Traversing the Traction Gap

by Bruce Cleveland

  Siebel’s CRM solutions were built using this client/server model, and its pricing was based upon “perpetual licenses.” Companies purchased a perpetual license to use Siebel for hundreds of thousands or even millions of dollars, along with a corresponding annual maintenance agreement. Customers were responsible for installing, configuring, and maintaining Siebel CRM solutions in their own data centers on their own hardware.

  In 1999, Salesforce’s founder and CEO, Marc Benioff, recognized that a new—and, to his mind, far superior—form of application software development, delivery, and pricing model was emerging. It turns out he was right. Really right.

  This new model relied on browser technology from dominant companies of the era, such as Microsoft (Internet Explorer) or Netscape (Navigator), to render the application interface on a user’s desktop or laptop, with shared servers and resources located in a remote location to process and store the application data. This model promised an easier way for application software companies to deploy their applications and an even easier way for their customers to consume and pay for them. Using this approach, companies no longer had to purchase servers, install software, and manage the entire system to keep it running.

  This new approach offered an entirely new business model. Companies could subscribe to use the service through a relatively low cost-per-user monthly fee. This let companies of all sizes gain access to mission-critical business software for a fraction of the cost and time of traditional enterprise software solutions.

  Benioff seized upon the opportunity to upend incumbent enterprise application software providers using this new computing model. And he chose a very clever way to discuss and position this new category. He didn’t fall into the trap—as most technology startups do—of talking about “cool technology features.” Instead, he decided to introduce and convey the significance of this new category by using an internationally recognized sign—a circle with a red line drawn diagonally through it—with the word “software” inside. The meaning—“No Software”—was obvious at a glance.

  He did this to easily and quickly signal that there was no need for companies to buy “expensive,” “bloated” enterprise software anymore. Just sign up and use what you need—just like a utility service such as water, gas, or electricity—and simply pay a monthly subscription fee.

  His first target application? CRM. And the market leader in CRM in 1999—now nearly a $2B juggernaut—was Siebel. In an instant, Benioff was able to beautifully convey what Salesforce did vs. Siebel and every other enterprise application software provider.

  Monte Zweben, former CEO of Blue Martini and current CEO of Splice Machine, provides an interesting anecdote from the era:

  At the time I was running Blue Martini, Tom Siebel was on my board. Another investor and advisor to my company was Marc Benioff. Marc was trying to convince Tom of this idea to create CRM in the Cloud (it wasn’t called that back then, of course).

  But, according to Marc, Tom didn’t bite.

  So Marc started this little dinky company to do CRM in the Cloud. Marc and I talked about it, and he offered me this great deal—it may have been free—to be their first customer.

  As a result, Blue Martini became the first customer of Salesforce.com and the first company to support a new category of CRM.1

  The company’s sales exploded—a lesson to other potential Salesforce customers.

  So, did Tom Siebel, an astute technologist and businessman, fail to understand the potential benefits of Salesforce and what is now known as cloud computing? Unlikely. Tom recognized that a subscription-based pricing model could potentially disrupt Siebel’s business model. He, along with other enterprise application software leaders—including Larry Ellison at Oracle and Hasso Plattner at SAP—intentionally derided the approach as a joke to undermine its image to their existing customers. At one point, Larry said, “Maybe I’m an idiot, but I have no idea what anyone is talking about. What is it? It’s complete gibberish. It’s insane. When is this idiocy going to stop?”2

  And, in the early days, the product offerings from Salesforce and others using this new computer-science and business model were sufficiently immature, and the business buyers sufficiently skeptical, that few people gave the new approach significant credence.

  But, as Blue Martini showed, Benioff’s insights weren’t a joke.

  Benioff successfully created a new category and business model that we all now recognize as cloud computing and “Software as a Service” (SaaS). He chose to use this new computing and pricing model to verbally attack the market leader, Siebel, in the CRM category.

  At the beginning, Salesforce’s solution was not initially capable of competing in the enterprise market, so Benioff went after small businesses—the ones Siebel ignored—that wanted and needed CRM capabilities but couldn’t afford Siebel.

  In the process, Benioff shrewdly used Siebel as the poster child for the pains associated with client/server computing. In other words, he personalized the weaknesses of the current category king. In the meantime, he plotted to make a direct attack on Siebel’s market.

  As explained by Clayton Christensen in his book The Innovator’s Dilemma, technology deficits can be overcome over time, by using profits from one market to fund entry into others. In that way, Salesforce eventually built better and better offerings that enabled the company to move from the small business category into the enterprise segment.

  “Breaking an old business model is always going to require leaders to follow their instinct. There will always be persuasive reasons not to take a risk. But if you only do what worked in the past, you will wake up one day and find that you’ve been passed by.”

  CLAYTON CHRISTENSEN, Professor, Harvard Business School, author, The Innovator’s Dilemma

  At the same time, Salesforce moved horizontally as well into areas beyond classic CRM, such as offerings in development infrastructure, all using this new SaaS model. Weakened by the 2001 worldwide recession, which put a hold on all large, expensive “nonessential” enterprise application projects, in 2005 the Siebel board elected to accept an acquisition offer of nearly $6B from Oracle. Now the door was open: Salesforce was left virtually alone to gobble up CRM market share across the economy.

  Many startups don’t understand the importance of doing category-creation work from the start. And many fail as a result. Perhaps the most tragic are those that have a ready-made new category waiting for them—and fail to recognize that fact, and don’t distinguish themselves from the competition.

  The data show that there are thousands of these failures each year. The fact is that unless you successfully create and define a new category—or redefine an existing one—and become the category king—even if your startup manages to traverse the Traction Gap—it is unlikely to generate significant returns for employees or the investors. Think about that. You could spend years building a company and scaling it . . . only to find that you are left only with “scraps.”

  ■

  THE CATEGORY-CREATION PROCESS

  “Okay,” you say, “I get it. We need to create or redefine a category. But how do we go about doing it?”

  The answer is that no single act can establish a new category for a company to exploit and dominate. Rather, category creation is a multistep process that can, and likely will, take years and a significant investment in marketing and sales to develop.

  To start, you must recognize that a category is nothing more than a problem. And it begins with identifying the nature of that problem, then unlocking the name of the category you want to create or redefine.

  To show you how you might do this, I thought I would share with you the actual category-naming and definition process I personally went through with a startup I founded—GreenFig, a combination B2B and B2B2C company—before I arrived at its category name and definition.

  GreenFig is in the educational technology space, and I was faced with the challenge of defining an alternative form of education in
order to differentiate GreenFig from existing traditional education institutions and alternative education options (e.g., online education companies).

  The following are excerpts from the actual document I developed as I explored a variety of issues regarding the problem with current education formats—before arriving at the final category name and definition.

  I started by putting the problem into words. This process was more challenging—and more important—than you might imagine. It forced me to take what was in my head and structure the concepts so others would be able to quickly and easily understand them.

  Here are some excerpts from the original document I drafted:

  The Problem

  Educational programs for professionals (e.g., doctor, lawyer, accountant), technical (e.g., engineering, computer science, scientist) and trade/vocational areas (e.g., nurse, mechanic, electrician) all combine an academic program with “hands-on” training and mentors.

  Students are continuously tested and certified for subject-matter proficiency. Apprentices are paired with experienced journeymen who act as mentors to ensure that knowledge gained through years of experience is passed down to the next generation. This is a tried, tested, and proven approach to transfer complex knowledge and skills.

  Yet this approach is seldom used in business; at least, not any longer. Due to rapid change and competition, most employers do not have the time or resources to adequately train and mentor newly hired workers.

  Over the past several decades, packaged application software from companies such as Google, Oracle, Salesforce, SAP, and many others has emerged to enable business and government organizations of all sizes to optimize their operational functions. These areas include, but are not limited to: marketing, sales, sales operations, finance/accounting, customer success, and support. Businesses implement and use this software to power these various functions.

  Businesses seek workers skilled in these operational functions and the use of business application software. If you go to any one of many job websites (e.g., Indeed.com), and enter search terms such as “sales operations,” “marketing operations,” etc., you will see hundreds of thousands of open requisitions for workers with the skills to operate business application software.

  While business application software providers can train people in the mechanics of how to operate their products, they don’t teach “business science”; how to perform the function. And no single vendor typically provides all the product capabilities that companies require; therefore, workers need to learn a variety of applications from various vendors to perform their jobs.

  Traditional higher-ed programs are not well-suited to teach “business science.” The applications and use cases change so rapidly that most professors are not up to speed on the latest techniques and applications. By the time a course is designed and peer-reviewed, it can be obsolete.

  Businesses are looking for workers who have work-related experience. Neither business application software providers nor higher-ed are well equipped to offer practical work experience.

  As a result, there is a need to create a new category of learning/education to address this vacuum in our current educational format.

  After I completed the work of defining the “problem,” I next set out to define the properties of the new education category I wanted to create:

  Definition of NewCo Category

  Skills-based training that leads to jobs in areas of high demand by industry and government organizations,

  Hands-on business application software instruction designed to prepare students to perform specific operational functions,

  Combination of physical (on-premise) and online learning delivered in real-time,

  Work experience gained through real-world projects guided by industry experts,

  One semester or less from zero knowledge to basic proficiency, and

  Application software-provider certification preparation and testing to ensure employers that job applicants have achieved basic levels of proficiency.

  The next step in the process was to compare education as it currently exists against a new education category I wanted to create:

  THE FROM / TO

  From

  To

  Expensive

  Affordable by most

  Time consuming

  Less than 6 months

  Insufficient knowledge/skill

  Domain-specific expertise

  No work-related experience

  Work experience

  Physically constrained

  Delivered anywhere

  Slow/difficult to change

  Rapidly change to address industry needs

  Category Brand Promise

  When you complete a “NewCo Category” program, you will gain enough proficiency in a functional area to secure an entry-level position in industry or government.

  With this differentiation characterized, I next set out to give these differences a name:

  CATEGORY DESCRIPTIONS

  Time

  Objective

  Type

  Rapid

  Job

  Learning

  Fast

  Proficiency

  Education

  Quick

  Skill

  Training

  Swift

  Talent

  Instruction

  Express

  Expertise

  Teaching

  Immersive

  Schooling

  Short

  Accelerated

  Some Existing Categories

  Rapid Learning

  http://rapidlearninginstitute.com/training-insights/survey-surprising-reason-training-pros-want-bite-size-learning/

  Short-Form Learning

  https://www.intrepidlearning.com/blog/short-form-big-opportunities-challenges

  Some Potential Combinations for a NewCo Category

  2-Word Combinations

  Learning

  Education

  Training

  Quick Learning [QL]

  Quick Education [QE]

  Quick Training [QT]

  Rapid Learning [RL]

  Rapid Education [RE]

  Rapid Training [RT]

  Immersive Learning [IL]

  Immersive Education [IE]

  Immersive Training [IT]

  Skills Learning [SL]

  Skills Education [SE]

  Skills Training [ST]

  Proficiency Learning [PL]

  Proficiency Education [PE]

  Proficiency Training [PT]

  Accelerated Learning [AL]

  Accelerated Education [AE]

  Accelerated Training [AT]

  3-Word Combinations

  Learning

  Education

  Training

  Quick Proficiency Learning [QPL]

  Quick Proficiency Education [QPE]

  Quick Proficiency Training [QPT]

  Rapid Proficiency Learning [RPL]

  Rapid Proficiency Education [RPE]

  Rapid Proficiency Training [RPT]

  Immersive Proficiency Learning [IPL]

  Immersive Proficiency Education [IPE]

  Immersive Proficiency Training [IPT]

  Immersive Skills Learning [ISL]

  Immersive Skills Education [ISE]

  Immersive Skills Training [IST]

  Accelerated Proficiency Learning [APL]—“Apple”

  Accelerated Proficiency Education [APE]

  Accelerated Proficiency Training [APT]—“Apt”

  Accelerated Skills Learning [ASL]

  Accelerated Skil
ls Education [ASE]

  Accelerated Skills Training [AST]

  I thought that both “Apple” and “APT” had some relevance to Education/Learning.

  4-Word Combinations

  Learning

  Education

  Training

  Quick Proficiency Skills Learning [QPSL]

  Quick Proficiency Skills Education [QPSE]

  Quick Proficiency Skills Training [QPST]

  Rapid Proficiency Skills Learning [RPSL]

  Rapid Proficiency Skills Education [RPSE]

  Rapid Proficiency Skills Training [RPST]

  Immersive Proficiency Skills Learning [IPSL]

  Immersive Proficiency Skills Education [IPSE]

  Immersive Proficiency Skills Training [IPST]

  Accelerated Proficiency Skills Learning [APSL]

  Accelerated Proficiency Skills Education [APSE]

  Accelerated Proficiency Skills Training [APST]

  I then tested a combination of these terms with different people in different groups to get their unfiltered responses. I learned a lot from those interactions. And the result took me in a different direction.

  In particular, I discovered an education category that had been defined but rarely used—and with no obvious market leader. The category was labeled “microeducation.”

  After doing some research and testing, I elected to adopt this terminology and to position GreenFig within this category.