A Company's (First) Tipping Point

I like to think of the first sale as being the first major tipping point for a startup. It is the hardest sale to make, since little is known about the product's efficacy or the company's stability in the marketplace. This is a classic lemon problem, where information asymmetry between the seller and the market result in a breakdown of trust and propensity to buy at fair price. Overcoming this inertia is extremely difficult but there are very clever ways to overcome this by creating strong positive signals in the marketplace. The following (true) story, shared by Dr. Macmillan at Wharton, is a great example of this:

A salesman came to pitch an industrial plant manager on an innovative new water filter. The filter was twice as expensive as the next best alternative but lasted 5 times longer with the same efficacy. The investment would have justified itself but he did not make the purchase, because he had to somehow justify why his expenses had risen in the quarter to the company before any ROI from the purchase was evident. Having gotten this response, the salesman went to one of Proctor and Gamble's factories and gave the filter away for free. In doing so, he created an invoice and had it signed on delivery by the company. He then went back to the manager and showed a signed delivery slip (not showing that it was actually given for free). The fact that a major multinational had implemented the technology was all the manager needed to justify the expense to his bosses so he purchased the new filter product.

This is just one great example of how one can leverage the trusted/positive image of a client and create a strong signal in the marketplace that inspires confidence in the company and product. The key here was that the manager thought that P&G had puts its trust in the product by purchasing it, signaling to him that it was indeed a good investment (whether this is withholding or clever positioning may be debatable, but the signaling effect is clear). Over the years, I have seen both good and bad signaling strategies.

Good ways to signal the market:

• Get a customer with a strong reputation in the marketplace. If you work with a company that is known to have very high standards in their business relationships, you will benefit from this. This could also be the case with an adviser or investor who has a strong reputation.
  
• Set up free trial periods. This will signal your confidence in your product by shifting the risk to you, while still not making the client's purchase totally 'free'.
• Make use of great PR. There seems to be a positive signaling effect in peoples' minds from reading about a product in a reputable source (ie: "as seen in the NY Times").
• Collect data. Lots and lots of data. Try to get the study conducted/verified by an independent source. Show where the product works best and where it is least effective (this will show you are transparent and not only showing the positive data).
  

Bad ways to signal the market:

• Sign up early customers for free. While this can be great for collecting data, it does not say much about whether the counter party actually sees the value of your business. Anybody will try something if it's free. When you pitch the next company, it really does not send any valuable signal.
  
• Working to get 'the wrong' early customers who do not help you 'signal' your product's value to your target customer base. For example, if your target is a Tier 1 company do not waste too much time going after Tier 3 companies. This may in fact create a negative signal (ie: Tier 3 companies use this product).
  

These are just a few examples that come to mind from my last startup. Obviously there are cases where these rules will not apply but in general I think this is a decent framework.