 21st century." But this begs the question: what is a "need"? Companies don't even agree on what a customer need is. Without a rigorous and quantitative definition of a customer need it is almost impossible to launch a product that meets customer needs.

As a result, it is not surprising, as Josh notes, that "there's often no correlation between the assumptions in a theoretical business plan and reality." But the problem is not with planning, the problem is the type of planning. If there is no agreement on what a need is, planning to fill it will not work. And launching a product to fill the need won't work the vast majority of the time either. 
 
The goal should be to develop a system that rigorously defines and quantifies customer needs and consistently leads to successful innovation. But with a mindset that encourages risk-taking and failure from the outset, it will be an uphill battle.

Startups Should Take More Risk?

Sarah thinks startups should take more risk: "they are supposed to be doing something that is risky, seems insane and can easily fail. If they aren’t, they’re probably not taking enough risk." 

This is a common myth and just about everyone, even the best in the business just accept it. But it is untrue. Startups should be figuring out ways to lower risk - and lower it dramatically. The problem is the equation that Sara (and just about everyone else) accepts without question: that risk = reward. She is encouraging startups to take more risk because this is the supposed way to create the next big thing. 
 
This myth is generally based on confusing risk with insight. What Sara should say is that startups should be doing something that is non-obvious because they have better insight into customer needs. Of course, doing this lowers the risk to the startup. Which is the real goal.
 
If you think you should be taking more risk, get out of your startup now. It will fail.

Four Flaws of Tech Commercialization

Guy thinks there are four flaws. He is right that "it's not easy to productize technology and start a company". The hard part is understanding the customer need. And he is right that patents (and technology) don't make people buy products. They buy products to get jobs done, and it is the job-to-be-done that is the most important part of commercialization. Failure to understand the job is the reason technology commercialization fails. 

Innovation Lessons From The 1930s

Should companies invest in innovation in today's down market? It depends on what type of innovation. In this Forbes article, the authors note that DuPont continued to invest in R&D in the 1930s and discovered neoprene (synthetic rubber), an enormously successful product. But this analysis lacks real data on investing in technology as opposed to innovation. How many companies lost how much in R&D and was it worth it? 

Innovation is creating a solution that meets customer needs. It is not investing in R&D. In any market, investing lots of capital in R&D can be (an usually is) extremely risky. 

A better way to invest in innovation is to figure out what the unmet customer needs are and then develop solutions based on known and proven technology first. If this isn't possible, then investing in R&D when the needs are known has much lower risk. So the right question isn't, "should companies invest in innovation?" The right question is "what is innovation?"

Silicon Valley a Systemic Risk?

The WSJ has a good editorial about why venture capital could never pose systemic risk. And I agree, but what is really revealing about this conversation about regulation and risk, is that the prevailing logic on venture and risk is absolutely wrong: everybody thinks risk taking is good. And the more risk, the better.
 
There is a sense that "good old American risk taking" is somehow the goal in itself: "venture capital is exactly the place where we have to encourage risk."
 
I would argue that the goal of venture capital is exactly the opposite: to mitigate as much risk as possible. The best entrepreneurs know this. They use their insight and experience with customers to mitigate as much risk as possible before they start a new venture.
 
The problem is that venture investors and entrepreneurs are not very good at mitigating risk. The dismal venture track record is a result of investments made based on "passion and vision" and gut feel about the market.
 
Don't take risk - mitigate it.