EP17: High Noon - Facing the Black Hats Who Are Trying to Take Your Market

The United States of the mid 19th century is ripe with stories of its timeless legends and colorful characters who helped weave the historical events that defined the Great American West. The stories and movies about the adventures of lonesome cowboys, men with black hats, or brave lawmen of the Old West who clashed frequently in conflicts such as the Gunfight at the O.K. Corral, the duals in the dusty streets of Virginia City, and tales of quick justice in Dodge City, continue to capture our imagination. 

When we talk of cowboys and other figures of the Wild West, we immediately picture a man on horseback. But no cowboy would roam the West or walk the streets without a gun…and such a gritty figure would most likely wield a very distinctive long-barreled revolver called the Colt 45. In fact, no gun in the Old West was as important or left such an indelible mark as the Colt Single Action Army Revolver, or more widely known simply as the Colt Peacemaker. 

It was said that "God made man, but Sam Colt made them equal."

And why it was called the Peacemaker and the “Great Equalizer” is as related to business and market dominance today as a cowboy is related to his boots. 

The Colt 45 leveled the competitive playing field because it equalized the relationship among fighting males…especially in the strong honor culture of the Old West, where discipline was enforced through one on one combat and duals deriving from even the faintest slight. So much so that the reason people used to be more polite back then could be argued that it was not because they were nicer people, it's because you might get killed otherwise. And that, as my fellow co-host Chris Beall would say, was considered to be a great inconvenience. join us for this episode of Market Dominance Guys.

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The complete transcript of this episode is below:

Chris Beall (04:35):

Question is is it okay to tell a sales rep how to do their job, what tools to use or technologies to use, process to follow? And it comes all the way down to this ancient question about what is the relationship to sales itself to a company and its strategy. So under the old paradigm, which came to us from, as we were talking about before the roots of capitalism, where capital is deployed to create the means of production that is factories full of machines with people tending the machines, or maybe it was some people doing things by hand or whatever, but capital is deployed in order to build something repeatably in that something turns into inventory, finished goods inventory, and that inventory must be disposed of and turned back into cash in order to make the cycle work. Right? So what that always suggested was well sales is this external function that just sits out there somewhere in the world.

And as long as they dispose of the inventory in a way that's reasonably efficient and they don't take too big a cut, then it's not really relevant to the future of the business. The inventory must be disposed of, sales must be good enough, but we certainly don't want it inside the company, because then it turns into overhead. That is when there's nothing to sell, then we carry the sales person. So, and the classic evolution of business through, I'll call it the capitalist revolution that occurred as a concomitant of the industrial revolution, hand in hand, we ended up with this model of the salesperson as effectively kind of an independent contractor. And it shows up in how we compensate salespeople, where we compensate them with variable compensation, with commissions based on what they sell. And the ultimate, most respected kind of salesperson is the pure commission rep, who is a lone wolf who does whatever they do.

And they run their territory the way that they want to run it. And it doesn't really matter if some mix of their Rolodex, their charm, bribes given and taken, whatever it happens to be. Now that's in the form of say nice dinners or whatever it happens to be, right? It doesn't really matter because ultimately if the sales rep decides to put more of their own money into selling and take as a result, [inaudible 00:06:48] who really cares, right? And so in this new formulation where there is no finished goods inventory, where all interesting products are manufactured instantaneously at the point of consumption, which is what's true of software... Back to the question, I guess.. Remember who's it is, it was somebody, Seth Godin or somebody talking about software... Maybe it was Marc Andreessen said, said software is eating the world, right?

And what it means is software eats the world because there is no need to carry finished goods inventory. That's at its core why software eats the world because you don't need any of it. Actually, there never is any software in that sense. It doesn't exist as a deliverable, you just experience it by interacting with it and then since software has moved into the cloud, you don't even need the damn hardware anymore. So now it's a magic trick where you say, "I want some, now I could go out right now." In fact, we're doing it right now, we're in Zoom video. I don't recall ever becoming aware of or interacting with or downloading or getting a machine for any software for Zoom Video. It never happened, right? And yet we're consuming something that is as sophisticated as any remote video experience ever was.

The kind where you would buy a screen and put it up in a conference room and you'd have hardware to do this and that. So software eats the world primarily because it doesn't exist, which has is its main strength. But it blows up conceptually, the relationship between sale and the company that's trying to make money from its innovation and that needs to dominate a market in order to stay alive because with increased fluidity, as software goes and eats the world, software also basically says, and anyone can attack anyone in business. Everyone's armed with... Software is the equivalent of six shooter and the Colt 45. Now the gun that tamed the West, right? Why? Because a little guy without an awful lot of physical fighting power suddenly was the equal with any man. That's why it's called the great equalizer, right? The great equalizer was the Colt 45. It equalized the relationship among fighting males.

And in the honor cultures out of which the United States drew it stock, it's rootstock, came out of a number of honor cultures where discipline was enforced through duel. And so the reason people used to be polite was not because they were nicer people, it's because you might get killed otherwise. And that was considered to be a great inconvenience. So there was this sort of universal discipline mechanism, which is you get your honor is questioned and something had to happen, right? So here we came out of that culture and we had an equalizer and now software is the great equalizer among business and businesses that don't understand this, that think that they're protected by the old protection which all looked like capital and access to supply chain, and being threatened by businesses that have no need for supply chain, that have no need for capital.

In fact, you're seeing that even in the venture finance software world, nowadays. Venture capitalists will no longer fund the creation of software. How about that? 20 years ago, venture capital was the primary way we funded the creation of innovative software. The software revolution was built... I'll go back to the beginning of my career. So I did my first startup in 1983, and we had a little bit of software that a guy had written in his basement, so to speak, actually sitting on the edge of his water bed in Boulder, Colorado. And it was just enough to intrigue one of the top venture capitalists at that time. In fact at the top of the class of 83, it was a fund called the Masters Fund in Boulder, Colorado of all places, right? And Boulder became and still is the number one per capita software shop in the world.

Corey Frank (10:39):

Really?

Chris Beall (10:40):

Yeah. Still is. And it all came out of that period in 1983 to 19, probably 88, 89, when there was this flowering of software companies and the venture capitalists at the time knew that the trick was to get them early and fund the development of their first product. So ideas were funded and turned into products backed then and then software ate the world so bad so to speak that even that little piece of inventory building went away and now anyone can build anything. I just hooked up a relationship between a 17 year old software developer and a very experienced kind of really [inaudible 00:11:22] entrepreneur out of the investment banking world who wants to revolutionize something about investment banking. And late fifties, almost 60 year old guy, who happens to know everything there is to know about algorithmic valuation of companies. And it's entirely possible that the three of them will end up building a multi-billion dollar revolution out of nothing more than a 17 year old's time that he can find while going to school, still going to high school, and an old guy's knowledge of how to solve a particular problem using algorithms.

You think about that. Think about the entire investment banking industry could be blown up, destroyed, by that little triad of people coming together with no venture capital whatsoever, until their product is filled, until they know that it works. And until it's dangerous, disruptive, you want to see a Colt 45 play the role of a Gatling gun. So that change, what's so interesting about that in the sales world is sales is still run as though we live in a capitalist society, but we live in a post-capitalist society where there's actually no role for capital in production anymore. Capital plays almost no role in production. Now, if you're Elon Musk, you need capital in order to do something else. Look at Tesla that the capital in Tesla isn't tied up in Tesla's factory. The capital is tied up in the speculative nature of how they sell their cars.

The fact that they sell their cars ahead, they actually reversed the inventory flow completely, backwards. You sign up to buy a Tesla two years from now, when you're getting a leading edge Tesla. And so the orders are already there and cash is already there, but you need more in order to de-risk the production cycle itself. The question is no longer, "Can we make the cars?" It's no longer, "Can we dispose of the inventory?" There is no inventory. The inventory is in Elon Musk's hand. It's a rate of production of a car that has never been built. Copy number zero doesn't even know. And so in his head, which he sells to the stock market and sells to the people buying the cars, there are these future cars. Want to buy my car that doesn't exist. So the car itself looks exactly like software at that point.

It's a specification for a product that doesn't exist that will be delivered just in time when it's made to you often some [inaudible 00:13:36] future. Please pony up a hefty deposit and I will use that deposit and go leverage that up in the stock market in order to see if I can build this car in time for you. And if I don't, you wait, and all this flex occurs, right? So we have this... And what did they do with their sales model? They just basically said, "Oh you know the old sales model where the car dealership is the territory, blah, blah, blah, all that stuff. Not going to do that."

Chris Beall (14:57):

We're just not going to do that. You can just go online and buy a Tesla. That's how you do it. You can go to a little showroomy thing, right? But there's no sales force in there to sell to you. They don't even know how to sell a Tesla. No human being knows how to sell a Tesla. So Tesla's their software and so there's an industry where you'd think, "Well, I still need the whole capital thing for the supply chain. I need all this stuff," but it turns out you don't. You need believers in the potential value of having this piece of software that happens to roll around on four wheels.

Corey Frank (15:28):

So believers, not capital.

Chris Beall (15:28):

Yeah.

Corey Frank (15:28):

The believers are the new capital.

Chris Beall (15:29):

The believers are the new capital and sales, the job of sales in the innovation economy, is to manufacture believers.

Corey Frank (15:35):

So the job... Say that one more time. The job of the-

Chris Beall (15:38):

The job of sales in the innovation economy is to manufacture believers.

Corey Frank (15:42):

That's huge, Chris. To pivot on a different type of currency, right? So what we've talked about last time is that I have to wait for this congruence of the prospect and the sales person to hit. And if they don't buy at that intersection point, right? Most sales folks will trash that prospect, but what's the percentage of, is it one out of 12?

Chris Beall (16:05):

One out of 12 are in market at any given quarter.

Corey Frank (16:07):

Right. So my job is to make believers of the 11 of 12 that aren't buying and eventually close the one of 12 that is.

Chris Beall (16:16):

Exactly.

Corey Frank (16:16):

But the 11 of the 12 still have a currency that doesn't show up on the immediate balance sheet that I have to be aware of, hyper-aware of.

Yes. And we can actually... It's possible to measure the shadow balance sheet. This is a [inaudible 00:16:31] shadow asset, and you measure it simply by the outcome of conversations and the probability of future conversations, that each one of those individuals you talk with, you can come up with a probability that they'll still be around when you talk to them again, probability that they come into market. So one out of 11 turns in to one out of 10 to one out of nine to one out of eight. Eventually you compress them against the end of that cycle. Where it's like counting cards. I used to be a blackjack player. And as you get down to the bottom of the deck, eventually every card will be dealt, right? If you're dealing all the way through in the abstract, right? And in the real casino, of course, they shuffle early in order to avoid this problem. But the statistically compressed deck scares the casino because the counter can know too much.

And this is a silly story, but I remember sitting there at the old what is now The Stratosphere, I'm trying to remember what it used to be called. And in third base and playing my two hands, I think I was playing at the time, I was being polite because there were some people at the table and every card in the deck that was left was a 10 and the dealer was showing a six and I knew it. So I'm just splitting in halves, right? And people are freaking out. I mean, some guy wanted to get in a fist fight with me, which I can assure him there were better ways that we could interact about this question of whether I was an idiot, but he was convinced that I was an idiot. And I didn't have to think, I just happened to know every single card left in the deck and said, "I can't see it's a 10."

And therefore I'm taking 10s until we run out a deck. Right? Well, this is what happens to that cycle. At first, only one in 12 cards so to speak, one in 12 of the people I talk to is potentially in market. And now I need to turn as many of those of the one out of 12 into believers as possible in order to fuel my movement into the market, because I need to have real customers because my customers within a market are my units of referenceability and referenceability is how I lower my marginal cost and marginal risk of entering that market more deeply. Every time I get a customer and a customer is successful with my product, he just bought my product and was not successful, right? That fact makes the next customer easier to sell, the next prospect easier to turn into a customer. So I have a manufacturing process where I'm manufacturing believers and an ever lower cost and an ever increased value.

So that asset has this weird quality. This is why exponentials are exponentials. The rate of flow of that asset, the net new customers that are coming in and becoming customers, actually increases the flow rate. And when flow rates get multiplied by increases of flow rate, that's the next [inaudible 00:19:08]. That's where the curves go like this and the amount of time it takes to dominate the market has to do with when that curve crosses a particular threshold, which is kind of the 50% plus one is what people say. It's not really the case. It's really a probabilistic thing. Are you going to own main street is the real question. Are you going to become the standard? When you become the standard, you own that market, and you really should reduce your sales effort and take your best salespeople and put them on another market. Bad habit to leave salespeople around in dominated markets.

It's almost like, you ever play Monopoly and there's couple of different types of people who play Monopoly, right? The traditional way to play Monopoly is that the Atlanta or Continental or Baltic, and you don't buy it, you're saving your money for the Marvin Gardens and the-

Chris Beall (19:54):

Park Place.

Corey Frank (19:56):

Park Place, right? And there's those folks that just wait for chance, just wait for simple chance of the marketplace that they're going to land and they're eventually going to get a Monopoly on those yellows or those greens or the Park Place of the world. And then with the aggressive, kind of the new way that you play Monopoly, is wherever you land, you just buy it, because you never know when the light blues or the pinks, et cetera. You're going to monetize every role of the dice today. [inaudible 00:20:24] but maybe on your 17th turn, monetized your activity on your second roll of the dice.

And I almost see kind of what you're postulating here, right? Is that saying, it's that, listen, stop trying to look at the marketplace as this one in 12 congruence of time, of fate, and that your success is hinges on that one in 12 chance. No matter how good your messaging is, no matter how good the timing is, you could still only close one of 12, but the activities behind [inaudible 00:20:58] interactions still have a currency, still have an atomic weight that you have to see in the abstract, in the higher level, in the strategic view, if you will. And that's what I love about what you're postulating here.

Chris Beall (21:11):

It's so interesting because it comes down to then the question of how do we manage sales? Because if we're managing sales for the quarter, which is what is the tradition, then what we get is the behavior that is within the quarter, that is the sales person's effort goes to making their number. And when they make their number, we're happy, right? And this is what I just heard from this sales manager, actually was a sales ops guy, but it was somebody in that world in this big company and their theory is, "Well, if the reps like it, they can use this tool," this ConnectAndSell tool as they call it, "Then they can use it. And if they don't well, that's up to them, but if they don't make their number, then we're going to encourage them more strongly to use this technology." Right? And the reason for that isn't that they're foolish.

The reason is they're just living in an old paradigm. The old paradigm being the rep has the territory. The rep manages the territory. And the goal is to dispose of the inventory. And so, as long as the rep is disposing of the inventory, which is it makes the quota, then we're all good. And it doesn't matter how they do it. It doesn't matter if they wave a magic wand or drive around in circles, it just doesn't matter a matter. But the real question at any given point is what are you doing with the 11 out of 12? What you're doing with the one out of 12 is you found them and they're probably going to buy, unless you're an idiot. So then the question is, well, what are you doing with the 11 out of 12? And the answer is, if you want to dump in a market, the 11 out of 12, when you speak to them, anybody in that set, you need to move the trust needle in your direction as a human being.

That is the classic other answer is, "Well we'll give them information." The 11 out of 12, right? "We'll give them information. We certainly don't want to waste time in a discovery call with them. Discovery conversation would be a total waste. Oh, we might spend 15 minutes or half an hour talking to them. And then they don't buy. That's such a failure. So sad." Right? So let's send them some marketing information, some collateral, and this and that. Well, nobody has generated a trust relationship ever with a brochure. Like, "I trust this brochure," is a nonsense statement. It just doesn't happen. People trust people and, by the way, people trust people and people only. We are wired to trust carefully and then we're also wired to trust increasingly until somebody shows they can't be trusted. So it's a threshold. It's a very funny looking curve, right?

Trust works like this. It's generally negative. And then if I decide that I trust you, it goes way up like this, but I'm strongly biased in favor of interpreting everything you do as good till you betray me. And when you betray me, then my trust goes to hugely negative and I never trust you again, right? How does trust work in the long run? But that's not the company's problem when they're going to market with an innovation. The problem is no one knows them and no one trusts them at the beginning and they need to exchange about 600,000 bits of information with everyone in their market that they can talk to with one and only one purpose, which is to move the trust needle above where it is today through an interchange of information, which starts with somebody making the approach, right? This is just classic sales. If you want to control your market, you have to make the approach and you have to initiate an interchange of information designed to get the other person to correctly trust you.

It's so simple when you think about it, right? And when you think about what do we measure salespeople for? Exactly none of those things are measured. Not one of those things is measured. Do we measure how many people that they interact with, how much information they interchange, whether they move the trust needle or not. And if so, how much? This is the essence of peeling your market off against competitors and this is actually why at the beginning of a market domination exercise, you should talk to more people per day than toward the end of it. For two reasons, one is you start running out of them because you're selling to some and then learning that others are fundamentally not in your market and whatever your idea of your market is, which you turn into a list, ends up having false positives in it. And it must have false positives because you can't know in advance the conversations and getting the information back.