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Initial reference customer selection for high technology products
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J. Tomas Gomez-Arias
Received August 2006 Revised March 2007 Accepted March 2007
Saint Mary’s College of California, Moraga, California, USA, and
Juan P. Montermoso Montermoso Associates, Sunnyvale, California, USA Abstract Purpose – The purpose of this paper is to show that high technology companies often find it challenging to select their first reference customer. This is a challenging decision because such clients are not simply an immediate source of revenue, but also a source of learning, a technology test bench and a powerful promotional tool. This paper aims to explore not only the factors that make such decisions strategically crucial, but also the motivations for a client organization to assume such a risk and the characteristics of such organizations. Design/methodology/approach – Theoretical and case studies. These ideas are illustrated with examples in both hardware and software, with a longer examination of HP’s adoption of AMD’s Opteron technology for its server line. Findings – The choice of the first customer is a strategic decision, not just a tactical one. It has implications in terms of revenue generation, technology development, business development and industry focus, and it can be decisive in the success of a new technology. Originality/value – This is one of the first papers to address the selection of the initial reference customer in high technology industries. Keywords Innovation, Customer orientation Paper type Conceptual paper
Management Decision Vol. 45 No. 6, 2007 pp. 982-990 q Emerald Group Publishing Limited 0025-1747 DOI 10.1108/00251740710762035
1. Introduction Start-up businesses or businesses introducing a new B2B product are faced with the daunting task of ramping up their commercial revenue as rapidly as possible to meet revenue and market share goals. In the case of high-technology products, this need is even more urgent given the relatively narrow window of opportunity existing for the successful launch of the product and its short lifespan in the market. Often such businesses will have the challenge to choose who their first reference customer will be due to the nature of the product, the sales cycle, limited production capacity or the characteristics of the industry. Examples of such businesses would be networking hardware, medical testing devices, and enterprise software. In these cases, the first customer means more than an immediate source of revenue. It will also be the organization where any product flaws remaining will surface for the first time and a showcase for other potential customers. As a consequence, selecting that first customer (also known as an initial, reference or pioneer customer) is different from selecting another sales prospect and has major strategic relevance. The adoption of Advanced Micro Devices’ (AMD) Opteron server processor by Hewlett Packard (HP) is a case in
point. Why would AMD choose HP and not Dell or IBM as its first customer for the new technology? Why would HP take the risk to adopt a relatively untried technology before its competitors? While business executives would like to optimize that choice and could use some criteria in working through the process, the existing literature is, with few exceptions (Brockhoff, 2003; Ruokolainen and Igel, 2004; Ruokolainen, 2005), of little help. This paper fills that gap and proposes a framework for such optimization and illustrates its use with some examples. In the next section we will analyze the role of the initial customer for a technology company. Next, we will look at why client organizations become pioneer customers for a technology product. Then we will study the selection of the right initial reference customer by vendors. We will then illustrate the whole process with a case example and draw some lessons from our analysis.
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2. The role of the initial reference customer Let us consider the case of a networking hardware manufacturer ready to launch a new high-end router targeted at the telecommunications market. For that kind of product, the potential market may be composed of just a few dozen companies worldwide. Of course, under ideal circumstances our manufacturer will want all potential customers to adopt his product, but more realistically he will initially focus his resources on only a small number of organizations. What are the driving forces for that role of the initial reference customer? (See Figure 1): . Revenue generation. Initial customers are actual paying customers and are expected to contribute to the bottom line as such. This is particularly relevant for start-up companies for whom the revenue stream of a single product can make the difference between survival and bankruptcy. Note that this is a major difference from a Beta site (Dolan and Matthews, 1993) where the user gets the Beta-stage product heavily discounted, for free or, in some cases, gets paid to use it. A corollary of this revenue growth is market share penetration. Motorola had this uppermost in their planning when they took the radically chic RAZR mobile phone to market in the USA. Motorola partnered with AT&T (then Cingular Wireless) to establish broad distribution and channel support. Once the channel presence was established with Cingular (now AT&T), Motorola ramped up availability from the initial fourth quarter 2004 sales of 750,000 units to over 20
Figure 1. Driving factors for vendor and initial reference client
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million in all of 2005, a goal they easily exceeded. The unique form factor and capabilities of the RAZR helped Cingular maintain and grow the revenue stream and establish market positioning (Lashinsky, 2006). Interestingly, Apple is following a similar approach using AT&T as the initial customer for its iPhone. Product development and improvement. Customer involvement in new product development has been predicated as a means to improve new product success rates, but most of the methods generally studied have to do with pre-launch activities (Kaulio, 1998). However, high-technology products often require major development and improvement efforts after the launch of the product. A close interaction with the right customer can add substantial value to this process by not only putting the product under the gruelling conditions of actual performance, like in Beta tests, but suggesting ways in which the product can overcome its limitations, akin to lead users (von Hippel, 1986; Urban and von Hippel, 1988; Luthje and Herstatt, 2004). For example, DemandTec, a seven year old software application firm, uses mathematical models to help retailers optimize prices to boost sales and profit margins. In 2001, Longs Drugs became their first customer to utilize the models developed by 53 engineers and scientists over two years. However, Longs Drugs was able to extend these models for their own industry and thus provided DemandTec with valuable insights into how price optimization can be improved. DemandTec is now using this feedback to expand the concept to financial service firms, cellular carriers, and manufacturers (Barret, 2006). Learning about more than just the technical aspects of the product. As they move into the marketplace, high tech companies need to gain more knowledge and experience about expected levels of customer service, effective selling points and the soft side of the business, something start-ups often need dearly after spending their short life focused on technology and innovation (Ruokolainen, 2005). A pioneer customer provides a proving ground for these areas. Promotion. An initial customer can strongly influence market penetration (Enkel et al. Gassman, 2005). For example, Ruokolainen (2005) found that for over 40 percent of the software start-ups analyzed, their first reference customer was the most important past event. The first reference customer contributes to sales growth by serving as a reference for other potential (and possibly skeptical) customers thereby reducing both technological and business uncertainty. The reference customer guarantees not only the functionality of the product, but also the ability of the supplier to take care of the customer under a range of situations (Ruokolainen and Igel, 2004). Also, the successful adoption of the new product by the first client may put pressure on its competitors to adopt the same technology in order to maintain competitive parity. When Microsoft launched its Distributed Partition Views technology in SQL Server 2000 it chose BrightStreet.com, a digital promotions backbone, as a reference customer, and it allowed it to “address industry concerns about the complexity of managing a group of SQL Server machines as a single logical database” (Bekker, 2001). Furthermore, satisfied reference customers can become advocates for the new technology helping spread its use in the industry, similar to the advocacy activities of loyal service customers (Butcher et al., 2001; Javalgi and Moberg, 1997).
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Strategic preemption. The adoption of a high technology product often requires a long-term commitment by the client organization not only to the product but to the technology. Furthermore, some organizations exert a large influence on the choices of other organizations in the same or related industries. As a consequence, a well chosen initial customer can help in shutting competing products and technologies out of not only one organization, but often an industry. By winning Longs’ commitment as its first customer, DemandTec has improved its chances of becoming a “must-have” piece of software for others in the retailing industry such as Best Buy, Safeway, and Radio Shack (Barret, 2006). Cost leverage. While a simple first customer environment may provide clarity in shaking out the bugs in a novel product, there may also be benefits in having a complex first customer environment, especially considering the inherent complexity of high technology products. Such a sophisticated client environment would allow multiple features to interact in a single location, requiring fewer sales, engineering and support resources to assist the customer. This could lead to significant savings over targeting a large and diverse set of customers. Longs Drugs, with its large network of stores and thousands of SKUs, will be able to subject DemandTec’s software to almost any imaginable problem it may face.
3. Why do client organizations become initial customers? But why do client organizations take the risk of becoming the first customer for a new technology? After all “whenever you are first in the cycle of new technology for a vendor, you are going to go through some pain and suffering” (Peckham, 2006). There are multiple reasons why a client organization may want to endure that “pain and suffering”: . Performance is a powerful reason, especially if the new technology means a quantum leap in features, quality, productivity or other relevant value metrics. This is especially true if they are highly visible and translate forward through the value chain to subsequent clients. For example, when Intel announced the launch of its new Xeon 5100 with BMW and Pixar as reference customers, Greg Bandreau vice president of technology at Pixar declared that “We will keep our Opteron chips to keep Intel honest,. . .but we will start upgrading to the new Intel chips in October” (Takahashi, 2006). . Competitive advantage. Performance is important, but having it before competitors have access to it can give a company a temporary leg up in a fast-paced and highly competitive marketplace. Being the first reference customer to install EnterpriseDB Corp’s open source database allowed Sony Online Entertainment to lower the cost of operating fast-growing multi-player gaming sites well below the cost of competitors (REDORBIT, 2006). . Being first to adopt a new technology gives a company an image of technological innovativeness valuable in some industries. When Motorola wanted to build on convergence trends in the phone and music player businesses, it directly competed with Apple and its iTunes offering to burnish its image with the twenty-something crowd. While it did not necessarily result in significant sales
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for Motorola, it did help solidify Motorola’s positioning as an innovative and creative leader (Motorola, 2005). An established vendor-client relationship may be a reason for a client to adopt a new product in the context of long-term loyalty where commitment, trust and shared risks are important. Once Motorola established a strong and successful market position with Cingular based on the RAZR product offering, it was natural for Cingular to take on the initial effort for the marketing and sales of Motorola’s ROKR phone offering, the iTunes-oriented member of the RAZR family (Motorola press release, September 7, 2005). As the initial reference customer, a client can expect all the vendor’s attention, resources and service to focus on that first adopter, rather than sharing them with other clients once the adoption of the technology spreads. Sony Online Entertainment can expect more attention from EnterpriseDB than from a company such as Oracle. By being the first to adopt the technology, a client company can shape its implementation to fit more neatly into its own value creation chain. Longs Drug Store, for example, was able to have DemandTec adapt its software to its own needs (Barret, 2006).
Some of these motivations have been especially visible in the well-publicized Airbus-Boeing rivalry for pre-eminence among the world’s airlines. For instance, Singapore Airlines is partnering with the European consortium on the Airbus 380. Such a purchase reinforces the brand image of Singapore Airlines as both a modern technological leader in the aviation field and also enhances their product offering for the long flights from Europe and North America to their home base in Singapore. In contrast, Boeing’s success with the Dreamliner 787 to USA domestic airlines such as Continental reinforces the price/performance advantage Boeing can supposedly provide to cash-strapped airlines. The risk sharing of financing and the ongoing loyalty to Boeing appear to be the major influencers for this decision. 4. Selecting the right initial customer Prospecting for the right initial customer is not an easy task if it is to fulfill the requirements we have mentioned above, but we can offer several selection principles: . Industry. The best initial customer will probably be in an industry where the new product or service can create exceptionally high value, often creating disruptive change in their value creation processes. This industry may not be the most important potential market for the product, but at least very closely related to it in order to serve as a significant reference for the target market. Drugstores may not be the largest and most profitable target segment for DemandTec, but it is an environment in which it can demonstrate the value of its product. . Size. It may be tempting to go for the largest possible client, since it could provide the largest potential revenue and serve as the best promotional reference for subsequent clients. In addition, large companies often have the resources, technical and otherwise, to assist in product improvements. However, large corporations show important shortcomings as sites for the initial implementation of an innovative product or service. Their size and complexity can overburden
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the sales force and customer service capabilities of the vendor, especially when this is a start-up company. Also, size is a poor proxy for technological prowess and innovativeness, and the expected learning from the client company is likely not to materialize. Mid-sized clients are usually a better ground for an initial implementation. Usually, a small or mid-sized company is more likely to perceive the performance gains it can obtain from the new product and how to use it to build a sustainable competitive advantage. Also, a smaller company will be attracted to the special attention it can get from the vendor as an initial customer and the ability to shape the technology to its needs. At the same time, although their direct revenue generation potential is smaller than the largest companies in the industry, mid-sized companies can be more involved in the improvement of the product, are often more technologically dynamic, and typically sustain higher growth rates, attracting at least as much or more attention in the industry as larger companies and in many cases exerting a stronger influence in the technological trends in the sector. Also, because of their size, they are less likely to overburden the vendor with service demands. KDDI, as a smaller telecoms firm in the Japanese market, was more open than NTT to adopt Corrigent Systems optical transport technology to update its architecture to accommodate voice, data and video over a general-purpose packet-based network (Harvey, 2005). Approach to innovation. The most innovative companies will be the most appealing pioneer customers for high tech products. Not only they will be more attracted to them, they will also be the ones with the most to contribute to the vendor and the best references in the marketplace. KDDI is not the largest, but has a reputation as an innovative player in the very competitive Japanese telecommunications market, and took the risk to be the first to adopt Corrigent’s technology. Previous relationship. There is a certain element of trust necessary for a client to adopt brand new technologies. That is why the first reference customer will likely be a company with which the vendor has had a previous relationship. However, as Ruokolainen (2005) notes, this previous relationship is often a social one between the senior executives (typically CEOs) of both companies, and not necessarily a vendor-client or technology partner one.
5. A case example: HP and AMD A good example of this overall approach is the purchase cycle of the AMD Opteron server processor by Hewlett-Packard. HP was faced with severe competitive pressures from Dell and others in the industry standard server space where Intel processors were dominant. HP’s business customers were at the stage where a step up in performance was needed but backwards compatibility with existing software and operating systems was necessary. HP did have access to the Itanium processor, a 64-bit RISC-based engine from Intel; however, its performance and lack of smooth backwards compatibility were clear negatives. Into this performance gap stepped AMD with its 64 bit Opteron processor. Opteron offers smooth compatibility since it was CISC-based, like the 32 bit Intel processors such as Pentium. And, in contrast to the Pentium and Intel’s server-oriented Xeon
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processor, Opteron offered superior performance based on its 64-bit architecture. As an added bonus, AMD’s pricing was lower than Intel’s, thus offering HP a way to undercut Dell’s comparable competitive offerings in price yet still provide equal or even better performance. From AMD’s viewpoint, HP as an initial customer offered a prestigious platform and AMD could boast of Opetron’s positioning as an entry level server processor, a position not yet solidified by Intel. Moreover, AMD’s R&D team was already working on the dual processor version of Opteron which would place AMD in a more enviable position. Since each company saw distinct advantages in partnering with the other, the negotiation process was like a “stylized dance“. As HP searched for a way to gain a competitive edge against Dell, AMD appeared to be a viable alternative. HP, of course, had a long standing relationship with Intel so starting a new one with AMD had to be done with care. Since it was clear to HP that Intel did not yet have a competitive offering to the Opteron, this provided a face-saving opening to HP to entertain the potential of AMD’s product offering. For its part, AMD was careful to note the advantageous potential to HP of being the first to offer a 64-bit server capability in the Industry Standard Server space occupied by Intel. The possibility that Opteron could support not only the Windows based server software but also Linux made the Opteron a very viable alternative. Naturally, AMD would also push the price/performance attributes as a clear advantage. And by introducing AMD processors into the HP environment with Opteron, the ground was laid for additional AMD processors in the PC client space such as the Sempron and Turion offerings. While the price did not necessarily have to be much lower than Intel’s the fact that those processors were aggressively priced with flexible pricing terms meant that AMD could offer a tidal wave of products. Thus the initial beachhead provided by the Opteron turned into a full-fledged flank attack by AMD on the Intel stronghold. This was a clear and compelling benefit for HP to become an initial reference customer for AMD. In summary, HP needed an AMD-type vendor to break the competitive deadlock with Dell. And AMD needed an HP-type customer to surmount the Intel market roadblocks. It is no surprise that these number 2’s in the high-tech computer industry would go together. What is surprising is the extent to which the First Customer relationship has flowered and blossomed to where it is today. A number of key conclusions with applicability beyond just high tech come to the fore from this prominent example. These findings can serve as practical guidelines to vendors as they consider potential companies as an initial reference customer: . Use industry and company size criteria to maximize impact in the marketplace while controlling for risk. The industry and size of the initial customer should be of such weight that its impact on the marketplace would be clear but still manageable. The PC marketplace in 2000 was so visible and dynamic that AMD knew that a prominent customer such as HP would have a major PR as well as monetary impact. So it was worthwhile AMD to pursue HP. . Focus on easing a prominent pain point for the buyer to ensure commitment. The vendor’s capability to ease a prominent pain point on the customer side should form the basis on that initial reference and a “proven value” in approaching new customers. HP was in a world of hurt competitively vs. Dell. It was taking time to
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build up their answer to the direct model. So having AMD as a more powerful “brain” in the HP Intel-based servers would strike at Dell from the feature standpoint. Realizing a competitive alternative to Dell/Intel with AMD could help HP climb out of its weak #2 position. And in fact, HP’s success with AMD processors led Dell itself to eventually adopt the technology. Reinforce the major benefit with cost justification numbers. The initial first customer will need to justify the new vendor on a rational basis. Being ready with cost justification numbers can smooth that process considerably. Ensure ongoing engagement to the product through interlocking processes. Early on, AMD was able to set up joint project teams with HP, thus assuring continued commitment from the HP side. This commitment ensures that timetables will be followed and the initial reference project will inch towards a successful conclusion. Do not drag out the project; rather focus on an end date and the right people to carry it out. It is important to set a deadline for the joint work so that the benefits roll out. Having the right senior level of management involved can keep the project on track. And access to the knowledgeable technical people can accelerate the solution of on-going problems that are bound to crop up.
6. Summary and conclusions So to summarize, what lessons might we draw? They would include the following: . In high tech, the first customer is not only a financial resource but a marketing accomplishment to be trumpeted for reference selling and credibility. HP was that and much more for AMD. . The first customer’s initial participation in the vendor’s offering is often just a starting point for a more robust thrust by the vendor into a significant part of the customer’s product line. AMD was thus able to penetrate from the server line into the client desktop and client notebook lines in short order and eventually break into Dell’s similar product lines. . The vendor must be savvy in manipulating the full range of marketing mix elements to win the coveted “first customer” position. Hence, pricing, delivery terms, availability, and the partnership arrangements are all crucial elements in closing the deal between AMD and HP. Ultimately, as all these examples show, the choice of the first customer is a strategic decision, not just a tactical one. It has implications in terms of revenue generation, technology development, business development and industry focus, and it can be decisive in the introduction of a new technology. Vendors need to pay close attention and judiciously utilize the guidelines presented if they hope to leverage initial reference customers on the road to success. References Barret, V. (2006), “What the traffic will bear”, Forbes, Vol. 2006, July 3, pp. 69-70. Bekker, S. (2001), “Microsoft puts reference customer forward for SQL cluster”, ENTmag.com, available at: entmag.com/news/print.asp?EditorialsID ¼ 1902 (accessed July 18, 2006).
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