Entrepreneurs: Beware of the Marginal Thinking Trap
Entrepreneur's New Year’s Guide
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The notion is simple: an entrepreneur’s primary focus should be solving customer problems, rather than making products. The product is simply a means to an end. Products will come and go, but customer needs will persist, and the benefits sought by customers will expand and grow.
As such, making new and improved versions of the existing product is not what matters, but rather, providing enhanced customer benefits. The priority should not be to make Product 2.0 but to provide Benefit 2X to the customer.
Entrepreneurs who don’t recognize this truth can expect to face dire consequences in the marketplace. A short-sighted focus on improving products will open the door for competitors to enter the market and offer enhanced customer benefits through new, innovative means. If you live by the sword, prepare to die by bullets.
Why do many entrepreneurs fail to learn this lesson? The issue starts at the idea stage of the entrepreneur’s journey. For many entrepreneurs, the source of their ideas is not based on interactions with customers, but rather interactions with various technologies and products in the marketplace.
The ideas are therefore product-oriented, and not customer-oriented. The end result is entrepreneurs who have solutions that are not tied to clearly defined customer problems. The ideas are simple solutions looking for problems, and this leads to entrepreneurs trying to force fit their ideas in the marketplace. Most experts will say that the disappointing performance of products like Segway and Tivo are examples of this flawed approach. Great technology does not necessarily translate into great products.
Even if the entrepreneur’s idea came from a careful study of customer needs and was thus, customer–oriented, history has shown that most entrepreneurs become increasingly product-orientated once they taste early success. This is because most entrepreneurs face substantial financial pressure in their early years and they fall prey to what is called the marginal thinking trap.
The Marginal Thinking Trap
The marginal thinking trap can be explained as follows. For every investment decision, there are typically two alternatives: the first alternative is the full cost of making something from scratch, and the second is to leverage what exists, leading to only additional or marginal costs. In general, the latter alternative, the marginal cost option, will be preferred and chosen.
Management thinkers like Clayton Christensen have shown that although this seems like a sound decision in the short term, it can have adverse consequences in the long term because this option hides the cost of not investing in what could be a better alternative. Henry Ford understood the implications of this trap, many decades ago. It was Ford who said, “If you need a machine and don’t buy it, you will find that you have paid for it, and don’t have it.”
For an entrepreneur who may be just getting traction in the marketplace, the marginal thinking trap is very real. For example, if a new technology emerges that has the promise of enhanced benefits for the customer, the entrepreneur has to decide between investing in the full cost of the new technology, or working with the existing product, and incur only marginal costs.
It is easy to see how a cash-strapped entrepreneur will choose the latter option. After all, why invest in the new technology that may not be proven? However, by choosing the marginal cost alternative, the entrepreneur is selecting the product-oriented option and could pay dearly if the new technology ultimately provides superior benefits to customers. By falling into this trap, the entrepreneur leaves the door open to others who could bring the new technology to market and take away the entrepreneur’s customers. According to Clayton Christensen, it was the marginal thinking trap that killed a company like Blockbuster and enabled the successful growth of Netflix.
Ready for Tomorrow’s Bullets?
The marginal thinking trap is a real issue to existing startups which have begun to enjoy success in the marketplace. These start-ups are often faced with emerging technologies that may better address their customers’ needs. Should they invest in the new technologies? This is a difficult decision, but true entrepreneurs will not disregard or ignore anything that has the likelihood of better serving their customers. After all, it is customer benefits that must be nurtured and enhanced, not products. Products die; customer needs will tend to persist and grow.
A question to all entrepreneurs: if you are the swords of today, are you ignoring the possible bullets of tomorrow?