When it comes to cautionary tales, Wharton School marketing guru Leonard M. Lodish is fond of recounting what happened to telecommunications startup Iridium. The company's product: a satellite-based mobile phone system that gave users near-perfect reception anywhere on the globe. Backed by Motorola Inc., Iridium spent some $5 billion launching 66 satellites and seemed destined for greatness.
Yet where is Iridium today? The company filed for bankruptcy last year, and sold its assets at fire-sale rates in December. While it offered terrific reception, Iridium's phones were clunky, expensive, and failed to excite consumers. "No one bothered to ask people if they would actually use the product," marvels Lodish.
Entrepreneurs make the same mistake every day. According to Lodish, 60% of business failures are really failures of marketing, as opposed to financing or technology. "Marketing decisions are the most important decisions entrepreneurs make -- and they make them very badly," says Lodish, co-author with Howard Lee Morgan and Amy Kallianpur, of the just-released book Entrepreneurial Marketing (John Wiley & Sons, $29.95) that is based on a Wharton course of the same name that Lodish has been teaching for six years. He recently spoke with BusinessWeek Small Biz editor Larry Kanter about how entrepreneurs can avoid some of the problems that have befallen others.
Q: What's the biggest marketing mistake entrepreneurs make?
A: The biggest mistake is not exposing their product or service to the people they expect to buy it. But only 38% of Inc. 500 CEOs -- and just 21% of all small-business owners -- engaged in any form of concept testing before they introduce a new product or service.
Q: It seems like a pretty obvious first step. Why do so few people take it?
A: It's difficult, and it takes time to do it right. It's not as simple as asking potential customers if they'd be interested in purchasing your product. First, you need to find the right group of people to ask the questions to. Then you need to introduce the product in a way that is similar to how you plan to do it in reality. If you intend to sell your service using, say, a two-page brochure, that's what you need to show your target group. Very often, you have to take their comments and go back and product test again. The basics are very important and people don't spend enough time on them.
Q: For those that do use product testing, what are some of the most common mistakes?
A: Entrepreneurs typically don't give pricing decisions the attention they deserve. Price itself can often impact the way people perceive your value proposition. In many cases, your price can be too low, sound too cheap to do what the product promises to do. Lots of entrepreneurs set their prices too low at the beginning. Over time, it's easy to lower prices. But it's hard to raise them. People get very angry if you are perceived as price gouging. If you make the mistake of setting your price too low, you can be stuck with it for a long time.
Q: Now that the dot-com bubble has burst, what marketing lessons have we learned?
A: I still remember arguing with my students. They all believed you had to spend millions on advertising to build a brand. I remember looking at CDNOW, which was spending $70 per new customer. They're lucky if they make a dollar per CD. How many customers are going to buy $70 worth of CDs? How is that kind of company ever going to be viable?
Some of the best brands have been built with little or no advertising. Look at Starbucks. Until about three years ago, they hardly spent anything on advertising. They built a brand by pleasing customers in their stores, and leveraging the word of mouth. And they did it beautifully.