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Investment
evidence
the
Marketing/Engineering Investment Ratio™ (M/E Ratio™)
"Your
evidence of the relationship between Market Research and success is right
on! Dell's M/E Ratio™ is North of 1.5." Michael S. Dell, Founder, Chairman, and CEO of Dell Computer Corporation
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the Super Successes
The graphic which
visualizes this research is there for a reason. Let’s take a closer look.
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Figure 3,
the "Money Rocket"
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the
"Money
Rocket"
Across
the broad landscape of technology-based enterprises are “super successes” like Dell Computer and Cytyc.
Here is a
graphical way to summarize what we might learn from these outcomes. We can picture the relationship between investment in up
front Market Research and success or failure. The axis on the left is the ratio of Market Research investment to engineering
investment, called the Marketing-to-Engineering Investment Ratio™ (M/E Ratio™), on a logarithmic scale.
Above an M/E
Ratio™ of 1, the enterprise is investing more in Market Research than in engineering. In the right column are super
successes. I have called the symbol in the upper right corner the “money rocket,” because it represents the way
successful entrepreneurs like Michael Dell rocket to revenue; to strategic and financial success. |
Success data
The Evidence shows
that super successful technology-based enterprises invest more in marketing (exclusive of promoting or selling) than in engineering.
Super successes
invest, on average, more than $2.50 in market research for every $1 in engineering.
"I wish we
would have followed your advice a long time ago and invested more in marketing. I wish we'd been more receptive to your input,
Ralph. I believe in the M/E Ratio™, investing at least $1 in Marketing for every $1 in engineering. I believe that even
more than $1 in Marketing is required for success!" Jim
Engel, President, Optra
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M/E |
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the Successes |
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infinity |
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Helicos
BioSciences, single-molecule DNA sequencing 2003
Invested $400K and nearly one man-year in front-end market research and market validation before commencing any engineering
development. Armed with a validated business opportunity, Helicos raised $27 million in Venture Capital in six weeks. Then
they raised another $40 million, for $67 million total, in another two years. Helicos went public with an IPO in 2007.
http://www.helicosbio.com |
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infinity |
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Balico,
balance aid medical device
MIT $50K Entrepreneurship Competition Grand Prize Winner 2005 |
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infinity |
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Angstrom
Medica, synthetic bone from nanomaterials
MIT $50K Entrepreneurship Competition Grand Prize Winner 2001
http://www.angstrommedica.com |
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9 |
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Litton
Medical, mid 1990s (ex-Becton Dickinson Division, ex-DataMedix). Litton's President Jack Derby learned as one of the middle
managers during Becton Dickinson’s turnaround, "Very avant-garde, wonderful stuff! I remember a very high [4] M/E Ratio™.
I learned the value of marketing from that success. When I became President of the successor operation, Litton Medical
Systems, I raised the Marketing/Engineering Ratio™ even higher, to 9." |
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6.25 |
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MolecularWare,
Inc., life science software
MIT $50K Entrepreneurship Competition Grand Prize Winner 1999
Time period: company inception in August of 1998; through winning the $50K, a working product, and the first customer in May 1999.
Seth Taylor,
Ph.D., Founder and President, observed, "We have spent a tremendous amount of time traveling around the country talking to
potential customers and learning what their needs are; before committing engineering effort to software code. WHEN
you make the market research investment is key. There is no point in doing market research after the product is developed.
Market research must be done up front! I think that marketing is key. Clearly, a good management team
should place substantial resources in the area of market research." |
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5 |
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ZippyCool,
Inc.
"Cool-On-Demand" beverage coolers for recreational power boaters
MIT $50K Entrepreneurship Competition Semifinalist 1999
Newsweek
featured ZippyCool in "Show Us the Money!"
Patrick C. Chou,
founder and team leader, noted, "We spent five times as many person-hours on market research [as on engineering].
That consisted of talking to people on the phone, designing and taking surveys, and interpreting the data. The ratio would
surely have been greater, except that we had to spend a fair amount of time on the engineering." |
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5 |
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Invent
Resources, inventions upon demand 1993
http://www.weinvent.com
Headed by three
Ph.D.'s granted more than 80 US patents and twelve R&D 100 Awards among them. Yet Dr. Sol Aisenberg of their management team
believes that, "The technology is easy. It's the people side, the market research, that is hard. We try to
establish that there is a market and that there are customers before initiating engineering."
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4 |
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Becton
Dickinson, Clinical Monitoring System (CMS) with Arrhythmia Recall (A/R) 1978. http://www.bd.com
A new management
team raised this Division's M/E Ratio™ from 0.01 to 4; resulting in tripling of market share, and climbing from #7 to #2 in 18
months, in a zero-growth market.
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4 |
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LiquidPiston,
internal combustion engine
MIT $50K Entrepreneurship Competition Runner-Up 2004
http://www.liquidpiston.com |
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4 |
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Varian
Associates, Component Leak Detector 1993
http://www.varianinc.com/vacuum/
Varian launched
its 990-CLD Component Leak Detector in 1993 with an M/E Ratio™ of 4, investing in nine months of marketing before committing
engineering. Although the helium leak detector is a half-century-old instrument, Varian's marketing effort surfaced the
"voice of the customer" to define and create an entirely new market segment, the component leak detector. Marketing
developed explicit lists of what engineering should design, and what engineering should not design. Armed with definitive
guidance from marketing, engineering completed the product in 19 days.
Varian Vacuum
Products' General Manager Peter Frasso proclaimed, "This is a super success! We created a whole new product category, and
dominate that market to this day. The component leak detector business never existed before 1993, but now represents a
significant and growing fraction of all our leak detector revenue. Marketing is very cost-effective."
Industry Week's
1997 "10 Best." |
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4 |
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DIVA,
video editing software 1993. Started for $385K and acquired for $4.5 million 2-1/2 years later by AVID.
http://www.avid.com |
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4 |
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Adaptive
Optics, machine vision system #2 - 1995
http://www.aoainc.com |
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3.2 |
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Adaptive
Optics, machine vision system #1 - 1994 |
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4 |
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AFC
Cable, wiring systems, armored cable, and associated products to distribute data, voice and power, 1997
http://www.afcweb.com
Named among The
Boston Globe's 50 fastest growing Massachusetts public companies for 1997 and 1998. One of Electronic Business Magazine's
Top 20 Small Companies (<$250 million) for 1998.
AFC Cable was
acquired by Tyco in 1999 for $588 Million. |
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2.33 |
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Exact
Laboratories, colorectal cancer diagnostics 1995 - 1997.
http://www.exactsciences.com
Read "How To Raise $100 Million."
Raised $15.6
million in venture capital during 1997 and 1998, and an additional $32.3 million in 2000 for $47.9 million total. Exact went
public with an IPO, and attained a market value of more than $300 million.
After his
success founding Cytyc (see below), Stan Lapidus launched Exact Sciences. In MIT's annual entrepreneurship course, Stan taught,
"We didn’t plan it that way. We just did what we had to do In retrospect, it would have been helpful to have such a
planning tool. We didn’t think in those terms [of the Marketing/Engineering Investment Ratio™] at the time. We just
did what was necessary to launch Cytyc successfully. Now, we have a budgeting tool in the M/E Ratio™." |
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>2 |
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MarketSoft,
enterprise software 1998 - 2002 |
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>1.5 |
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Dell
Computer, PC's 1998. http://www.dell.com
Climbed from
startup to an $18 Billion annualized sales rate and a $93 Billion market capitalization in 14 years. Dell maintains this high
M/E Ratio™ in spite of investing $250 million in 1998 in R&D.
"Your
evidence, Ralph, of the relationship between market research and success is right on!
"We are
absolutely customer-data driven at Dell Computer. We invest in understanding the customer, the industry economics, and the
market segmentation; to help us developing the business model. My time is spent on the customer, on strategy, and on product
direction." Michael S. Dell, Founder, Chairman, and CEO of Dell Computer. |
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1.53 |
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ThingWorld
Corporation, Internet Media, 1998. Raised two rounds of venture capital. Successfully set up partnership deals with Lycos,
Tripod, Comedy Central, and Houghton Mifflin Interactive. Known to Web publishers for "ThingMaker" software to create
tamper-proof Internet images - Web "Things" - characters, pictures, and objects that can interact with its users. |
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1-2 |
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Juno
Online Services®, free e-mail 1996. http://www.juno.com
Launch to
400,000 subscribers in 140 days! Since 1996, more than 6 million people have subscribed to Juno, making it one of the two
largest Internet online services in the world.
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1.5 |
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Cytyc,
PAP smear screening 1988 - 1989.
http://www.thinprep.com
Read "How
To Raise $100 Million."
Examine Cytyc's payback from market research.
Startup to IPO
in 8½ years, worth $6.2 Billion in a 2007 acquisition by Hologic. With $43.6 million of venture capital investment, one of the
largest VC financed startups on the East Coast in the prior ten years.
Early market
research, in advance of engineering, identified profound changes from the initial product concept. Market research guided
engineering to develop the right technology, the patented ThinPrep slide prep system.
In May 1996, the
United States Food and Drug Administration (FDA) approved the ThinPrep PapTest as a replacement for the conventional PAP smear for
cervical cancer screening. In November 1996, the labeling was approved, with the FDA concluding that the ThinPrep PapTest
was "significantly more effective" than the traditional PAP smear, improving detection ... by 65%."
"The
biggest advance in 50 years in preparation of PAP smears," according to Mark Schiffman of the National Cancer Institute.
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1.5 |
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Intuit,
Quicken financial software 1990 - 1993
http://www.intuit.com
A 12-year old
startup in 1995, worth $2.1 Billion to Microsoft in its attempted acquisition. Generated $600 million annual revenues (fiscal
year ending July 31, 1997).
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1.5 |
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Z2
Corporation, injection molding system 1997-1999
MIT $50K Entrepreneurship Competition Finalist 1999
Z2's novel
material flow improvement technology (patent pending) for plastic injection molders is delivering increased productivity and
decreasing scrap, While Z2 invested $200K and 18 months developing and testing a prototype, they invested $300K in market
research.
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1.5 |
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PSI
Environmental, boiler temperature gauge 1993 - 1995
President Dr.
Art Boni remarked, "I certainly consider this a resounding commercial success, especially considering that selling to electric
utilities must be one of the toughest sells that there is."
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1.25 |
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Phoenix
Controls, VAV building controls 1983
View their payback from market research.
http://www.phoenixcontrols.com
Phoenix Controls
launched a new field in the 1980’s, variable air volume (VAV) building controls, with a prototype electronic air control system for
chemical fume hoods. They invested in up-front market research which proposed simple product changes that resulted in
decisive market viability, and a US Patent for a sustainable competitive advantage.
The MIT
Enterprise Forum in 1992 spotlighted Phoenix Controls’ successful financing, continuous growth through $20 million in annual sales,
and world domination of their market niche. INC Magazine honored Phoenix as one of the "500 fastest growing privately held
companies" three years running, in 1991, 1992, and 1993. Only 10% of the 500 ever appear three times. Gordon
Sharp, the Founder and President, summed up the key to their success, "Market research gave us a handle on where to go."
Acquired by
Honeywell in February, 1998.
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1.25 |
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Molten
Metal, elemental recycling 1991, startup to IPO worth $500 million in 5 years. Climbed to $1 Billion market capitalization.
Author's note -
their M/E Ratio™ dropped to 0.1 by 1997, and they filed for Chapter 11 bankruptcy on December 3, 1997. Molten Metal is a case
of a company being a success at one time in their history (with a high M/E Ratio™), and being a failure at another time (with a low
M/E Ratio™). Other similar cases in this research include Varian Associates with certain products, and a Becton Dickinson
division which passed through several owners.
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1.2 |
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Monster
Board, employment via the Internet, 1998
1-800-MONSTER
http://www.monster.com
World's largest
job web site; for employers and for job seekers, with over 45,000 job listings and more than 430,000 resumes on-line. One of the
first 500 commercial web sites, and one of the few profitable ones. |
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1.2 |
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Aurora
Systems, Computer-Telephone-Integration (CTI) software 1990 - 1994 and precursor |
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1.1 |
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Brooks
Automation, semiconductor wafer robots 1988 - 1989
Read about Brooks' payback.
http://www.brooks.com
Although Brooks
Automation had pioneered robot wafer handlers and cluster tooling, by 1989 the order rate was stagnant, hovering around $3.5
million. The company was performing essentially no market research. The management team purchased Brooks for $2.1 million
and brought in a new CEO, Bob Therrien, who began investing heavily in marketing, raising the M/E Ratio™ to 1.1.
"Dynamite!"
said Bob Therrien of the results.
- from 35
employees to 3,500
- from $3.5
million revenue to more than $.5 Billion
- from a $2.1
million investment to a publicly traded company with a market capitalization of $1.6 Billion.
Their 50 percent
CAGR (1991-95) was double that of wafer fab equipment. Brooks' 77.5 percent growth in 1996 out-performed the industry's 11.8
percent rate.
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1.1 |
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Evidian
USA, enterprise software 1997 - 1999
Read "Market Research Drives Revenue"
This startup
struggled mightily, spending somewhere between $40 and $50 million total over five years, including $2 million per year on promoting
and selling, yet only achieved $500 K per year in sales.
A new CEO, Mr.
Richard Langevin, raised their M/E Ratio™ to 1.1 in 1997 whereupon sales took off like a rocket from $.5 million per year to #14
million per year.
Incredibly,
Evidian USA dropped the M/E Ratio™ back down to 0.03 in 2000 after Mr. Langevin was promoted elsewhere within their parent
company. Sales ceased. Literally, Evidian never made another sale. After they had shipped all the units on backlog,
revenues ceased. They shut the doors in 2002 after three years of no sales and no revenue.
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1.05 |
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Reflective
Technologies Inc. (RTI), reflective sportswear, t-shirts, sneakers, backpacks 1994 - 1995. Popular Science "100
Best" for 1996. Spotlighted by the MIT Enterprise Forum in December, 1997 in "The Adoption Of Innovative Technology In
Consumer Markets." |
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1 |
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Amana
(Raytheon), RadaRange microwave oven 1966 - 1975
See Raytheon's
largest commercial failure, below, in the failure column. Amana raised the M/E Ratio™ from 0.033 to 1.0, whereupon the
microwave oven became a success.
By 1975, sales
of microwave ovens would exceed that of gas ranges. In 1976, the microwave oven became a more commonly owned kitchen appliance
than the dishwasher.
The microwave
oven is now the largest selling kitchen appliance in the world, with over 200 million in use.
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1 |
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Acugen
Software - semiconductor test software 1986 - present
Click for their web site.
See their payback
vignette.
Startup to world
market dominance in 18 months with no capital and no sales force. Forced the entrenched competitor, Data I/O with a 50 person
field sales staff, to withdraw. |
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1 |
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Lycos,
Internet directory, 1997. http://www.lycos.com
"I
increased my market research investment to equal the engineering investment." Robert J. Davis; Founder,
President, and CEO of Lycos.
- Startup to IPO
in 9 months - fastest IPO in US history
- Zero to $450
market capitalization in 28 months
- One of the top
5 Internet sites in the world
- 700
advertising partners
- Passed $1
Billion in market capitalization 4/3/98
- Approached
$1.3 Billion in market capitalization 6/23/98
"The
stock has been on a tear to get there: up 66 percent this year and a staggering 504 percent over the last 12 months." Reported
by The Boston Globe on 6/24/98.
- Approached
$1.6 Billion in market capitalization 7/6/98, for a gain of 894 percent in the last 52 weeks.
- Reaches 44.5%
of the Internet audience in October 1998, only 3
- percentage
points shy of Yahoo, the No. 1 Internet hub
- Stock soars
24% on 11/16/98
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1 |
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EMC,
enterprise storage 1990s. http://emc.com
Former upstart surpasses IBM in market value. |
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0.9 |
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Open
Market, Internet commerce software, 1998. Startup to IPO worth $1.2 Billion in 24 months!
"The
technology is available. The only question is - what is the business model? We are doubling our Marketing/Engineering Investment
Ratio™ [to develop the business models]," said Shikkar Ghosh, founder and Chairman of the Board.
"World's
fastest growing software company," according to Software Magazine's 1996 annual ranking. Open Market grew 3,620% in
contrast to the 34% average revenue growth for software companies of similar size (under $30 million).
Open Market is
the number-one market share leader for Internet commerce software, according to Dataquest's 1997 Digital Commerce Software and
Services Market Share report. Open Market is listed with 30% market share. This figure is three times that of the
nearest competitor and more than the next five competitors combined. |
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Results
through June 17, 2010 |
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