Make Investors Sit up and Notice #11 – 10 Ways to Pivot

Make Investors Sit up and Notice #11 – 10 Ways to Pivot

Ì want to begin this post with an admission and acknowledgment:

I’ve been bombarding you with material for months that is high-level, sometimes counter-intuitive and, I hope, new and unique for you in the realm of how to fund your company. I’ve piled so much on your plate that you might be thinking you’ll never be able to fit it all into one investor meeting, much less remember half of it in that important meeting. In fact, you may be concerned that if you try and communicate everything I’ve suggested to an investor he or she may take you for a bookworm, not an intrepid entrepreneur.

So, if you’re feeling a bit overwhelmed (like the woman in the picture) by all the information and confused about how to use it, I get it!

Here’s the good news: Everything we’ve been discussing these many weeks can be synthesized into one overarching theme:

TRUST

Everything we’ve been discussing is about trust. We focus on trust while others focus on a market advantage, disruption potential, scalability, and creativity — among other things — because trust trumps them all. Let me repeat that:

TRUST TRUMPS THEM ALL

So as you read and review the posts I’ve written over the past few months remember that what’s important is not trying to incorporate every single thing into your pitch.  Instead, use them to deeply understand what builds trust and what erodes trust among investors.  Your context has to be TRUST.  If they trust you, they’ll truly hear you when you speak about your product, your company, and its potential. If they don’t trust you, it won’t matter how good your company is.

‘Nuff said.

The past couple of weeks we’ve been exploring the pivot. We’ve briefly looked at what a pivot is and is not. Why?  Because investors know that every company has to pivot at least once and probably more.  A CEO who can’t pivot at the right time kills his/her company.  We’ve explored the common circumstances when a pivot may be warranted. And we’ve examined when a pivot may not be the best option, even when conventional wisdom says it is. Today, we’re going to deepen your contextual understanding of when and how to pivot. I’m going to draw upon the great work of Eric Ries, author of “The Lean Startup,” as well as the experience and wisdom I’ve gained through my own entrepreneurial pursuits and my many conversations with investors.

My purpose in briefly going through the ten types of pivots that Mr. Ries has identified in his work is to help you find your own situation or potential future situation, based on the type of business you have, the model, industry, customer profile, sales channels, etc. etc. Wherever you are in business, a pivot opportunity is likely on the horizon. So, get to know the types of pivots and the situations when they might be useful to you — and remember that our overall context is developing and building investor trust, so the point of learning these things is to be able to apply them when necessary and to communicate to investors that you’re prepared.

I’ll define the ten pivots using the work of Mr. Ries that you can find here. The commentary is largely my own and that of my colleagues.

1. The Zoom-In Pivot

Consider this pivot when one feature of your product ends up becoming the whole product. You’ll learn this from the early adopters, or perhaps when you release to the wider market and don’t gain the traction you expected — a sign that customers aren’t sure what your product’s primary benefit is. You had a large set of product benefits, but early adopters are only using one aspect and/or the wider market isn’t flocking to it as you’d expect. The essence of this pivot is to simplify the product offering and focus on that one element that people are using.

Nike recently engaged in this type of pivot within its golf business, opting to stop selling golf clubs and related equipment and focus solely on apparel and shoes.

2. The Zoom-Out Pivot

This is the reverse of the Zoom-In pivot. In this case, your single-feature product isn’t gaining traction so you incorporate that feature into a new product that has additional features and benefits. This situation could arise when the major value proposition you hypothesized for your single-benefit product didn’t mesh with consumer desires, or when it provided only part of a larger solution-set that you didn’t predict. So, you develop a new hypothesis and develop a more varied product that, you hope, better matches consumer desires.

LinkedIn pivoted in this way. LinkedIn began as a popular, but limited offering allowing business professionals to post and share their positions, achievements and endorsements. But over time, the Company added things like lists, groups and limited advertising among members to enhance the social network benefits of the product. This has the effect of users spending more time and more active time on the LinkedIn site, as opposed to simply using it as a static “super resume” to which to link prospects and colleagues.

3. The Customer Segment Pivot

You’ve built a great product or service and people are using it in the way you’d hypothesized, but those people aren’t the group of core customers you’d planned on. Perhaps, the product is useful but not compellingly needed by your target customer; or buy-in and sales cycles are too long. A pivot could be warranted if you can identify a different customer base, one that could use your product for a more important perceived need.

Jonathan Crowe, writing in Open View, provides a good example of this type of pivot. Eloqua launched as a chat/messaging application designed for the financial services industry. But that industry never warmed to the product. It was functional but considered non-essential. Eloqua pivoted to a different customer segment — companies needing an efficient way to increase lead generation. Eloqua was later acquired by Oracle for $871 million dollars. They found a new core customer that really needed the product.

4. The Customer Need Pivot

The essence of the customer need pivot is utility. Your product or service is useful, but perhaps not useful enough. It solves a problem or caters to a need, but not the need your customers find most important. In this case, you’re not pivoting to a new customer segment, but re-designing your offering to be more compelling for the customer segment you already have.

I like the example of Starbucks for this type of pivot. The company began as a retailer of coffee beans, but of course ended up as a retailer of freshly brewed coffee and other foods. Today, of course, customers can buy whole bean or ground coffee by the pound at Starbucks locations, but the compelling need that still drives millions to the company’s stores daily is a cup of fresh brewed, distinct coffee.

5. The Platform Pivot

The platform pivot is of great importance to software and Internet companies. This often occurs when a company has developed an application for their platform, but the platform itself becomes the main thing interesting to customers. However, it can also happen in the reverse, wherein the “killer app” becomes vastly popular rather than the platform.

A good example of the platform-to-app pivot is Flickr. Flickr began as an online role-playing game (platform) within which one feature was a photo-sharing mechanism (the killer app). Customers didn’t warm to the game, but loved the photo-sharing app. so much that the company was acquired by Yahoo!

6. The Business Architecture Pivot

I’m going to let Eric Ries define this pivot, from an excerpt of The Lean Startup, reprinted here.

“This pivot borrows a concept from Geoffrey Moore, who observed that companies generally follow one of two major business architectures: high margin, low volume (complex systems model) or low margin, high volume (volume operations model). The former commonly is associated with business to business (B2B) or enterprise sales cycles, and the latter with consumer products (there are notable exceptions). In a business architecture pivot, a startup switches architectures. Some companies change from high margin, low volume by going mass market (e.g., Google’s search “appliance”); others, originally designed for the mass market, turned out to require long and expensive sales cycles.”

This type of pivot occurs when you design a product for B2B and end up selling it to the mass market, or vice versa. A great example of this type of pivot is the former Midwest Express Airlines, which merged with Frontier Airlines in 2010. Midwest Express began as KC Aviation in 1948, as a private flight service for employees of the Kimberly-Clark Corporation in Neenah, Wisconsin. After deregulation of the industry in 1978, the company decided to pivot to the consumer airline industry and operated successfully for three decades, with its famous hot chocolate chip cookies and two-wide large leather seats.

7. The Value Capture Pivot

The essence of this type of pivot is the “monetization” of a feature of a product or perhaps the aspect of a service. This occurs when a particular feature or aspect can be segregated out and a value chain is built around it that enhances the revenue generating potential of the company. Capturing value, of course, need not be a direct revenue play. It could involve such things as capturing data that could later be sold or capturing customers.

This kind of pivot opportunity can arise when what you do has corollary benefits that you hadn’t perhaps known before. I have a client that is in the health and wellness space. Their core business has been providing highly personalized, research-backed exercise protocols for a niche audience of people over 50. But for years the company has collected data from over 1 million client sessions. Recently, in conversations with an investor, it was suggested that the company might consider a pivot from a “specialized health service” to a “health and wellness data collection company.” After all, data on health and wellness could have high value to other businesses. The company is now considering that pivot.

8. The Engine of Growth Pivot

This type of pivot often occurs in concert with the value capture pivot. The basic premise is a change in the business model to speed up or increase profitable growth. Lars Lofgren, citing Eric Ries, writes in his blog that there are three engines of growth focused around how a business gets and retains customers: stickiness, viral and paid advertising. So an engine of growth pivot might involve changing the way a business gains and retains customers. This, of course, could heavily implicate things like sales and marketing strategies, production/manufacturing strategies and R&D choices and resources.

The National Football League provides a good example of such pivots. Recognizing that many customers could not watch their favorite teams when they lived outside of the local TV market, the NFL created a for-pay channel called “Red Zone,” where fans can watch, commercial free, every scoring drive of every game live, once a team got the ball inside the opponents 20 yard line. Major League Baseball has done something similar by providing subscription-based packages on the cable networks allowing fans to watch any game being played, no matter where they are geographically. These strategies increase overall revenues from games as millions of fans tune in to see their favorite teams, even though they cannot attend the game and the game they want is not offered on local television.

9. The Channel Pivot

The classic case in a channel pivot is selling a product “direct” to customers rather than through other sales channels. The reason for such a pivot is more simplicity in sales. A good example is Saturn, which owned its own “stores” for selling automobiles rather than work through dealerships. Saturn, of course, started that way rather than pivoting to the direct sales model. But the point is the same — get closer to the customer, create a simpler sales process, perhaps create a shorter sales cycle and retain control over the entire sales process.

10. The Technology Pivot

This pivot is more common among mature companies and involves finding a better solution for customers through a different technology that the company already has or can develop. Generally, such a pivot does not involve changing the core customer segment, solving a new problem, creating a new value capture or changing channel partners. The only question, as Mr. Ries explains, “is whether the new technology can provide superior price and/or performance compared with the existing technology.”

Software updates, new computer models, fuel-efficient vehicles, golf balls that spin more or travel farther, high-efficiency appliances and many, many other examples help define this kind of pivot.

Notice that a common theme here is what Ries calls “continuous innovation.” But this is NOT about unbridled creativity and impetuous “shake-ups.” It is about well-reasoned, well-researched shifts in strategy based on real testing of new hypotheses, within well-organized strategic protocols designed to produce results you can measure against the current hypothesis under which you’ve been operating. In other words, a good pivot is research/data based, thoughtfully planned and executed strategically. In the next post in this series, we will conclude our discussion of pivots by exploring the elements of an effective pre-pivot plan.

In the next post in this series, we will conclude our discussion of pivots by exploring the elements of an effective pre-pivot plan.

Key Takeaways: Understanding the different types of pivots will help you be more prepared when you face a pivot situation. Think about your own business and explore the ten pivots provided here –find those that you feel might most apply to your business. Be able to communicate to investors that you understand pivoting in general, you understand that sometimes a pivot is going to be warranted, you know the one or two pivots your company will most likely need to be prepared for and that you have prepared for them.