Crossing the Chasm

By Kevin Shea

Microcap stocks and small developing companies face numerous risks throughout their growth. Some are tactical or related to operations, while others are strategic and could impact the life of the company. Make a poor tactical choice and it may cost time and money, make a bad strategic choice and it could doom the company.

One critical strategic decision is made at that point in the growth curve in which customers begin to change from early adopters to early mainstream. This shift was defined as “Crossing the Chasm” by Geoffrey Moore in his 1991 book of the same name.

Moore demonstrates that a companies’ ability to effectively manage this critical time will have dramatic impact on the success of the company.  Crossing the chasm occurs at the bend in the growth curve, or at the “inflection point”.  It is at this point that revenue can ramp dramatically or begin to show restrained growth Q/Q.

Moore “argues there is a chasm between the early adopters of the product (the technology enthusiasts and visionaries) and the early majority (the pragmatists). Moore believes visionaries and pragmatists have very different expectations, and he attempts to explore those differences and suggest techniques to successfully cross the “chasm,” including choosing a target market, understanding the whole product concept, positioning the product, building a marketing strategy, choosing the most appropriate distribution channel and pricing”.  – Wikipedia

The technology adoption life cycle, or “diffusion theory” is the underlying thesis for company growth, while crossing the chasm is the point between early adopters and early majority.  One can see that a primary reason for the importance of this stage is the entry into large customer volumes that will lead to significant revenue. Mainstream markets make up on average 68% of potential customers.

Venture Capitalists often demand some insight into vision for entering the mainstream. Strong long-term business plans will address the issues of crossing the chasm, even when the company is still in its infancy.  In performing due diligence on micro-cap companies, potential investors should also consider the impact of crossing the chasm.

So, what should be considered when conducting due diligence around the chasm? Buying behavior, product needs, relationship, support, benefits,  process, and people

• Early majority often does not talk to, nor trust, early adopters, so recommendations have less value in buy decision.
  • Mainstreamers want trusted references, so the company needs to identify early adopters who can bridge the chasm and promote the product. E.g. in medical devices, clinical trials are essential for mainstream acceptance.
  • Mainstreamers typically demand a reference site, as they are afraid to be first to the product.  Mainstreamers become sheep after the 3^rd reference site.
• Early adopters buy revolutionary change, mainstreamers by evolutionary change
  • Mainstreamers are willing to change, but not much. Some data suggests that the level of pain cannot be higher than 20%, lest the product be rejected or fought against internally.
  • Where product benefits are hard to define, or the product is too early in the growth phase, the selling effort at the chasm may shift to “missionary selling” in which mainstreamers must accept a new concept as well as change in the “normal way of doing business”
  • IMO, investors should avoid a company that devolves to missionary selling
• Early adopters expect discontinuity between old and new, mainstreamers seek to minimize discontinuity
• Early adopters want to force change for strategic advantages, mainstreamers want to enhance established business processes.
• Early adopters will buy the concept, mainstreamers will buy the defined benefits.
  • Companies must be able to shift their selling proposition to one that details the benefits rather than one in which the benefits are “obvious” to the early adopter.
  • Mainstreamers will tend to buy the obvious market leader to minimize failure or be seen as making a poor decision.
  • To this end, companies need to strategically shift sales methodologies to service the mainstream
• Early adopters will tolerate product issues, mainstreamers will reject poorly behaved products.
  • Products should be easy to use, free from bugs, and well supported.
• Early adopters will work to improve the product, mainstreamers will demand support and user guides.
  • Company will need to attend conferences, hold training sessions, provide on-site support, develop internal customer support, and overall, implement a “hand-holding” strategy.
• Early adopters will buy on their own, mainstreamers will require a collaborative buying decision
• Sales to early adopters may be through company executives, mainstreamers will by from sales staff, agents or channel partner.
  • In selling the product, early adopters will seek to adapt the process to the product or the product to the process, these early adopters may often see themselves as an extension of the R&D or engineering team and participate in product improvement, feature development or functional design.
  • Mainstreamers want the “whole product” which is the how, what and why of the product. Mainstreamers need to be shown how the product is used, how to include it in a process, how to gain its benefits, how to “sell it to the next guy”, and more.  Mainstreamers are more focused on “my work” and less so on supporting a company “who will make a lot of money if I do their work AND mine”

In crossing the chasm, companies must always look out for the skeptics, or laggards.  I always called this group, the curmudgeons.  And I would suggest that if I could turn the curmudgeons, I would ultimately win, since everyone knows it.

This group is pretty much anti-everything. They want to maintain the status-quo, argue the benefits, disbelieve any marketing “hype”, seek to block purchases, and in general, put up stiff opposition to early adoption. And, for whatever reason, these people have a vocal seat on the buy committee, a place at the table on early sales meetings, and more.

Even though they may be the last to buy and the hardest to sell, if the curmudgeons want it,  they often become your best salesman and adoption can proceed from both ends of the adoption cycle.

All in all, companies face numerous challenges from other strategic and tactical issues. They face “milestone challenges” at the cracks within the adoption cycle defined by type of customers. The chasm is a prominent milestone challenge and is significant because it occurs early in the life of a growing company. The chasm offers numerous individual obstacles that could hamper development, or one big challenge that could kill it.

Crossing the chasm has been notable since its definition in the early 90”s and it is still applicable as a business management issue to address. Have you ever been involved with a company that had a great product, but it didn’t go anywhere after a few key sales?  Have you ever wondered why your company that was doing so well but all of a sudden crashed? Have you scratched your head as your “good” company’s sales started to slow at what you thought was the inflection point?

Keeping these issues on the table during due diligence could aid in your evaluation of potential, and ultimately on your ability to make money on a particular opportunity.

Lastly, let me suggest how a few companies that I am long on stack up against the chasm.

• Power Solutions International (PSIX) is a well-developed firm long ago past the chasm. PSIX has a stable product that offers obvious benefits to many customers in an array of markets.  It is developing new products that will address the needs of even more markets. Originally profiled on members forum on 04/24/2012. 
• MiMedx Group (MDXG) is just exiting the chasm as its product has gained traction among the early mainstreamers. Their sales staff has ramped dramatically, supported by more evidence of efficacy from trials. However, there may be some residual tugging from the chasm.
• AxoGen (AXGN) is just beginning to enter the chasm.  Their product has been put into practice by early adopters, they have a developing list of patient success stories, but they are only know beginning to convert that into ramping sales. AXGN faces all the issues that are noted above. Originally profile on members forum on 04/11/2013. 
• Charles & Colvard (CTHR) has been around for quite a few years, and new management has now turned the ship in the right direction. They have demonstrated their ability to produce, improve and sell the product but have not entered the mainstream (yet). New distribution partners could propel them out of the chasm. Originally profiled on members forum on 10/15/2012 

As a reader, if you have any stocks that you are watching that you would like to map against the adoption cycle and/or the chasm, feel free to comment.

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