Entering a new category is one of the most expensive things a business can decide to do. The expense is not only the direct cash cost. It is the management attention that goes into the new category and is therefore no longer available to the existing one. The firm's working position is that almost every good category entry is a two phase entry, and that a single phase entry should be avoided unless a very specific set of conditions hold.
Four conditions the firm looks for
- A clear buyer. The team can name the person in the buying organisation who would pay for this product and describe, in that person's own words, why.
- A credible first product. The team can write down the first product in a paragraph and point to the capability the business already has that makes that product a natural next step rather than a cold start.
- A real economic model. The team has built unit economics from a bottom up assumption set, stress tested the model against a bad year, and agreed in writing the cash the entry is allowed to consume before the plan is reviewed.
- An exit clause. The team has written down, in advance, the signals that would tell them to stop. A plan without an exit clause is not a plan, it is a commitment.
Why two phases
A two phase entry protects the company from the most common failure mode, which is betting the operating plan on a category that turns out to behave differently in reality than it behaved on the model. The first phase is a small, time bounded commercial test built around the first product. The second phase is a full build built around everything learned in the first phase. Between the two phases there is a dated, written review, and the review has the power to cancel the second phase without embarrassment.
The firm will not recommend a one shot entry unless all four conditions above hold and the cost of a delay is larger than the cost of a reversal. That is an unusual combination and most categories do not qualify.