EP11: The Two-State Solution in Market Dominance: Dollars or Donuts?

States, lots of ‘em, 50 states. Plus Red States, Blue States. States of consciousness. Physical states. Liquid/Gas…

How about the state of Markets, being Market Dominant, or simply being an “also-ran?”

The fact is there are only two states you can reside in as a company: you're either dominating one market or more, or you're dominating zero. And if you're dominating zero markets, you WILL go out of business in time unless you turn into a company that IS dominating at least one market.

Market Dominance is security, it’s collateral, safety, shelter, asylum, parlay; but most importantly, it’s freedom. Because the only two reasons a company dominating a market can ever go out of business is either financial mismanagement or if the market is just too small.

So how do you map your journey to market dominance? What’s changed over the past few years that makes it easier for some and more difficult for others to even get out of the gates? In this chat, I ask Chris for his insights into the real stakes of entering this Octagon of business without true dominating intent. This is the Market Dominance Guys and today’s episode entitled, “The Two-State Solution in Market Dominance: Dollars or Donuts?”

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The complete transcript of this episode is below:

Chris Beall (02:39):

It's the talk that I gave, starts with corporate strategy and the challenges of corporate strategy, and it goes all the way down to the psychological nuances of the script. In one case in the dinner case, I'll call it, I leave the details a little fuzzy. So I get to sort of the fact that there are these psychological imperatives and the language is important, but it's not a workshop. The idea is to get people discussing this controversial question which is, is it possible that an old path to dominance has gotten more difficult because of some secular changes in the world?

Which is primarily the concentration of wealth in the hands of a smaller number of people which has driven the growth of private equity, and private equity has driven the competition of money with corporates where corporates have to compete against money that has an easier job. What does the money have to do? All the money has to do is make an investment. They have to find an asset they want to invest in, and they see them as assets, not as companies. And then they put the money into that company through this complex looking process. But it's the same for all parties who might ever want to buy that company, no different.

They have more flexibility. They can take positions from whole ownership down to some fraction, which a corporate can't do, corporate needs control. So they have a wider variety of targets they can go after. They have no requirement to integrate, none whatsoever. You can buy the company and just let it run, or they can buy it and put in new management, or they can buy it and have a thesis about operations, or they can buy it and combine it with another company.

They can do anything that they want, right? I'm a corporate when I buy a company, what can I do? I can either let it run independently and decide whether the law says I have to consolidate the books or not. And then I can say, "Well, I've added it to my portfolio, and I'm going to seek synergies later at the SSL approach, or I'm going to integrate that company into mine, into the acquiring company, which is known to fail 90% of the time.

So as a corporation, I have to pay up. Now I have to pay premium prices for an asset that may or may not be the right asset because I can only learn so much about it before acquiring it. And after acquiring, and I have to do more work with a higher failure rate. The guy I'm competing with just does his due diligence strokes a check and says, "Yeah, we'll flip it later."

Right? So that path to strategy, that mountain that sits in front of me has gotten steeper and steeper and bigger and bigger and corporate strategy, which is, essentially, which markets am I going to go at? Right. I have product strategy too, but even there, I tend to execute as a big corporate, I execute through acquisition. And product strategy, I still can kind of do it that way. The venture capitalists take care of that problem for me.

They build the research and development labs off there in Silicon Valley and Silicon slopes and Austin and Boston and all those places. And all of these people come to work for them thinking that they're starting these businesses, but all they're really doing is just working for these laboratories that are working on categories of problems. [inaudible 00:05:42] isn't quite happy because they get a free labor and they have a salvage operation running, just strip the IP out of these things if the business didn't work, which they don't really care about, the business that is.

That business's a demo of value for a future acquire and every once in a while, you'd do kind of demonstration make one of them. So as that game is played, no problem. Product strategy is a big corporate. I could choose to make my own products and take them to market, but that fails almost every time. Now, some people know how to do that. Half of those people are talking to you right now. So it's so uncommon that it's just not even worth considering a product strategy.

But your big strategy is market strategy. I need to go and take a new market because market domination is by strong evidence, the only insurance against business failure. So that's actually where I start this talk, which is quite surprising to people. I say to them, the fact is there are only two states you can be in as a company. You're either dominating one market or more, or you're dominating zero.

If you're dominating zero, you will go out of business, unless you turn into a company that's dominating at least one market. The only reason a company dominating a market can ever go out of business, or two. One is financial mismanagement to the point where you can't even recover in a market dominance position. Usually you take on too much overhead. So if your overhead is so big and you can't figure out how to get rid of it, or you're too dumb to get rid of it. And if your market is too small, then dominating a market, doesn't ensure your survival.

Corey Frank (07:24):

So, what is defined as a market, Chris.

Chris Beall (07:25):

I use Jeffrey Morris' definition. So a market is a list or set actually, but a set is usually expressed as a list, of mutually referenceable companies. That is, they have the mathematical property that when one of them buys a product from vendor A, a specific product X from vendor A, then every other participant in that market, everybody else in that set becomes more likely to buy that product at the same price or under the same conditions of knowledge.

So you keep lowering the cost, the internal cost, your cost as a seller of taking the next unit within the market of advancing in the market as you take units. So markets essentially are mathematically downhill operations. Once you get a Boulder rolling downhill, it rolls faster and faster and picks up more boulders, right? So in a market, once you get that first customer, which is very hard to get, by definition, anybody else who's positively influenced to buy from you, that particular product by definition, they're in that market.

If I will buy, because you bought a little bit mean. I'm a little more likely to buy because you bought, you and I are in the same market for that particular product. And that's it. It's just a mathematical concept. It's a set of all of those who are mutually, mutually reinforcing with regard to their desire to buy. And the reason for markets being defined like this, and this is markets for, usually not entirely estate, which categories, but if I'm a company coming into a space I'm not established. So I've got the same problem as though I have a new product or innovation.

I'm new. New is bad. Nobody wants to buy new in business, right? Everybody wants to buy new as a consumer because as a consumer, I'm putting my money at risk. And if I'm identity as a consumer is wrapped up around, like my social status is wrapped up around the perception of other people that I do, new things, then I'm easy to sell to.

This is what consumer products tend to come into the market quickly. If they hit a little subset that are like, wow, that's the cool thing. And then cool tends to take them either up a big or they just eat the cool factor. And that's all they get is the cool ones, right? There was no equivalent of that in business, except a tiny fraction of people called technology enthusiasts that you can sell to and you can sell new stuff to them. And they were very, very small and they flame out quickly.

In the business world, people are afraid for their jobs when I buy, I fear for my job. So I'm not sure surely much more conservative than when I'm risking my money because I'm not risking my money anymore. I'm not risking the price, right? If even if I buy a Tesla, the worst cases, I melt the price of a Tesla minus the resale value of a Tesla, right?

So I take it off the lot and then I sell it the next day because I hate it, because it turns out those two big screens make me have seizures while I'm driving or something. And it's like, "Well, I got to get rid of this Tesla." What if I might lose, I don't know, 5,000 bucks. It's not so bad. If I buy my company a Tesla, so to speak, and we could commit to a business process in which the Tesla is essential to the business process.

This is how we're going to get to our conferences from now on. We're not going to fly. We're going to drive this Tesla really fast. And then we discover, Oh, darn their speed limits. We hadn't taken into account that there are speed limits. It will go really fast, but we can't go that fast. And now it's too expensive to get to all the conferences we need to go to, and we're going to go out of business. "Hey Chris, why'd you buy the Tesla? Why didn't you stick with the airplanes?" "While they're kind of expensive and all that and the Tesla promise to be cheaper and blah, blah, blah."

It's like, Oh, okay. So you failed to notice something in your analysis and we're not letting you ever buy anything again. So we're going to take your power away. Maybe take your job away. So what am I risking? Oh let's see my reputation by kids' college education, my retirement, my respect in the community, whether my wife stays with me, husband, dog, whatever. I risk everything [inaudible 00:11:39] it could be to be first bigger or the newer, the scarier.

So what's so unique about B2B and what frankly drives me crazy when I see these predictions that B2B will go to the way it BBC, and it'll all just be easy buying online. It has to do with how much information the buyer has. It has nothing to do with how much information the buyer has. In fact, the 180 degree opposite. The more information the buyer has accessible to them in B2B, the less inclined they are to buy. Because the information is all vendor information or vendor influenced information. You can't tell. It's the fake news problem. It's all fake

To some degree, every single thing anybody says about any commercially available B2B product is shaded in the direction of trying to influence the buyer to make a decision. The buyer knows that, and the buyer knows that decision could cost them their career

Corey Frank (12:34):

The B2B buyer knows that. [crosstalk 00:12:36].

Chris Beall (12:38):

That's right but the B2B buyer has this, their consumer, when they get up in the morning. They drive to work in their car and they close their car door. They walk with their briefcase up to security, and as soon as they scan their badge and they go into their cubicle, it's almost as if the air is piped in differently or the ceiling tiles or the magnetic forces change them to these risk averse pieces of mankind, versus they'd be so risky to buy something on their own money, but they come into this environment and they have much more of a sensitivity to marketing information, product information, the phone ringing in a sales or a stranger on the other end of the line. So it's the same person on the weekend between Monday to Friday, but the stakes are higher. Is that what I hear you saying?

Corey Frank (13:34):

Exactly. The stakes are so high. They're so high that only somebody who is so reckless that nobody would ever let them buy anything for a company just goes out and goes, Oh, I'll just get one of these. They'll just get whatever it is. Even something as simple as a conference. Look at the decision to buy something as simple as, "I think we'll go to this conference," not even as a sponsor. Very simple. Risk isn't that high? You don't like the conference. You don't go again.

And yet a committee will form around it. People's opinions will be asked, right? It's not this idea that... In fact here's the contradiction. Okay. The big contradiction. So we're told us sellers, two things are going on. One is our B2B buyers are becoming consumer-like, and the other is the buying committee is getting bigger. Now think about that physically.

A consumer privately sits there in front of their computer or on their smartphone, and it looks at some information and gets influenced by influencers, whoever it is, Kim Kardashian or whatever. And they go as a consumer, "Oh, I think I want this, click, click, click. And they have like buy with one click on Amazon and all that kind of stuff, right?

The B2B buyer, we're told, does the same thing more and more each day. And yet somehow they're doing it by committee. The committee is getting bigger. So what is the committee all sit around at that person's desktop and stare at the stuff and go, "No click here. No click there." It's physically impossible to reconcile the notion of the B2B buyer becoming more like the B2C buyer and the committee growing, ever larger and more influential.

They're opposite ideas and yet we're fed both of them by the pundits. The experts in B2B sales, with the exception of what I'll call the four horsemen of Outbound, right? Jeb Blount, Anthony Iannarino, Mike Weinberg, Mark Hunter, people around that set go, "No, no, no, you don't get it. None of that stuff's happened." What's happening is the scared buyer is still the scared buyer I must talk to a seller that they learned to trust. And that seller is when it tell them what to buy. And they're going to earn that trust by being trust able at the beginning, and then trust worthy over time.

They actually have information asymmetry. They know better than the buyer, and so they will be the trusted advisor. Think of the contradiction between the B2B buyer being B2C and the need for the trusted advisor and the growth of the committee. All of these are contradictory ideas. And nobody exposes the contradiction. "Oh no, no. They're all happening." Why? Because as an expert, I can make more money selling sales techniques to you. If you believe all this crap, right?

But what's really happening is nothing has changed, except this internet thing has provided so much additional information in the form of scary noise. The buyer has become more conservative rather than less. And that more conservative buyer expresses themselves in the larger committee. The committee is an insurance policy against the individual buyer, making the decision and being held accountable. So the committee is not a corporate idea like, "Wow, we need to have 10 people involved in every sale."

It is, "Wow! It's so confusing out there. Things are moving so fast. So if velocity increasing and information flow and availability increasing. And so here I am as the buyer, what do I do for safety? There's safety in numbers. I'm not going to make this decision by myself. I'm going to make it with others. However, only one person in that committee, whoever it is who kind of is guiding it, or is the person that everybody else is looking to the person who would have been alone. If there hadn't been the committee, that person is going to rely completely on trusting one of the sellers more than they trust themselves.

The threshold for a B2B purchase decision is not to trust one of the sellers more than you trust the other sellers. It's to trust one of the sellers more than you trust yourself. This is the essence of the B2B equations from a market dominance standpoint. Now we go all the way back to, Oh, look what happened. Private equity came in and wrecked the landscape for buying companies in order to enter markets.

So now I have to enter markets by myself, which means I have to sell my way into markets. So now I'm on the outside, my buyers are these cautious creatures who aggregated into these committees when they're doing serious buying. So I have to somehow gain an advantage there over all my competitors in order to dominate this market.

Before I could take my balance sheet and get an advantage by cleverly identifying a company that was ready to sell itself. To me, that's hard. Now I have to do something though 100 times harder, which is I've got to get this cautious animal called the B2B buyer first identified, as to find them. Then I got to get their trust. And then I got to grow their trust through a process in which new players are going to come in and that trust has got to go out into the committee, somehow.

I have to exceed a threshold I'm not aware of, which is they have to trust me more than they trust themselves. Otherwise, they're going to go to the standard outcome of a B2B buyer, which is no decision. 90% of all B2B purchasing processes end in no decision. The reason is none of the sellers climb the mountain high enough, the trust mountain high enough to be trusted more than the buyer trust themselves. This is the essence of the entire market domination and therefore survival question for every B2B company.