Knowing When It's Time to Pivot
Is your business experiencing declining margins? Are you having difficultly acquiring new customers? If so, you may be losing your differentiation, and you may need to pivot to a new business model.
In the book The Lean Startup, author Eric Ries defines a pivot as "a structured course correction designed to test a new fundamental hypothesis about the product, strategy and engine of growth." As strategic advisors we often help companies to define and execute pivots.
Recently we worked with a security client that was facing differentiation and profitable growth challenges. Commoditization in its core markets had reduced the premium our client was able to charge for networked cameras and sensors. We expect this trend to continue for the foreseeable future, which put our client in a difficult position. Their products were relatively undifferentiated, and their value-added services were not creating long-term customer loyalty. They needed to pivot.
Defining the Pivot
Our first step was to help the company to align on a new business model. We define a business model as:
- The markets we serve
- The products, services and solutions we offer
- The way we configure our operations
- The prices we charge
These choices are linked. For example, if we invest in our operations, we may as a result provide higher-quality products or more valuable services, so our offer may improve. That in turn may allow us to raise prices.
Our client had historically taken a product-first view of its business, with services as an afterthought. We proposed to turn that model on its head: their primary goal should be to sell a long-term services contract, with the product as a secondary choice.
This had big implications for the customer segments they would pursue and the product categories they would offer to the marketplace. Some of the customer segments were much more likely to buy products with services contracts, so we focused there first.
To gain agreement on a pivot of this magnitude, we needed to:
- Build a compelling case that the current business model was broken (or at least severely bent!). A business model pivot can be a risky undertaking, so it is important to demonstrate beyond a doubt that a pivot is necessary
- Identify the key assumptions underlying the pivot to a new business model, such as: "What new customer growth must we see to justify the pivot?" or, "What price can we charge and still make the sale?" If possible, validate those assumptions with a pilot program for select customers.
Executing the Pivot
We helped our client to develop a new services bundle that included equipment financing. We also put in place a plan to reorient sales resources toward selling the new bundle, and the training program to help them sell it effectively.
We also worked closely with the client's Finance team to work out the implications for the P&L of selling a long-term equipment lease contract with monthly payments, rather than an upfront equipment sale. These and myriad other details took a long time to iron out, but they were critical to gaining buy-in to the execution of the pivot.
The key to a successful pivot is to put a strong, detail-oriented manager in charge who believes in the shift and is committed to making it happen. Otherwise, organizational doubts and inertia may slow or even prevent the pivot.
The management team is now executing the pivot and has great confidence that it will result in accelerating profitable growth.
Is your business at a pivot point? Have you successfully pivoted to a new business model in the past? Share your thoughts with us at email@example.com.
KARL STARK AND BILL STEWART | Columnist | Co-founders, Avondale
Karl Stark and Bill Stewart are managing directors and co-founders of Avondale, a strategic advisory firm focused on growing companies. Avondale, based in Chicago, is a high-growth company itself and is a two-time Inc. 500 honoree.