How to Become a Middle Market “Unicorn”

How to Become a Middle Market “Unicorn”

A few years ago, private companies worth more than $1 billion were rare enough that venture capitalists called them “unicorns.” Today, CB Insights says there are 107 firms that fit the venture capital definition of a unicorn. It’s funny how definitions change with time, as do perspectives on what constitutes uniqueness.

In our conversations with middle-market business owners, we often discuss and white board issues of differentiation, focused strategies, competitive advantage, and uniqueness. Issues around each strategic vector can be a bit arcane sometimes, but each alternative is very important when considering strategies, capabilities, exit multiples, and probabilities around business success. This is especially true for industrial, security, and technology businesses as the Internet of Things and Big Data become an integral part of their industries.

For middle-market business owners, the steps to differentiation are often derived more from solid legwork than pie in the sky thinking. Often, it’s from identifying a fundamental need that is not being served and executing the heck out of it, simply and elegantly, based on real understanding of customer motivations. Simply put; find out what bugs them and provide a competing service or features to eliminate the bugs. Some would call this a ‘gap analysis’. Uber, an illustrative example of a unicorn, took the inconvenience and uncertainty out of the taxi business by creating a simple experience where the customer has more control (push a button on phone to get the car you want), the guessing is gone (track when car shows up), and remove uncomfortable interactions (clear pricing in advance of pick up, direct communication with the driver). Uber basically just created a much more pleasant way to get the ride you want, when you want it.

So what can you do in your business to act like a “unicorn”? Here are a few good places to begin:

Start with your customers. Use market research to understand if your customers are underserved. Find out what aspects of the product offering in the category are not served well or ‘what bugs your customers’. Getting to their real motivations is the most important aspect of this. Don’t ask if they’re “satisfied” – this will get you nowhere. Dig deeper to find out what really motivates them and understand performance against expectations.  If you exceed your customers’ needs in areas they don’t care about, you are wasting resources. If customers are underserved in areas they care a lot about, you may have an opportunity to meet their needs in new ways and capture more economic value.  Bill Gates said: “Your most unhappy customers are your greatest source of learning.” And he couldn’t have been more right.

Know your markets. Assess the competitiveness of the market and truly understand the basis of competition. If you’re dealing with hyper-competitive or commodity markets, your company’s ability to differentiate may be more difficult, but not impossible. Service differentiation and differentiation based on the strategic use of technology is a great place to start and powerful if executed well. Technology is also becoming ever more attainable for middle market business due to SaaS, cloud infrastructure, and sophisticated off-the-shelf service offerings.  Explore ways to use these new tools to differentiate your business.

Identify “lock in’ mechanisms. Calculate customer-switching costs and understand your firm’s ability to ‘lock in’ customers. If you’re able to create situations where moving away from your firm is inconvenient, costs money, or takes time then you’ve created some element of lock-in. ‘Lock-in’ doesn’t mean you can take your customers for granted or mistreat them, just look at what’s happening in the taxi industry. Rather look at win-win ways to “lock in” customers by out-delivering your competition.  In 99 percent of companies we see, lock-in is always relative to the strength of the relationship with your customer.

Know your company’s capabilities. Review and inventory your firm’s core competencies, capabilities, talent, and resources in light of what you are trying to accomplish. If you don’t have the capabilities or the resources, figure out a way to develop them.  Developing capabilities doesn’t have to be costly. Consider external partnerships and alliances to help augment capabilities quickly. Also, focus on building core competencies from within based on internal best practices.  Leverage your ‘ecosystem” of partnerships to deliver the economic value that would be prohibitive to achieve alone.

Focus on customer loyalty. Customer loyalty drives profitability. Differentiation based on the factors that improve customer loyalty is one of the best investments a middle market company can make. We don’t mean simply creating a rewards program a la frequent flyer miles (but these are helpful), we mean identifying and rewarding high value customers throughout every interaction with your company and realizing that employee loyalty is a big driver of superior service. Fred Reichheld, renowned loyalty expert and Bain & Company fellow defines loyalty through one question: “How likely is it you’d recommend us to a friend?” He points out that many middle market, family run businesses have evolved into industry leaders based on their steadfast focus on loyalty including Southwest Airlines, Chick-Fil-A, Enterprise Rent-a-Car and Harley Davidson, to name a few.

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