Crossing the Chasm: Marketing and Selling Disruptive Products to Mainstream Customers

by Geoffrey A. Moore

The message that will resonate now is much more likely to be “Look at this hot new market.” This message typically consists of a description of the emerging new market, anchored by a new approach to a problem stubbornly resistant to conventional solutions, fed by an emerging set of partners and allies, each supplying a part of the whole product puzzle, to the satisfaction of an increasingly visible and growing set of customers. The lure embedded in this story is that we are seeing a new trend in the making, and everyone who has a seat on this bandwagon is going to be in on the Big Win.

The idea is to get in a room with a number of people in a given industry and outline the current state of technology innovation in the vendor’s marketplace as it relates to their business. Correctly framed, these sessions put the customer, rather than the vendor or the vendor’s product, at the center of things. They align themselves with the customer’s needs and the alternatives available to meet those needs. Thus, although they are at one level clearly self-serving to the vendor, they do not feel self-serving, positioning the vendor more as a consultant than as a salesperson.

To define the battle effectively so that you win the business of a pragmatist buyer, you must: 1. Focus the competition within the market segment established by your must-have value proposition—that is, that combination of target customer, product offering, and compelling reason to buy that establishes your primary reason for being. 2. Create the competition around what, for a pragmatist buyer, represents a reasonable and reasonably comprehensive set of alternative ways of achieving this value proposition. Do not tamper with this set by artificially excluding a reasonable competitor—nothing is more likely to alienate your pragmatist buyer. 3. Focus your communications by reducing your fundamental competitive claim to a two-sentence formula and then managing every piece of company communication to ensure that it always stays within the bounds set out by that formula. In particular, always be sure to reinforce the second sentence of this claim, the one that identifies your primary competition and how you are differentiated from it. 4. Demonstrate the validity of your competitive claim through the quality of your whole product solution and the quality of your partners and allies, so that the pragmatist buyer will conclude you are, or must shortly become, the indisputable leader of this competitive set.

The number-one corporate objective, when crossing the chasm, is to secure a distribution channel into the mainstream market, one with which the pragmatist customer will be comfortable.

Essentially, these group into five classes, each of which is associated with an optimal approach: 1. Enterprise executives making big-ticket purchasing decisions focused on complex systems to be adopted broadly across their companies, 2. End users making relatively low-cost purchasing decisions focused on personal or workgroup technologies to be adopted locally and individually, 3. Department heads making medium-cost purchasing decisions for use-case-specific solutions that will be adopted within their own organization, 4. Engineers making design decisions for products and services to be sold to their company’s customers, and 5. Small business owner-operators making modest purchase decisions that are nonetheless highly material to them, given limited capital to spend and a strong need to get value back. Each one of these groups has a preferred channel of distribution.

Sales 2.0 consists of direct-touch marketing, sales, and service conducted entirely over digital media. The marketing looks a lot like the Web-based self-service transactional marketing for end users. The difference arises when the prospect clicks on a link. Instead of going to an automated response system, the click alerts a human salesperson who then approaches the end user via email, chat, or a voice call. Based on the prospect’s level of interest, this can lead to a referral to a website, a download of relevant literature, an invitation to a webinar, or a Web-enabled live demo of the offer. As prospects demonstrate increasing levels of engagement, the system tracks their status and alerts salespeople to the next step in the sales cycle. The entire process, from interest to close, is conducted over the Web.

Small business owners are really just consumers wearing a different hat. Their challenge is that their business needs do not fit neatly into consumer buckets, and so they find themselves slogging through outlets like Fry’s and Office Depot trying to figure out what to buy and how to work it. They know they need help, but they don’t have deep pockets, so they are always looking for a way to get things done on the cheap.

The higher the volume, the more transactional the process, and the more you depend on filling the top of the funnel. The higher the price, the more relationship-oriented the process, the more you focus on the bottom of the funnel. And, yes, with Sales 2.0 you do tend to focus most on the middle of the funnel, where process effectiveness and efficiency have their biggest impacts.

Companies crossing the chasm, coming from success in the early market with visionary customers, typically have their products priced too high. Price does become an issue with the pragmatist customer, but when the channel feeds back prospect resistance and uses comparable products as evidence of the expected pricing, companies too often argue that they have no such competition, and that the channel does not know how to sell the product properly. However, products can also be priced too low to cross the chasm. The problem here is that the price does not incorporate sufficient margin to reward the channel for the extra effort required to introduce a disruptive innovation into their already established relationship with a mainstream customer. If the channel is going to go out of its way to take on something new, the reward has to be significantly more attractive than whatever is available from business as usual.

If we put all these perspectives together and look at them in a crossing-the-chasm context, the fundamental pricing goal should be as follows: Set pricing at the market leader price point, thereby reinforcing your claims to market leadership (or at least not undercutting them), and build a disproportionately high reward for the channel into the price margin, a reward that will be phased out as the product becomes truly established in the mainstream, and competition for the right to distribute it increases.

Neither of these actions resolves itself readily into a checklist of activities, but there are four key principles to guide us: 1. The prime goal is to secure access to a customer-oriented distribution channel. This is the channel you predict that mainstream pragmatist customers would expect and want to buy your product from. 2. The type of channel you select for long-term servicing of the market is a function of the price point of the product. If this is not direct sales, however, then during the transition period of crossing the chasm, you may need to adopt a supplementary or even an alternative channel—one oriented toward demand creation—to stimulate early acceptance in the mainstream. 3. Price in the mainstream market carries a message, one that can make your product easier—or harder—to sell. Since the only acceptable message is one of market leadership, your price needs to convey that, which makes it a function of the pricing of comparable products in your identified competitive set. 4. Finally, you must remember that margins are the channel’s reward. Since crossing the chasm puts extra pressure on the channel, and since you are often trying to leverage the equity the channel has in its existing relationships with pragmatist customers, you should pay a premium margin to the channel during the chasm period.

The purpose of the post-chasm enterprise is to make money. This is a much more radical statement than it appears. To begin with, we need to recognize that this is not the purpose of the pre-chasm organization. In building an early market, the fundamental return on investment is investor risk reduction, accomplished through converting an amalgam of technology, services, and ideas into a replicable deployable offering and proving that there are customer use cases that create a demand for this offer. Early market revenues are one measure of this demand, but they are typically not—nor are they expected to be—a source of profit.

Now, if the current model of high-tech market development were not flawed, this might work, or at least work better or more often. But in fact, the revenue development that actually occurs looks more like a staircase than a hockey stick. That is, there is an initial period of rapid revenue growth, representing the development of the early market, followed by a period of slow to no growth (the chasm period), followed by a second phase of rapid growth, representing return on one’s initial mainstream market development. This staircase can continue indefinitely, with the flat periods representing slower growth due to transitioning into adjacent mainstream segments, and the rapid rises representing the ability to capitalize on those efforts.

All investment is a bet on performance against competition within time. What the chasm model surfaces is a need to rethink these variables. From the investment point of view, the most pressing question initially is, How wide is the chasm? Or, to put this in investment terms, How long will it take before I can achieve a reasonably predictable ROI from an acceptably large mainstream market?

How big will this market be? Again, the simple answer is, As big as can be motivated by the target market’s use case—its compelling reason to buy—as served by the whole product. Market boundaries occur, in other words, at the point of failure of either the value proposition or the whole product. By contrast, the other market-making factors—alliances, competition, positioning, distribution, and pricing—do not impact the size of market but rather the rate of market penetration. Given free market economy incentives, efficient solutions in these areas will fall into place sooner or later if the market is truly there.

Estimates of market size, rate of penetration, cost to achieve market leadership, and anticipated market share can all be made in the light of day, without smoke and without mirrors. There will still be plenty of room for disagreement about probability of success and degree of risk, but there should not be any fundamental leap of faith demanded.

So the call to action to the investment community is, Make your client companies incorporate crossing the chasm into their business plans. Demand to see not only broad, long-term market characterizations but also specific target customers for the D-Day attack. Drive them to refine their value propositions until they are truly compelling, and then use these to test how many target customers there truly are.

How long should I live off of venture capital, and when should I adopt the discipline of break-even cash flow? The bounds of this decision work as follows. Until break-even cash flow is achieved, nothing is secure, and your destiny is not under your own control.

In fact, in slow-developing markets with low capitalization requirements, there is a very strong case for adopting profitability from day one. Early visionary customers will pay consulting fees and prepay royalties to help fund low-capitalization start-ups. From an accounting view, these prepaid royalties cannot be booked immediately as revenue, but they can make you cash-flow positive from day one, and thus keep 100 percent of the equity reserved for a later date.

Early market development efforts typically do not respond well to massive infusions of capital—in the 1980s we saw this with the IBM PC Jr. and Prodigy; in the 1990s with pen-based computers and video-to-the-home, in the last decade with RFID chips for inventory management and smart grids for electric power distribution. You simply cannot spend your way into the hearts and minds of technology enthusiasts and visionaries. To be sure, there is a minimum level of capitalization required. You have to be able to travel to make direct sales calls, and show up looking presentable, and you probably should have an office and a phone that is answered in a professional way. You do need to invest in early market public relations—the product launch is crucial to building early market success—but you do not need to advertise, nor do you need to invest in developing partnerships or building channel relationships.

Once early market leadership has been established, however, the entire equation changes. The whole product investment—securing the partnerships and alliances and then making them work to deliver the final goods—takes a significant number of funded initiatives. So does the channel development process, both on the pull and on the push sides, creating demand and providing incentives for sales. And it is critical during this period to have an effective marketing communications program, including press relations, market relations, and advertising.

The key is to initiate the transition by introducing two new roles during the crossing-the-chasm effort. The first of these might be called the target market segment manager, and the second the whole product manager. Both are temporary, transitional positions, with each being a stepping-stone to a more traditional role.

Online adoption is best characterized in terms of four fundamental activities: 1. Acquire traffic 2. Engage users 3. Monetize their engagement 4. Enlist the faithful

That said, the process is anything but a linear progression from Gear 1 to Gear 4. Here’s what happens instead: Engagement comes first. Can you create a digital (or digitally mediated) experience that is sufficiently compelling and differentiated that end users will want to repeat it, hopefully many times over? Such repetition establishes a pattern of consumption, the first key underpinning of a mass market. You have found at least a few dogs who will eat the dog food and like it.

Once the engagement gear begins to spin, then it is time to introduce the acquisition gear. These two interact with each other, each modifying the other, as you seek to answer the second big challenge facing your fledgling enterprise: Can your compelling experience scale? This means grow both on the demand side (onboarding new users, eventually those who want something more or different from your initial users) and on the supply side (onboarding new content or product features to broaden the offering from its initial footprint). Scaling always requires modifying the offer, and modifying the offer always has an impact on scaling (though not always a happy one). This is not for the faint of heart.

Tipping points are as key to consumer adoption as they are to B2B. Prior to reaching one, all efforts to scale require pumping in additional fuel—if you cut off the fuel supply, the system will revert to its initial state. But after you pass the tipping point, the system restabilizes around a new status quo, and actually pulls you forward to get you to your new “right” position.

Given this context, the goal of the acquire-engage phase of the consumer life cycle is to get past this tipping point as quickly as possible.

Enlisting the faithful involves “hyper-engaging” with a small but vocal minority of consumers who have already demonstrated a propensity to evangelize and proselytize on your behalf. They do this because they believe in you and what you are doing so much they have made it part of their own identity. You don’t pay them—indeed, to do so would be insulting; they are doing this because it has become part of who they are.

A consumer’s degree of enlistment manifests itself in three states. At its highest level, it’s the kind of evangelical behavior we are talking about here. This is the key to viral marketing, where your cost of customer acquisition plummets because your existing customers act as your best marketing campaign. Think of this as the equivalent to an NPS (Net Promoter Score) of 9 or 10 (“I would definitely recommend this to a friend”). A lesser state of enlistment, one more akin to an NPS of 7 or 8 (“I would probably recommend this to a friend”), does not fuel viral marketing, but it does ensure consumer retention. This is equivalent to an entrenched brand preference—when I buy beer it is Heineken or Beck’s Non-Alcoholic. I don’t evangelize either brand, but they always get my business. This is the level of enlistment needed to forestall churn. When enlistment falls below this level, one now more akin to an NPS score of 1 through 6 (“I would have reservations about recommending this to a friend”), that can signal anything from openness to switching to outright defection. Indeed, at the bottom of the range, it likely indicates counterevangelism, which is about as bad as it gets in consumer marketing, as in the 2004 film about McDonald’s, Super Size Me.

In a consumer model, the goal of the enlistment gear is, at minimum, to keep churn below, say, 2 percent per month (giving you a lifetime customer value of about four years), and more positively, during the growth phase of the category, to catapult you into hypergrowth. You begin to work the enlistment gear, therefore, once you are confident that your engagement and acquisition gears are humming, seeking to use its acceleration to get you past your anticipated tipping point.

All this leads us to the fourth and final gear, monetization. Whereas crossing the chasm is definitely a pay-as-you-go model, the four gears represent a “URL” approach (not uniform resource locator, but rather “Ubiquity now, Revenue Later”). Most of the great consumer Internet successes in the first decade of this century followed this approach, introducing the monetization gear very late in the game, in some cases not until afte...

The key idea here is that monetization, regardless of when it is introduced, will slow down the other three gears. If you invoke too early or too swiftly, it is like popping the clutch on a manual transmission—you stall the engine. The art instead is to feather in the monetization gear in such a way as to minimize and absorb its retarding ...