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Published 23 July 2012 04:15, Updated 24 July 2012 06:43
Number crunch ... Many start-ups wish they’d focused on selling much sooner than they did. Photo: Louise Kennerley
When an entrepreneur decides to start a business, there are typically several important tasks at the top of his or her To-Do list, such as writing a business plan, choosing a name, and obtaining financing. Once the company is up and running, most founders obsess over perfecting the product or service, and perhaps devote energy to secondary tasks such as building a website.
Too often, there’s a task that’s far down this list of priorities that deserves to be much higher: Making the company’s first sale.
As part of an ongoing research project on entrepreneurial selling, we’ve conducted one-on-one interviews with founders of 120 start-ups in China, Kenya, Mexico, Nigeria, the UK, and the United States. Our focus: How, when, and why did you make your first sales, and looking back on that process, what do you wish you’d done differently? While we’re still analysing the responses and will eventually publish formal research on their answers, our preliminary results highlight some of the biggest mistakes that start-ups make when it comes to selling.
The biggest insight is that many start-ups wish they’d focused on selling much sooner than they did. Many company founders say they could have cut development time or better understood key customer objections (before they’d sunk huge money into product development) if they’d simply started trying to sell their product sooner. Again and again we heard founders wish that they’d conducted our interview sooner, as the simple act of answering our questions might have caused them to reflect on why they were ignoring this critical aspect of starting a company. This finding supports one tenet of the Lean Startup movement, which advises start-ups to create a “minimum viable product” and begin seeking customer feedback as soon as possible.
YOUR COUSIN DOESN’T COUNT
Our interviews found that a surprising number of startups make initial sales to family, friends, or other acquaintances. While these transactions provide revenue, these buyers are often moved to make a purchase out of love, politeness or a feeling of obligation, rather than real market demand — and crucially, these sales don’t offer candid feedback or give any indication of what a real, unbiased customer might think of your product or service. While it’s fine to utilize a professional network to sell — for instance, in the B2B service space, we spoke with several startups whose first sales were to their previous employers — don’t neglect to realize that the best customer feedback will come from transactions that are truly arms-length.
BE CHOOSY FOR A STRATEGIC BUYER
When a company has no incoming revenue, it can be tempting to cast a wide net for sales prospects, and to do business with the first potential customer that comes along. In our interviews, we frequently heard regrets from companies that had gone that route. They wish they’d been choosier and had more carefully selected their first customers, based on the customers’ ability to provide important usage data, references to a next set of customers, or credibility and reputation enhancement. In the US, for instance, we spoke with a medical device company whose first sale was made to a hospital who worked with the supplier to closely track the cost savings realized by using the new product, and this cost savings data became a key part of the future sales pitch. In the IT space, being able to say that Google (for instance) is a client can give credibility to drive future sales. The message is clear: When considering a first sale, don’t focus only on the much-needed cash, but think clearly about what other benefits this relationship can deliver to help drive future sales.
Without a long track record, it can be hard for a start-up to establish and hold firm on the value of the product or service it’s offering. For that reason, we’ve found many start-ups feel compelled to offer big discounts to get a first sale done. In particular, we found companies that received venture capital financing often faced pressure from VCs to achieve a first sale as a milestone, and were encouraged to offer discounts to achieve it. But in our interviews, we encountered start-ups who regretted offering big discounts to achieve a first sale. Doing so can set a pattern, diminish the long-term value of a product or service, or hurt cash flow (if the sale results in a loss). Companies talk, and if you sell to one industry player at a very low price, you can expect future customers to hear about it and push hard for a similar deal. To counteract that pressure, if you’re forced to offer an initial discount, formalize it as a one-time or short-term offer: Announce that any customer who signs a purchase order by September 1 will receive 20 per cent off, for instance, but after that the discount will disappear.
After speaking with 120 company founders about what they’ve learned about selling and what they wish they’d done differently, the biggest advice we can offer is that selling is the core function of any business, no matter what the industry. As such, it’s an activity you should be thinking about — if not actively doing — from Day One. Stop fantasising about your great product idea or your perfect business plan. Instead, get out there, engage prospects, and start selling. Every business needs reality checks, and interacting with actual customers is the best way to receive them.
Harvard Business Review