New INC Magazine Blog Post by Kaplan Institute Exec Director Howard Tullman

Is Your Business Recession Resistant? Use These Four "R" Rules to Get Prepared

The big R may, or may not get here this year. But the time to prepare for a down cycle is before it hits.

By Howard Tullman

Executive director, Ed Kaplan Family Institute for Innovation and Tech Entrepreneurship, Illinois Institute of Technology

@tullman

Any startup entrepreneur can tell you that customers are hard to come by and painful to lose. If you're quietly leaking customers out the back door while you're frantically trying to attract new ones every day, you're just treading water, going nowhere. Believe me, you're not gonna make it up in volume. Good gets better, bad gets worse. Business models that don't make sense rarely have happy outcomes. Low customer acquisition costs may be seductive, but they can quickly lead you astray. Because success isn't automatically or inevitably about more customers; it's about attracting and retaining the right customers.  There are some customers that you'd just as soon do without (bad bets, high maintenance, low margins, etc.) although you don't necessarily know that from the start.

 The smartest business builders will tell you that not all customers are equal in value or importance even if they're not "bad" customers. They'll tell you that that, early on, you need to focus on customer quality and loyalty, not merely quantity; that it's ultimately all about building the right audience and not just an indifferent stream of crappy traffic; and that customer segmentation and selective, carefully focused attention is critical in the early stages of a company's development. Because you're dealing with scarce resources; because authentic engagement is essential; and because you absolutely need to make every dollar count.

 Any smart investor also knows that one genuine dollar paid by a real customer (forget the freebies) is worth five or 10 times the same dollar raised from an investor. Or, frankly, even a million dollars raised from some overexcited VC who's all about momentum, and selling the "story" and who's not paying attention to the underlying metrics which will ultimately make or break the business.

There's not enough money in the world to prop up a bad business in perpetuity or to continue to hide economics that don't make sense. This is why virtually all of the "we'll send you goodies in a box" subscription businesses (Birch Box, Blue Apron, Loot Crate, etc.) are rapidly disappearing or being written off by the desperate bricks-and-mortar guys who invested in them.  Nordstrom bought one of the early players, the Trunk Club, at a ridiculously-inflated price before the real world came along and started popping the balloons.

We're starting to see that the early, indiscriminate growth of flash-in-the-pan businesses is fading and they're not going to have the fundamentals or the base of recurring revenues driven by satisfied and profitable customers to get over the next round of bumps, which sadly seem right around the bend. The "R" word is everywhere you look and part of every financial conversation, and things are quickly getting dicey in startup world.

I've been thinking about four other "R" words as guideposts for the hunkering down that the guys and gals who want to stick around should start doing right about now. In fact, if you haven't already started trimming the sails, cutting incremental expenses, and working on protecting your current customer base, you may find that you're too late to make all the necessary adjustments without cutting a lot closer to the bone than you'd like.

Here are my Four Rs:

Relationships:  Move immediately to protect and secure the people presently in the boat--existing customers are the most accessible, nearest to reach, and hopefully the easiest to hang on to.

Reassurance:  No one wants to be left holding the bag when the boss asks why they're spending a bunch of bucks with your business or service. This means your job now is to be certain you've provided your advocates the necessary ammunition and justifications to make the case for keeping you.

Raise the Bar: Your customers' expectations are constantly rising and the competition for their attention, time and dollars is also constantly growing. You need to be doing everything possible to up your game and to be there (meaning, anytime and anywhere) when they're ready to buy. Reacting to requests isn't enough anymore. You've got to be discovering and anticipating their needs and desires.

Retention: Too many businesses today take their customers for granted and don't spend enough time and money on retention, which is a lot better investment in tough times than trying to recruit new customers. There's a lot of science to managing the emotional levers and behavioral drivers of your customers, but you've got to commit the people and the necessary resources if you are serious about getting the job done.

LAUNCH DAY FOR NEW iPROs AT THE KAPLAN INSTITUTE

PEPPER STILL A BIG HIT AT THE KAPLAN INSTITUTE

Kaplan Institute Executive Director Howard Tullman Interviewed in Askmen

The Keeper Team at Kaplan

Lookingglass Theatre Benefit at City Winery

Kaplan Institute Exec Director Howard Tullman Appears On Tasty Trade

New INC. Magazine Blog Post by Kaplan Institute Exec Howard Tullman

There's a Reason the Tortoise Wins

Startups are under tremendous pressure to scale quickly. But it's an overused and potentially dangerous strategy. Stretching your territory is pointless if you can't take care of the customers you already have.

By Howard Tullman

Executive director, Ed Kaplan Family Institute for Innovation and Tech Entrepreneurship, Illinois Institute of Technology

@tullman

We've all heard the story about the tortoise and the hare a million times but the basic lesson-- that slow and steady progress wins the race in the long run-- is still remarkably relevant and applicable to businesses of all sizes and shapes.  

And it's especially relevant to startups. Slow and steady sounds a little old-fashioned and even a bit boring and it's rarely something that you'll hear any West Coast VC say -- particularly when the topic on the table is how quickly to blitzscale the company.  But it's something that the very best entrepreneurs always take to heart and keep top of mind. Rushing to roll out your business nationwide (and being a mile wide and an inch deep) may make the venture folks in the board room happy, but it's bad for your business if you aren't ready.

Scaling is the seductive but double-edged distribution sword of the web. Being accessible everywhere at once, virtually overnight, is super easy.  Serving and supporting all these onesie customers spread around the world is unbelievably difficult and costly. The smartest entrepreneurs hunker down and master their craft and their basic business economics before they race around the country trying to one-up the competition. They've figured out that you've got to nail it before you can scale it. Focusing on deep penetration and stronger connections to (and results for) bell-cow customers creates the kind of solid foundation that will survive the roll-out bumps and sustain the base business when those key commitments and critical milestones take far longer (as they are wont to do) than anyone expected. Doing a lot of different things and chasing too many rabbits is not the same as getting the right things done right.

One of the most common mistakes that young entrepreneurs make is to fail to appreciate that most markets are at least two-sided. That is, you've got to be certain that you've properly aligned supply and demand before you move into a new market. Your customers may be demanding that you rapidly expand and assuring you of their undying support in the next town. But just watch their excitement and interest disappear overnight if they discover that you can't deliver, and they end up with egg on their faces because they vouched for your expansion capabilities. Adding customers in new markets without first putting in place the required resources, facilities, inventory and other kinds of critical infrastructure is an easy trip to the toilet. It's like the busted-out guy who takes an Uber to Bankruptcy Court and then invites the Uber driver into the proceedings as a creditor.

Similarly, it's way too easy as the new guy on the block to be sucked in by a large customer and bet large on substantial expansion without the certainty that the major player will stick around. The big guys are big for good reasons. They're tougher and smarter and more demanding and, in most cases, they're also the best business brains. What you can learn from them and what they can help you accomplish is priceless. If you can lock these folks in and deliver the right results for them, there's no better place to be and no easier way to scale. But they drive really hard bargains and they're absolutely bloodless and will cut you off at the knees in a second if they see a better opportunity or, frankly, if senior management just changes their mind. They're not long on loyalty. It's much better to get a pet if you're really looking for love.

And speaking of love, as you start to scale and soar, you need to be very careful not to leave your early adopters and beginning boosters behind. They were there for you when the whole thing got started and - especially in large organizations - they're critical references, foundational supporters, and concrete proof that your product or service is sticky. Make sure you give them the attention, the care, and the ammunition to prove that they made a smart choice in selecting you initially and that it's still the right choice today. Tracking improvements in same-store sales is the best and easiest way to measure stickiness and also the best way to keep score, especially when those critical numbers keep ticking up year over year in your oldest markets. This is critical to measure because, if the older customers lose interest or connection and they're leaking out the back door, it doesn't matter how well you're doing in terms of acquiring new customers at the front end of the funnel. 

Good business isn't usually about beating the other guys. There will always be new and different competitors and there will always be people pitching cheaper and even better solutions. Chasing someone else or trying to quickly copy their plans and trying to outshine them assumes that they know what they're doing and are a lot smarter than you. I don't think there's any good reason to believe that. Sustainable businesses create real, demonstrable value for clients and customers. They keep upping the ante, and they consistently deliver proof of the pudding. No one new gets to rest on their laurels or their past performance even if they have a track record to point to which most startups don't have.

Customers' expectations are progressive and, as you grow, everyone in your business needs to have the same attitude and objective. It's NOT about how fast you're going (of course, you should never slow down); it's about how fast you're getting faster and better. It's all about acceleration, not simply velocity. And it's about innovative techniques and technologies rather than tonnage as well. Precision trumps volume. Your pitches, programs and proposals must be better, not just longer or louder. This discipline of "always trying to be a better you" needs to be a central part of your company's culture and embedded in the ways that you do business, whether you're selling products or services - widgets or wisdom - or whatever. 

Having a great product isn't enough. Because no one sells just a product these days. We're all in service businesses trying to secure not a single sale, but to grab and hang on to the lifetime value of each customer. Creating a business that will last is about building long-term relationships and compounding customer trust. Connection and continuing engagement coupled with constant improvement and innovation are what keeps you in the game.

Startups don't have an established following or a brand that customers can default to as a way of overcoming the decision fatigue that plagues us in a world of infinite choices. Startups make a future promise and then it's directly on them to deliver on their commitments and to keep raising the bar. Your business's job is to earn and retain my loyalty. Loyalty today means nothing more than the absence of a better alternative.

Kaplan Institute Exec Director Howard Tullman Speaks on Customer Experience and Innovation at Northwestern Memorial Hospital

Hanging Out at the Keeper Summer Party

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Kaplan Institute Welcomes Ed Kaplan and Guests for Tour and Video Testimonial

New INC. Magazine Blog Post by Kaplan Institute Exec Howard Tullman

Throwing Ideas Against the Wall to See What Sticks is a Recipe for Failure

And it doesn't work for spaghetti, either. If you're trying to develop new products, it's important to narrow the field to improve your chances of picking winners.

By Howard Tullman

Executive director, Ed Kaplan Family Institute for Innovation and Tech Entrepreneurship, Illinois Institute of Technology

@tullman

During my years as the president of Kendall College, it was a source of considerable pride that I continued my unblemished QSR record of eating bad food as cheaply and quickly as possible and knowing next to nothing about cooking.  I could barely boil water.  Never mind that I was trying to resuscitate and ultimately save this 75-year-old culinary school, which offered a great faculty and training along with a consistent inability to figure out how to pay its bills. Before I got there, it's fair to say that they threw almost everything at the problem, including the kitchen sink. 

The only way I made peace with my chef-instructors was to assure them that I would concentrate on fixing the finances, growing enrollment and strategic partnerships, and building them the best technical platform for culinary education, but I would never try to tell them how to season the soup. There's a lot to be said for staying in your own lane.

In any case, it was a viable, if uneasy peace. They knew the place was a mess and that they needed help - they just didn't know if the "new guy" knew anything. They were tired and dizzy from the constant and frantic flipping from one new idea to the next without really giving anything much of a chance to actually take root and grow.

Reinventing Kendall was a long, painful process, but eventually even the most skeptical instructors came around because it's hard to argue with success. In this case, successful innovation was about iteration and successive approximation -- getting a little bit better all the time. In fairness, they ultimately changed their attitudes and their willingness to be part of the process rather than the problem. More importantly, they started to see that our carefully-focused and meticulously-measured actions were beginning to produce quick wins and concrete changes. A clearly articulated vision, a straightforward and realistic path (no "miracles happen here" jumps), and a patient and progressive plan to get there began to make it look like a more secure future was possible.

And, in the process, I also learned a few valuable tricks of the trade that helped to make things better, as well as a great deal about what didn't work and needed to be avoided. And, to be clear, the things that didn't work for Kendall wouldn't work whether your business had been around for decades or you were building a brand-new business.

One of the earliest lessons is that the "al dente" method of throwing stuff against the wall and seeing what sticks doesn't actually work for spaghetti or for startups. Kendall's leaders had tried a little bit of everything and had managed to do almost nothing because they were spread a mile wide and an inch deep. They were trying to do things quickly or cheaply that they shouldn't have tried to do at all. Good strategy is always the same-- it's deciding what not to do.  

Marketers used to call this shotgun method of chasing a bunch of rabbits at the same time the "spray and pray" approach. I still see it, especially in the area of new CPG introductions, where the idea seems to be that sheer volume and variety -- tossing dozens of different products into the market as rapidly as possible -- is deemed the key to successful innovation rather than adopting a more targeted and limited approach based on consumer research and testing, followed by launching a few strong contenders and then constantly iterating from there. There's a lot less frenzy and maybe even a little less fun, but it's much more likely to lead to near-perfect pasta. More isn't necessarily better -- only better is better -- and less is often more.

It comes down to a simple question and then developing an approach that leads to the right answer. The question is this: if you consistently hit three home runs (winning new products) out of 10 fairly costly attempts, would you rather achieve the same three wins with only five better-crafted and thought-out product launches? And if the answer is obviously "Yes", then how do you create an innovation process and strategy to assure those far more cost-effective results? 

The first stage of the process is to reach a broad consensus on what constitutes success and a commitment to develop and hold fast to certain metrics so that everyone is objectively clear on what a "win" looks like.  And so that: (a) the goal posts don't move and (b) you're prepared to kill off the projects that aren't hitting the marks without debate and without delay.

The biggest problem in business is permitting lousy projects to persist to avoid making hard choices and hurting people's feelings. It's a little easier in a startup because this is often an existential issue-- if you're not making it, you won't be around long enough to worry about it. This is why I always say that there are no skid marks when a startup shuts down.

You can pick and choose your own criteria for success, but in general terms I always look for half the story to be internal requirements and the other half to be customer/market driven. So, for example, if I were picking six, I'd split the pie something like this for a typical consumer product:

 Internal

     1. Ultimately meets the company's financial requirements

     2. Achieves sufficient and agreed-upon market penetration (% All Commodity Volume)

   3. Generates profits across the distribution chain and channels

            External

          1. Pre-demand for product exists based on customers' awareness

         2. Meets customers' expectations/desires

                      3. Fulfills customers' requirements/needs in a distinct way

The second stage is to develop and flesh out the funnel and any necessary filters.  Here again, rigorous adherence to the rules and requirements of each gate and benchmark in the funnel is critical to keep weak offerings from slipping through. You need to avoid diluting the entire process by having too many offerings moving from the earliest evaluation phase on to the investment, development and action phases.

1.    Prune the Pile

You need to spend the necessary time and resources right from the start to sort, evaluate, scrap and settle on a few key ideas. Test a bunch at the beginning because early testing is a cheap way to insure that you don't over-invest down the line. Take your time. Then start cutting, but don't narrow the field too soon or too quickly - we make better decisions when we're presented with multiple alternatives. Imagine being at the bottom of a diamond-shaped path. You want to go wide for a while so you're thinking broadly and outside of the box and then tighten the selection set down to the final most viable ideas. Focus on the problem to be solved rather than the particular solution being advanced. And don't let anyone (even the boss) push their own agendas or favorites too far.

2.    Expand the Evaluation Group

The wider the pool of people and opinions that you can bring to bear on the problems, possibilities and products, and whom you can engage in the process, the more likely that you will reach better and smarter conclusions. Getting out of the echo chamber starts with the first phase of consumer research, but the same idea extends to the need to engage a broad cross section of the people in your own organization to make sure that the initial ideas make sense. You're going to want to pull lab and tech people into the conversation to address issues of feasibility and practicality - can we do it? You'll need finance people to look at whether it's worth doing across several dimensions - can we afford it? And finally, now that the project is getting some legs and a better definition, you want to go back to the well and ask the market and your prospective customers whether it still makes sense to them - will the dogs eat the dog food? And this is also the time to start thinking about time - schedules, milestones, timetables and realistic launch dates. Plenty of products fail because no one bothered to look at the calendar and the appropriate buying cycles.

3.    Make a Serious Commitment to the Rollout

Once you decide to go, there's really no room for half measures. Thinking small is a self-fulfilling prophecy. This is why it's so important to have a few deep dives rather than trying a dozen different deals without sufficient energy, marketing or other essential resources behind each one. And you've got to have all the necessary follow-ups and follow-throughs as well because getting the ball rolling isn't enough - you've got to get it over the goal line.

I've seen dozens of failed launches over the years and excuses a plenty. Worse yet, too many people try to declare victory too soon or celebrate based on metrics that just don't tell the whole story. It's not enough to ship; the product has to sell through and this is why metrics like % ACV (All Commodity Volume) are crucial. (See https://www.inc.com/howard-tullman/the-only-question-that-matters.html.) Having your product sitting smartly on the shelf instead of in someone's shopping cart isn't what this is all about. While having people talk about your product is nice, it's more essential that they buy it.

Bottom line: the best innovators focus on quality not quantity and on doing a few important things really well.

Kaplan Institute Welcomes Kasey and Jess from Packback

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Kaplan Exec Director Howard Tullman Speaks on Tech Trends to Clareo Food Brainstorming Session

New INC Magazine Blog Post by Kaplan Institute Exec Director Howard Tullman

Never Mind Plan B. You'd Better Get This Plan C Ready.

Investors are getting fidgety as the economy shows signs of slowing. They're going to get very picky with their follow-on funding choices. What are you going to do if they don't choose you?

It's getting more difficult every day for startups caught in the lukewarm limbo between ideas and invoices to get their early backers to follow on and up their bets with subsequent investments--even at flat valuations. For a bunch of desperate businesses, flat is gonna be the new up, especially when it's not clear that the earnest entrepreneur has found a viable business model and/or a way to stop the bleeding sooner rather than later.

Investors aren't patient people, especially when traditional markets are booming. Too many pivots with too little to show for the dollars down the drain and pretty soon no one wants to hear your "someday soon" story or your next grand plan. And if you're not even breaking even, no bank will look twice at your business or your balance sheet. This change isn't restricted to the dearly departed debacles in the Valley; it's going on in every village where waves of wishful thinkers are starting to wonder what hit them.

My sense is that the smart investor conversations taking place today aren't very often about the company going for the gold or about the current investors doubling down so some startup can shoot for the stars. These increasingly cranky chats are less about excitement and enthusiasm and much more about ennui and possible exits. Because sunk costs and opportunity costs are two things that some early investors and every VC understands.

While the entrepreneur is sweating survival, the investors are trying to decide whether their incremental dollars would be better spent on a new deal elsewhere. These are the days when the easy money gets hard. Those great gluten-free sugar cookies from the hip new bakery down the block that just shut its doors are tasting more like ashes in their mouths and they're asking themselves how they ended up sitting in a room with no doors feeling like some sucker after the circus left town.

The unhappy folks still sitting at the table (more likely associates now rather than the partners who got the ball rolling) aren't talking about how much more money they can put to work; they're trying to figure out how little additional cash they need to put up in order to preserve what's left of their position.  Everyone is telling you that they're really not inclined to do much of anything at all if you can't drag some new money from outside players to the table to help set the price and get the next round started. Feels a little bit like a search for the greater fool-- and even if they find someone, it's likely to be a down round.

This is a Plan B world at best and the down-and-dirty talk on the limo ride to LaGuardia almost always includes whether to shoot the CEO while in the process of trying to clean things up and save a little face. So, if you're the one on the bubble, forget Plan B, and get started on what I call Plan C.  You need to get a head start on talking about the tough choices and critical changes that need to be made. It's about figuring out what immediate actions you can take that will make a difference before they turn the lights out. You can have results or excuses, not both. Focus on facts rather than futures if you want to be around when things turn around. And forget about playing the blame game -- no one cares.

 Plan C is all about choices: contraction, consolidation, combination, conversion, and concession. The last C is closing the doors, and that's not a sight that anyone wants to see. So, move quickly and determine which of the C's makes the most sense for your startup.

1. Contraction

Suck it up and admit it. You can't be all things to all people, and no one ever has been. Focus on what sets you apart and what represents the best prospect of a long-term, sustainable competitive advantage for your business. Forget everything else. Don't apologize, don't try to explain; just buckle down and get the job done.

Businesses that scale too soon and that are a mile wide and an inch deep are doomed for many reasons, but the clearest and most telling is that they can't cost-effectively engage with, support, or connect to their customers because the customers are simply too few and far between. It's critical to nail it before you scale it; if you're grossly over-extended, your business is going nowhere.

2. Consolidation

Shut down the stupid San Francisco office sooner rather than later. You had no business being there in the first place and the fact that you're doing no business there ought to speak for itself.  San Francisco may be the most overheated and least representative market in America. Everyone there drinks the Kool-Aid for about 10 minutes and then moves on. Building a new business there is as slippery and unstable as trying to nail Jell-O to a tree.

New York should be next on the list. NYC isn't a city--it's 5 or 6 different marketplaces mashed together, with a million people waiting to eat your lunch just for fun. Your business expansion needs to be driven by actual demand, feasibility and real opportunities, not by some investor's fantasies and/or fables about life in the Big Apple foisted on the public by the media and by people barely making it in Brooklyn.

Amazon's closing their direct China operation after 20 years of effort to achieve about 1% of the market is a great recent example, although Jeff B clearly hangs on to things a lot longer than most mortals. Could it be the unending pot of money, rather than logic that enables such perseverance?

3. Combination

Take a careful look around and see who else is in your space or adjacent to it. Who else is doing things right? Calculate what the prospects of some kind of combination may be, especially if your market itself continues to be more cluttered and competitive. Pull off the right kind of combo and you can bring a single story to the market in a cleaner, more efficient and less costly way. This is exactly the kind of story that investors want to hear.

It's not easy in any market to attract the technical talent, the motivated salespeople, and the operations folks that you need to grow quickly. A well-planned and thoughtfully executed combination can demonstrably accelerate the process. You need to be careful to make sure that the companies' visions are aligned and that the problems they're addressing are similar and that the cultures of the businesses (and the leaders in particular) aren't in conflict. We've started to see more and more of these combos lately Cheddar being bought by Altice USA and Quartz's purchase by Uzabase are just a couple of deals where the metrics look okay, but the jury on the success of the marriage is still out.

These things aren't made or broken in the board room when the papers are signed; they rise or fail in the implementation and the execution. But in today's world, it's often a lot better and smarter than trying to go it alone.

4. Conversion

Sell some of your stuff to someone else. You may be great at lead generation and lousy at closing the sale once those prospects show up at your door. Or you may be a great sales organization that sucks at fulfillment and customer service. 

When you look at your skill sets and your customers, users, clients, etc. through a different lens --looking at them as potential assets to be converted or sold to some other enterprise-- it helps you see more clearly exactly what kind of business you're building. It may make the most sense to look at your company as a conduit or an intermediary and not as a one-stop shop trying to meet all the needs of the marketplace. You've got to play to your strengths and build on those if you're planning to stick around. Not every business gets to be the front door these days.

Twitter's acquisition of Highly is a good case in point of a fold-in purchase.   It made a quick buy rather than spend time building an attractive add-on piece of tech--the ability to highlight content and then share it. And you can bet that the Highly guys were constantly looking over their shoulders wondering if they were gonna see some cash from one of the giants or simply get crushed by them. The smartest players always think about managing their capital intake so they can be building their businesses to be bought when the time is right. 

5. Concessions

Maybe your pricing made sense in some early fever dream where you were the best and only player in the space. But now there are fast followers and clones everywhere and their offerings (at least on the surface) look a lot like yours. Once your customers start talking about price, you're on a very slippery slope.

Netflix went the opposite direction with very disappointing results. Instead of stealing a page from Amazon and lowering prices to make the inbound competitors even more miserable, they raised them and, for the first time, saw a decrease in users in the U.S. The market promptly punished the company for shedding customers. You never want to take your customers for granted or believe that they can't leave. You need to earn them every day.

Here's the bottom line. In the long run, you can't save your way to success and it's no fun to fire your friends or postpone your pet projects. But if you don't survive during the difficult times, you and your business won't be around to savor any success down the road. Do what needs to be done and do it now.