Making Hard, but Transformational Choices
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Most people building a product or a company, know exactly what the word “pivot” stands for. A two syllable word, but with profound consequences.
For the uninitiated, here is the technical definition.
Technically, a pivot is the central point upon/around which a system moves or turns. Clearly, an important attribute of any system.
For startups & businesses, the meaning is somewhat different, albeit just as important. A pivot in business means you are redefining one or more aspects of your business — aspects that are core to its existence today.
Needless to mention, this pandemic that we are all into has forced most companies to pivot key parts of their businesses including their unique value propositions, held sacred and untouchable thus far.
Pivot: A response against threats to business feasibility
To understand Pivots, we need to understand components of any business that are core to its existence. The Lean Canvas provides us with a framework to think through this.
The canvas basically distills down any business to its most important aspects. But even amongst these, there are three components that are absolutely critical and core to a business’s immediate feasibility.
- The problem you are solving & the solution you’re offering
- The channels you employ to deliver your product
- Your cost structure & Revenue generation model
One look at the health of these components, and the signs of whether a business is thriving or needs help becomes clear very quickly.
When to Pivot?
No two pivots are the same.
Some pivots are more radical & sudden where the business needs to pause, reconfigure and restart. Other pivots while still as important, are more gradual and strategic.
The biggest difference often is the timing — or when the business actually realized and/or decided that it needs to pivot.
The next obvious question is — How do you know if your business needs to pivot? At what point? What are the indicators?
The short answer is if we look at the three critically important components we listed above and if any one of them is struggling, it’s time to think about a radical direction change.
Missing Problem-Solution &/or Product-Market Fit :
- Consider the following questions about a business
- Can you clearly define the problem that the customer is trying to solve?
- Can your product solve the problem in a way that’s a win-win for both you and the customer?
- Do enough people care about it and will pay for somebody to solve it?
If the answer to any of the above is “NO” — it’s a sign that the business is missing Problem/Solution and/or Product/Market fit. Which basically means You have a product — but it either solves the wrong problem, or a problem people simply don’t care enough for you to make money off of.
If that’s the case, the business needs to pivot to solving a problem that presents a real and profitable business opportunity. Not rocket science, right?
The key is to realize that for any startup or new business, identifying and validating a problem that’s worth solving, and then coming up with a solution that works takes time and resources. Its also important to note that as a business pivots to a different problem — often their target market will change to a different customer segment too.
Pivots due to missing product market fit are the hardest to navigate, because basically all the cards are stacked against you.
There are many big names that started with solving a problem few cared about and didn’t find product market fit — ultimately pivoting to a problem that presented a large untapped business opportunity.
Take Play-Doh, for instance.
Play-Doh started as a wallpaper cleaner but later found its mojo when it hit an unrelated, but massive, “clay modeling for kids” market. With roughly the same product, Play-Doh pivoted to solving a different and profitable problem serving kids and toddlers instead.
Channel Pivots: When Product Managers are asked what some of their riskiest assumptions are, they often cite market risk or technology risk. The thing that Product Managers and builders often don’t take into account is Distribution risk, which is, — can a product successfully be distributed/delivered to customers at scale? After all, Does it matter how brilliant your value proposition is if your potential customers can’t find or buy your product? If this is plaguing your business, it’s time for a channel pivot.
A recent manifestation of a Channel Pivot is what many businesses were forced to execute after COVID hit. Due to this raging pandemic, a lot of F&B outlets that traditionally relied on patrons dining-in had to scramble & get their offerings online. They’ve had to redesign everything around them — starting with integration with food delivery apps, figuring out packaging, restructuring headcount.
The same is true for businesses in many other industries that primarily relied on offline distribution models for decades and had to pivot to online distribution channels.
Unlike popular belief, pivots are not always about an abrupt direction change, but can sometimes be both subtle and gradual. For instance, channel pivots are not just about distribution strategies — but they are often also about Pricing , Competitive Positioning, new offerings, supplier network strategies too.
For example for a fine dining restaurant, one pivot would be to offer a flat rate for a set number of meals per week or month, with limited menu choices. Or like the “affordable Luxury brand” Coach did when they came up with designer face masks.
During the pandemic, customers that primarily shopped offline have moved online. This means they’ve discovered more options to buy from — and can compare your prices with your competition. If you are a hyper-local business that only had an in-store pricing strategy — you will now have to slowly pivot and figure out both online and in-store pricing strategies and prepare for a more price-sensitive customer and increased competition.
Cost Structure and Revenue Pivots: Pandemic or not, any product or service that you are selling needs to be profitable, or at least must have a realistic path to profitability. That means that a business should have a plan that drives revenues higher and costs lower. Preferably both, but at least one.
Consider freemium models, where you offer a free tier (forever) to get early users and then later hope to figure out a way to make them convert to paid plans. But as many startups have realized, it’s easier said than done. The penny gap problem is real, and you soon find that converting free users to paying customers is incredibly hard even if you are charging just a penny.
“The truth is, scaling from $5 to $50 million is not the toughest part of a new venture — it’s getting your users to pay you anything at all.” — Josh Kopelman
In a Freemium model, if a business cannot figure out a way to convert enough users from FREE to paid, they’ll quickly be operating in a situation where the cost of supporting free users is greater than revenues from paid conversion — and that’s not a great situation to be in. Long term, the business needs to either find a profitable way to convert users, pivot to a different Revenue model, or restructure its costs significantly.
Pivots are hard on people
As you can see, far from the literal meaning of “turning around a central point”, pivots are anything but a simple and painless turnaround.
For human beings, any deviation from what’s intuitive and familiar is hard to process, especially when there are emotions attached. A Pivot is a substantial deviation — almost a restart — and that’s what makes them painful for most people.
What makes them harder is that pivots often follow failures — perhaps you realize that there is no market need for the product, or you’ve got the business model completely wrong, or the competitive environment is too brutal for your business to make money, or perhaps the investors are losing confidence in the business’s ability to generate revenues & returns on their investments, or black swan events such as this pandemic we are all into. The chips are already down.
If you are the CEO of a business experiencing these headwinds, you need to process that and chart a new course. If you are an employee of a business that’s in the middle of a pivot, depending upon the new direction, it’s possible that the new direction of the business might impact you adversely.
Last year as the pandemic crushed travel and hospitality businesses, Airbnb was forced to change direction and it laid off roughly 25% of the company globally. Here’s what Brian Chesky wrote about the lay-offs:
“……..This crisis has sharpened our focus to get back to our roots, back to the basics, back to what is truly special about Airbnb — everyday people who host their homes and offer experiences.
This means that we will need to reduce our investment in activities that do not directly support the core of our host community. We are pausing our efforts in Transportation and Airbnb Studios, and we have to scale back our investments in Hotels and Lux.”
This was the case with many businesses. With a new business model, a new customer segment, an unfamiliar competitive set, new business and/or product strategy, or a crippling pandemic — a pivoting business will make new plans & perhaps need different expertise — and it’s possible that expert might not be you. These are all very hard things to do, process, and experience, especially when the tide is against you.
That’s why pivots are so hard. Apart from the financial implications, pivots have real human consequences.
But, Pivots can be transformational
Despite being hard to execute, Pivots done well can be transformational to a business, especially if they are timely.
The most famous example of a transformational pivot is Netflix which started as a company that delivered DVD to your mailboxes but saw the writing on the wall for DVDs — soon most people would not be viewing movies on their DVDs.
Netflix slowly pivoted and created the massive streaming business that we all know of. (By the way, Netflix still mails DVDs and profitably so.)
Another transformational pivot is IBM — except that, unlike Netflix, it was forced to get out of its core Personal Computing business — a market it dominated in the 1980s.
But despite being forced to pivot as they sold their PC business, IBM successfully pivoted towards building a solid IT consulting & services offering and transformed its business model. IBM is today known not as a device manufacturer, but for IT consulting services for large organizations.
For Smoother Pivots
It’s important to remember though that Netflix had a profitable CD business as it slowly self-disrupted its mail-order business and moved to streaming. Same with IBM — which despite being forced out of the PC business — leveraged its strong customer relationships from the PC business to pivot into consulting. In other words, a pivot must be a lateral extension of a firm’s existing capabilities, communicating clearly its strategic intent.
But of course, not everyone has the luxury of a solid business and/or time on their side. There are many, many businesses where a smooth pivot was not an option and the business had to completely shut down (remember Quibi?). In short, you need at least one core aspect of the business to hold on to, as you prepare for a turnaround — A firm footing.
A firm footing can be, like Netflix, at least one profitable line of business, a great product, a strong founding team, customer partnerships, a trusted set of investors, etc. Much like a basketball pivot, as long as the business has one foot firmly on the ground, making major changes to other aspects of the business become easier to manage, helping you ride the rollercoaster, and transform.