How $289m Was Lost Gambling On The ‘iPod Market’
63% of high-growth products fail to return the initial capital invested (Sahlman, HBS).
This is a worrying statistic that many other studies into product development confirm - new product development has very high failure rates. One significant contributing factor is the dominance of a product-based market definition for opportunity sizing. In this approach, companies are literally gambling on new product development.
It does not have to be this way.
Companies make big investment decisions based on intelligence gathering on the overall market size and the size of a defined market opportunity. So getting accurate, reliable market opportunity data is a crucial part of your product teams risk management.
However, if this information is inaccurate or misleading, huge amounts of money and development time are at risk.
And here is the problem.
Market opportunity sizing is still very much biased towards a company’s definition of value – its products. Current product sales and analysis of a product's experience are not actually what customers care about. A true market definition should seek to understand the real goal that customers want to achieve.
If you define a market around a product, your investment decisions will be made looking through the rear view mirror. You will be focused on analysing what has already happened, you will not see what lies ahead.
This is what Microsoft did when it invested, or rather gambled, $289 million in its Zune MP3 player. It tried to compete for market share in a product-based market, the ‘iPod market’.
Traditional market sizing = price x product x buyers
Traditional ways of defining the market opportunity are based on product-based data. A typical approach is: product price, times the number of customers, equals the size of the market. The market opportunity is then proclaimed as an aim: acquire X% share of the market by targeting customer persona X, sounds reasonable.
However, this method focuses on the company’s definition of value, ‘the product’. It then targets a company constructed customer persona – e.g., ‘the maverick’, as a way to express its strategy for getting market share. This approach is high risk and does not provide a true reflection of what the market really values or that products are constantly changing in the market.
This is what happened in late 2006 when Zune was launched to compete in the ‘iPod market’. The Zune was pursuing a flawed market strategy.
By 2007, Apple had sold over 200 million iPods at an average of $150. At this time the cumulative size of the ‘iPod market’ was around $30bn and you could see the attraction to Microsoft. A 25% share of the ‘iPod market’ would give it just under $2bn in annual revenues.
Microsoft invested $289m in the Zune to compete for 'iPod market' share head-on with the iPod. It deployed world-class talent in technology development, marketing and branding. However, by mid-2009 the Zune had only sold 2.5 million units and was pulled from the shelves.
The Zune managed less than 2% share of iPod and MP3 player sales.
Microsoft’s desire for an X% share of a product-based market was framed by a business-driven objective. This objective is not reflective of what the market truly values.
While iPod sales were shortly to go into decline, Microsoft was busy looking in the rearview mirror. This rearview angle on the market opportunity led Microsoft to place a $289 million bet. A bet it was destined to lose.
The real truth is that no one wanted iPod any more than Zune or CD’s or records or cassettes. What they wanted was to ‘listen to music’. The market does not want your product. They want to get a job done better and/or cheaper.
Microsoft failed to identify with this customer definition of value. What Microsoft needed to do was build deep insights around the customer ‘job’. From this understanding of value, it could have identified that certain segments of music enthusiasts were struggling more than others to ‘listen to music’.
Why did Zune fail?
Zune was actually a great product. And so it should have been with Microsoft's £289 million investment in marketing and product design. Microsoft knew it had to be exceptional to compete head to head with the iPod.
However, it failed not because it was a bad product. It failed because:
· It could not get the job, ‘listen to music’, done better or cheaper than the competition.
· It arrived far too late to a saturated product-based market, with a me-too MP3 player.
Microsoft was not able to see the markets real needs until it was too late. Its rearview focuses on gaining ‘iPod market’ share meaning it could not see that the iPod was not the best solution and it was to be displaced by a new product platform, the iPhone.
Exceptional product execution alone, will not win markets.
Like most companies applying traditional market sizing, Zune attacked the market using outdated product sales data and business-driven customer personas. Yes, Microsoft had good customer intentions, but these were not the center stage of its strategy. The product was center stage.
To win, its product concept needed to be aligned to a winning market strategy.
The iPhone disrupted the iPod. It helped the market to get the job done cheaper. The disruption happened because music enthusiasts could leverage an existing investment in the iPhone or other smartphone devices. This removed the need for music enthusiasts to buy, carry and use a separate music playing device such as an iPod.
Over time the iPod would become obsolete.
The iPhone and smartphone product platform were far more useful than iPod's because they helped customers get many jobs done. In this case the job ‘listen to music’ was added to the iPhone platform, the need to buy a separate music device became unnecessary. It saved music enthusiasts both time and money.
The JTBD is solution neutral
‘Listen to music’ is the ‘job’ the customer is trying to get done. It’s a solution neutral statement of the goal the customer is trying to achieve. This is a stable, reliable, accurate definition of the market as it places the customer goal at the center of the company’s mission.
What customers really value is getting their jobs done. Creating new customer value is about solving their struggle to get a job done at the right price. It is this struggle that causes a customer to seek out and buy a product.
Studying the customer 'job', 'listen to music', should have formed the foundation of Microsoft's market investment strategy. This would have revealed the right growth opportunity segment to align its product development activity.
Define a winning market strategy using JTBD
A JTBD definition of the market would have helped Microsoft understand what market segments were underserved or overserved. It would have been able to size specific market opportunities and reduce its investment risk.
Its investment goal should have been to frame the music enthusiasts 'job' as the market. This is not about the persona but the 'job' and understanding which groups of music enthusiasts are struggling in the same way. JTBD need-based segments are statistically valid and very unlikely to have any strong correlation to a business-constructed persona such as 'the maverick'.
JTBD markets are good definitions for market opportunity sizing because:
Job-based markets are stable.
People have been doing the job of ‘listen to music’ for 100’s of years. The metrics customers use to evaluate the job are the same now as they will be in 100 years’ time. This means your team can evaluate each competitor product against a stable set of customer metrics.
Each metrics is rated, using a statically valid sample of the market, in terms of importance and satisfaction. Over time these ratings might change but the metrics won’t.
From this perspective, the rearview mirror is banished. You will be able to see how well the job is being done by each solution and understand how different segments prioritise the metrics differently.
Market ratings of importance and satisfaction allow us to map opportunities and understand how the competition is helping specific customer segments get the job done, and locate the biggest gaps for value creation.
JTBD opportunity segmentation and sizing are precise.
Some segments of customers struggle more than others to get the job done. A JTBD study will analyse which customers are struggling most, what causes that struggle and how much they are willing to pay. K-means clustering software can then build a segmentation model to determine how segments are underserved or overserved and the size and value of each segment.
A JTBD study gives you complete oversight of the whole market, its size and how much market share each competitor product has and how much customer value is still left untapped.
JTBD market data gives you and your team the confidence that the market strategy and big investment decisions will be right.
If there is one key thing to remember with JTBD, it is not to try to analyse the current product experience. Rather, define why people are buying these products, then describe and analyse the job they are trying to get done. .
Ask customers to rate the importance and satisfaction of each customer metric and develop your segmentation model. Finally, size and value each segment and decide which market strategy to pursue.
Broadly, the following six steps are required
Define your market by understanding the customers JTBD.
Analyse the JTBD by defining both functional and emotional customer metrics and evaluate how important and satisfied each customer is.
Identify the willingness to pay for each customer.
Develop a segmentation model of the market, and identify what is causing each segment to be underserved or overserved.
Identify the size of each segment by understanding the total number of customers, each customer’s willingness to pay and the frequency they are trying to get the job done.
Decide the market strategy. We use further criteria to select the right opportunity segments for any specific company to pursue.
Avoid gambling on new product development
Building successful high-growth products is hard. Maintaining market share is hard. Why add gambling into the mix?
Sizing market opportunities using product-based data is very tempting as the data is more readily available. However, making big investment decisions using product data is a gamble.
Product data does not reflect true customer value and has significant decision making bias toward the company definition of value. Also, this data is out of date so quickly as products are changing all the time.
This approach failed Microsoft. The iPhone and other smartphones were perfectly positioned to disrupt the iPod and MP3 players over the following 5 years. Yet it invested huge sums of money to win market share of products going obsolete in the 'iPod market'.
With the right market definition and right customer metrics, this would have been visible. The market opportunity was really about music enthusiasts and helping them to get the 'job', ‘listen to music’ done better and/or cheaper.
To lower the risk of investment decisions for new product development, your team needs high-quality market data based on customer’s metrics, centered on the 'job', not the product.
A JTBD market study will determine what opportunities are actually available (if any) and which market strategy you should invest in. You want to know how to best serve each customer segment, which product platform is best and which features actually help get their job done better and/or cheaper.
Do you want to learn exactly how a Jobs-To-Be-Done approach might apply to your product or company? Book your FREE Innovation Strategy Session.