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Who Is Going To Buy The Darn Thing?
 

Who Is Going To Buy The Darn Thing?
Invest More In Marketing Than In Engineering To Find Out!

Institute of Electrical and Electronic Engineers (IEEE)
Proceedings of the IEEE Electro International
By Ralph E. Grabowski

 
Table of Contents

   Abstract
1 The evidence is in
2 Who needs Marketing?
3 Exactly how much is "more" Marketing?
4 Avoid the pitfalls of the flaming failures
5 Do what the super successes do
6 Go for it!
7 Implications for technology-based enterprises
8 Summary
9 References
   Figures
   About the author

   PDF reprint -  28 pages, 0.7 MB
   PDF 2-page abstract with summary of the data - 0.3 MB

 

invest more in market research than in engineering
  5 - Do what the super successes do.
Super successes invest more in marketing than in engineering.  They invest, on average, two dollars in marketing (exclusive of promoting and selling) for every dollar invested in engineering.  They invest up front, before the product is ready.
 

Cytyc

Stan Lapidus started Cytyc to pioneer a new field, PAP smear automation.  Cytyc represents a high business risk; combining a new field, new market, new company, and new product.  They typify the extremes of technology with a fusion of biotechnology, machine vision, medical image processing algorithms, and robotics.  With all that risk, Cytyc raised $43.6 million in venture capital financing,(49) went public, and achieved a $6.2 Billion market capitalization!  See Figure 4, Cytyc financing.  Why?

 

Cytyc financing
$ 3,600,000 first round VC startup
$ 40,000,000 other VC rounds
$ 48,000,000 IPO
$ 85,800,000 secondary public offering

$ 177,400,000 financing

    Figure 4, Cytyc financing

 

With the entrepreneur still in his basement, Cytyc invested 1.5 times as much in marketing as they did in engineering.  Cytyc invested $120K in marketing versus $80K in engineering in their first twelve months.  See Figure 5.

 

 

 Invest-
 ment
 ratio

 First
 twelve
 months

Period of
developing
the product

Period of
ramping up
purchase orders

Marketing

1.5
$120K

not
shown

 

Engineering

1
$80K

not
shown

 

Promoting
+ Selling

 not
 shown

 

 

not
shown

 

 

 

───────────  time  ───────────►

product life cycle

    Figure 5, Cytyc's Marketing/Engineering Investment Ratio™

 

In MIT's entrepreneurship course, Stan Lapidus 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 Ratio™] at the time.  We just did what was necessary to launch Cytyc successfully.  Now, we have a budgeting tool in the Marketing/Engineering Investment Ratio™."(50)

Fundamental to Cytyc's business case was the primary market research that compelled investment.  Cytyc accomplished market research before much of their engineering, performing marketing when the market did not yet exist.(51)

This author is often asked, "How can we do marketing, when the market doesn't exist?"  Since high tech entrepreneurs create new markets, the implication of the question is that marketing cannot be done, and especially not in technology-based markets.  In fact, the evidence shows that successful technology-based enterprises, such as Cytyc, do just that.  They invest in significant up-front marketing.(52)

Cytyc began their investment with a market segmentation(53) to identify the portion to serve, and the access point.(54)  They worked to understand their customers' demographics, market trends,(55) and the industry drivers, which precipitated an expose of "PAP mills."(56)  (57)  The outcries lead to Congressional Hearings.(58)  (59)  By that time, Cytyc's market research was available to be used in testimony before Congress, helping to result in new legislation that will speed market demand for their products.(60)

Technology-based startups present two types of technical risk.  First, there is the risk that the startup cannot make the technology work.  The second risk, as happened at Cytyc, is that the startup does make the technology work, but that they are developing the wrong technology.  Up-front marketing can guide engineering to the right technology.

Cytyc's up-front marketing investment identified profound changes from the initial product concept, which used machine vision.(61)  An entirely new product idea arose from the primary market research; a patented slide prep system, ThinPrep™ Pap Test™, which creates a cell monolayer and simplifies the PAP reading process.(62)  With marketing guidance, Cytyc's engineering developed the right technology.

Phoenix Controls

Phoenix Controls launched a new field in the 1980s, 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 an unfair, defensible position.  For example, in their first twelve months they invested $1.25 in marketing for every $1 in engineering.

The MIT Enterprise Forum spotlighted Phoenix Controls' successful financing, continuous growth through $20 million in annual sales, and world domination of their market niche.(63)  INC Magazine honored Phoenix as one of the "500 fastest growing privately held companies" three years running, in 1991, 1992, and 1993.(64)  Only 10% of the 500 ever appear three times.(65)  Gordon Sharp, the Founder and President, summed up the key to their success, "Market research gave us a handle on where to go."(66)

Intuit

Some entrepreneurs achieve their financial goals when they sell the company in an acquisition.  Microsoft offered $2 billion to Scott Cook for his twelve-year old software startup in 1995.(67)  Intuit's M/E Ratio™ is about 1.5.(68)  Enjoying sales of $600 million (fiscal year ending July 31, 1997), Intuit controls approximately 70% of the personal finance software market with a product called Quicken.(69)

Stephen Robbins, as an Intuit engineering manager, recognized that "Intuit is absolutely driven by marketing.  It is perceived as a good thing that Intuit is marketing directed.  Marketing is viewed as the key to success.  Inside the engineering department, for example, engineers have a keen awareness that marketing is quite important to the success of the company."(70)

Diva

As another example, DIVA, with software for video editing on the MAC, was launched for $385K from family and friends.  DIVA was sold for $4.5 Million two and one-half years later in an acquisition by a larger company called AVID.  DIVA's M/E Ratio™ was 4.  The entrepreneur, Jonathan Harber, invested one year in market research around the globe, and in business planning, before initiating software engineering.(71)

Molten Metal Technology (MMT)

Molten Metal Technology (MMT) leapt from a raw startup to a publicly traded company with a $500 million market capitalization in 4 years.(72)

Their technology uses a molten metal bath, typically 15 tons of steel at 3,000oF, to dissolve and catalyze hazardous and non-hazardous wastes to their component elements.  At that temperature, the efficient liquid reaction consumes wastes at supersonic speeds.  Commercial scale tests achieved 99.99999% conversion in a closed loop, sealed system, with heavy metals recovered as slag, gasses as raw materials, and useful metals as alloys.

"I've seen a lot of environmental technologies over the years.  But I've never seen anything that's excited me as much as this,"(73) said Maurice Strong, Secretary General of the 1992 Earth Summit in Rio de Janeiro.  "It can literally revolutionize our ability to deal with toxic wastes,"(74) Strong said, in an Industry Week article proclaiming MMT's process the "Technology of the Year."

"Here was an invention that could help society and improve the quality of life,"(75) said John Preston of MIT's Technology Licensing Office, seeing gold.  "It is one of the few 13's on my scale of 1 to 10 - maybe the only one."(76)

John Preston has a unique vantage point to place technology in perspective with marketing.  Under John's direction, MIT commercializes [licenses] about 100 technologies every year.  "I believe in the Marketing/Engineering Investment Ratio™.  Out of 450 patent submissions a year that come through my Office at MIT, I see one outlyer a year that does not need as much marketing.

"Molten Metal's technology, for example, satisfies such an obvious societal need that MMT needs less marketing than any of the other [449] technologies.  Furthermore, MMT has a huge R&D staff making an enormous investment in the [awesome] technology."(77)  MMT's R&D investment resulted in more than 200 patents granted, pending, or disclosed.(78)

Nevertheless, MMT's M/E Ratio™ was 1.25 in one of their early years, 1991, and 0.36 from 1990-1994.  Not only was the M/E Ratio™ high, but also the absolute dollar amount was large.  MMT invested $.84 million in marketing in 1991, and a cumulative $12.2 million in marketing in 1990-1994.(79)  (80)  (81)

Molten Metal is marketing driven from the top down, with their CEO, Bill Haney, and other (non-marketing) executives estimating that they devote 20% - 70% of their time to marketing.(82)

John Preston concluded, "Normally, marketing investment should exceed the R&D investment.  Molten Metal has such a radical invention that they are an exception.  MMT needs less marketing.  All the other technologies need more marketing."(83)

"I think the Marketing/Engineering Investment Ratio™ is insightfully correct,"(84) wrote MMT's VP of Marketing, Dr. Ian Yates.  "We invested in a large amount of market research to identify our entry strategy and to target the right first set of customers.  Additionally, marketing provided input for our corporate financial processes."(85)

MMT illuminates their marketing focus in their 10-K Form, referring to specific marketing methods and listing the results achieved:

  • Primary market research and segmentation

    "MMT has identified its initial target markets through discussions with potential users that have specific requirements, by analyzing the total US market ... and by determining which ... " [MMT can readily address].

  • Targeting entry points

    "For the initial commercialization, MMT has identified three markets where it believes MMT offers the greatest immediate value and meets pressing customer needs: ... "

  • Strategic alliances

    "In each of those markets, MMT has formed relationships with market leaders to deliver initial facilities."

  • Engineering guidance

    "The Company's commercialization strategy includes identifying industrial market leaders as initial customer prospects and performing technical evaluations on customer waste streams at MMT facilities.  Such activities are intended to keep the technical development focused on market opportunities."(86)

 

Supported by that marketing guidance, MMT formed strategic alliances with DuPont, Rollins Environmental Services, and L'Air Liquide.(87)

From marketing direction toward 'the right first set,' "Molten Metal executed agreements with leading customers in each of its target market segments:"(88) Martin Marietta, Westinghouse, and Hoechst Celanese.(89)

With 'marketing input for the financial processes,' MMT raised $140 million in equity capital.(90)

Yet, they did not have the courage to maintain their M/E Ratio™, which declined to 0.1 by 1997.  MMT declared bankruptcy in December 1997, and is thus also reported as a failure.  John Preston was wrong; MMT needed more marketing.

Established enterprises, too

Varian Associates Vacuum Products Division

When Varian Associates created the Model 990 Component Leak Detector at their Vacuum Products Division, there were indicators of low market research investment in mature businesses: a one-half century old, $1 billion, Fortune 500 company; a two-century old technical field, and a fifty year old product category.

At the same time, there were indicators of significant engineering investment: a high tech product selling for more than $25K, customers who are in highly technical fields, Windows software, an embedded microprocessor, CAD designed N/C machining of exotic metals, gas handling, highly engineered pumps, motors, and valves; and complex safety and operational interlocks..

However, Varian's M/E Ratio™ was 4!  They invested in nine months of marketing effort before beginning engineering.  Varian's marketing effort surfaced the "voice of the customer" to develop explicit lists of what engineering should design, and of what engineering should not design.  Armed with definitive guidance from marketing, engineering designed the product in nineteen days.  See Figure 6 for the time history of Varian's M/E Ratio™.

 

 

 Invest-
 ment
 ratio

Identifying
problems
worth money

Period of
developing
the product

Period of
ramping up
purchase orders

Marketing

4

9 months

 

 

Engineering

1

 

19 days

 

Promoting
+ Selling

 not
 shown

 

 

Product capturing
major orders

 

 

 

───────────  time  ───────────►

product life cycle

    Figure 6, time history of Varian's Marketing/Engineering Investment Ratio™

 

According to their Division Manager, "We are taking major market share away from our competitors, fast.  We're seeing volume orders, more than one unit on purchase orders for the first time, ever.  We just got a $250K order.  Marketing is very cost effective for us."(91)

Becton Dickinson Medical Systems (BDMS)

Becton Dickinson Medical Systems installed a new management team in 1977 who began investing heavily in marketing, raising their M/E Ratio™ to 4.  Marketing identified and plainly specified the technology for engineering to focus on for decisive competitive advantage.  BD returned to profitability, tripled market share, and rose to #2 against HP as #1 within 24 months!(92)

See Figure 7 for BD's global success as a result of increasing the M/E Investment Ratio™ to 4.(93)  (94)

 

 

Marketing*/Engineering
Investment Ratio™

(*) excludes promoting and selling

increased from 0.01 to 4

 

 

  1977

 

  1980

Systems
sales

  $ 7 million

  $10.5 million

Profit / loss

  3% loss

  2% profit

Market
share

  #7 of 10
  USA 7%
  Europe 5%
  Japan 0.1%

  #2 after HP
  >Tripled to 25-30%
  Europe x7 to 35%
  Japan x1000 to 100%

Engineering
employment

  1

  15

    Figure 7, BD's global success as a result of increasing the M/E Ratio™ to 4

 

Before 1977, BD had initiated a number of engineering projects for their "gee-whiz" value.  Many engineering efforts had been urged by the sales force, which had hoped to exhibit technology that would make customers' jaws drop.

Becton Dickinson had fallen victim to what the Price Waterhouse entrepreneurial guide lists as Common Pitfalls to Avoid: (95)

  • "Common Pitfall Number 10,
    Enthrallment with technological wizardry that ignores what customers actually need.
  • "Common Pitfall Number 18,
    Mistaking selling for marketing."

 

By the time BD's new management team arrived, there were fifteen major projects already going on in engineering.  The patient location technology, Telocate, described earlier was one of the fifteen.  New BD marketing staff rigorously examined all fifteen against three questions:

  1. What benefits does the customer wish to spend money to receive?  Quantify them.

  2. Considering only those, where might we already have, or develop in engineering; a decisive, defensible competitive advantage?

  3. In which market segment(s) can we deliver the most value to the customer?

 

Armed with customer and market data, in six months, BD marketing abandoned or shelved fourteen out of the fifteen engineering projects as unneeded, ill conceived, or not decisive.

For example, even though BD had been the Coronary Care business for twenty-five years, and in the telemetry unit for twelve, they had become so enthralled with the technology that they overlooked a basic customer need: ten days after a heart attack, the patient who is fitted with a telemetry transmitter and told to walk around is still frightened, and remains in sight of the nurse who has a defibrillator.  Therefore, Telocate was a technology for which there was no need.

Surprisingly, the market analysis which nixed Telocate discovered that BD already had a competitive advantage with their existing telemetry system, and did not realize it.(96)  Marketing proceeded to train the sales force to think in terms of customer needs.  BD's telemetry sales doubled in six months; a dramatic development for a zero-growth market.

BD marketing then assembled a "task team" led by a marketing person, with two engineers.  That nucleus invested the next six months in up-front market planning in the one technology area, out of fifteen, where BD had a defensible competitive advantage and could deliver the most value.  They targeted the segment where BD could exploit technology-induced market dynamics to rapidly improve market share.(97)  They segmented the market, analyzed the competition, and specified engineering features that would deliver customer benefits.(98)

The group wrote a detailed business plan that compelled several hundred thousand dollars of BD investment.  Engineering resources focused on this one project, Arrhythmia Recall (A/R).

BD's resulting success is displayed in Figure 7.  The astute reader will notice that market share tripled, while sales went up 50%; a consequence of deliberate market focus and segmentation.

Incredibly, no A/R units were delivered during this period.  BD engineering was addressing a significant technical challenge that simply took time.  Even though competitors were delivering (poor quality units designed rapidly), customers recognized that BD's A/R upgrade would better address their needs.  They decided (there's that word, decisive) to purchase from BD.

 

SBIR companies

PSI Environmental

PSI Environmental is the commercialization spinout of the SBIR company, Physical Sciences, Inc.  They have one product, a temperature monitor for coal-fired utility boilers.  Their M/E Ratio™ has been 1.5, and is now in the process of being increased significantly beyond 1.5.

In less than two years, they sold more than sixty units at $25K each, for $1.5 million.  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.  They have a long, multi-year adoption cycle.  So, to sell so many units in our first two years must be considered a success."(99)

 

 
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