A year after Ethical Ocean launched in December, 2010, its founder began to wonder whether it was on the right path.
Revenues for the Toronto-based company, which specializes in selling socially responsible products online, were growing by an average of 50 per cent a month.
Still, customers complained that there were too many products to sort through, many buyers didn't return, and revenue was being eaten up by advertising costs.
So this past January, founder and chief executive officer Chad Hamre and his team figured they needed to move in a new direction.
"We decided to bet the whole farm on a better model because we think we will be better off long-term. It required some pretty stressful conversations, but we took the plunge and executed the pivot fast," Mr. Hamre says.
Strategic pivots such as the one Ethical Ocean made have become an increasingly popular path to success among a growing number of companies, especially in the tech world.
The idea is to not stick with a business idea, plan or model that isn't working, but to fail fast and quickly change direction or even start anew.
While pivoting has become fashionable, and for many it makes good sense to save a struggling company, there is also reason to question whether it's always smart to pivot, or whether it's sometimes better to to stay, or make a tweak to, the course.
Either way, it's not a decision to be taken lightly or without due diligence, the experts say.
"How do you know if it's time to pivot? When your head is flat from pounding it against the wall," says Barry Sharp, a Vancouver-based business consultant and professional accountant. "I used to be in the computer software business and the mantra was you have to change something to make change. All business is similar."
Jackie Lauer, a facilitator and coach with management consulting firm Axletree Consulting Inc. and a mentor at the Accelerator Centre in Waterloo, Ont., says she is often asked by company heads whether their business should pivot.
"I want a CEO to tell me whether he is basing the decision on one complaining customer that vented on social media, or whether it's based on facts, such as those from focus groups, surveys or customer feedback," she says. "A pivot should be based on facts."
Mr. Sharp also says it's important to get the facts by continually tracking business progress through measures ranging from revenue growth to website hits to customer surveys. How long an entrepreneur waits for a business to gain traction or decides it's time to make a left turn "is a matter of your own patience level," he says, but adds that, that if there isn't evidence of progress after several months, it's time to take a serious second look, and often with expert input.
"The trendy approach is to fail fast, but before you decide if it's the right thing to do, don't look at what you're trying to do, but what you have that's worth something. List your assets. Ask 'How can I can I turn that into something that's got value to someone?'" he says.
Sometimes all that is required is a minor shift.
Mr. Sharp, for instance, has a client that wanted to import wine in beautiful bottles from Europe, but with the markup the liquor control board required, the price would have been too steep. Mr. Sharp and the client determined that the wine was mediocre; the real asset was the bottles, so the business shifted to importing empty bottles to sell to wineries as tourist gifts.
For Benjamin Bérubé, founder of D2Soft Technologies Inc. in Montreal, pivoting wasn't the right way to go.
Mr. Bérubé developed Nimbb, a webcam video recording interface. He started to work on it in late 2008 and, in May, 2010, went to San Francisco to meet with potential investors. They wanted him to change the concept to a job interview service for businesses, rather than keep it going for multiple uses.
He didn't succumb to the pressure that he says investors often put on entrepreneurs to change to gain traction fast. Instead, he kept his day job as a computer consultant until September, 2010, when, without outside funding, he went to work on Nimb full-time, and has continued on the same course, increasing revenues, customers and becoming profitable.
"I think most people are proud when they say they are pivoting, [but] I always thought the opposite – that it shows you are losing focus," he says. "People think to be successful, you need to get money fast and the idea will succeed if you go fast. I think to be successful, you need to take time to focus.…If I had listened to [potential investors], I'd be far from where I am today. Changing is an easier way to get out of a situation; sticking to your vision is harder."
For Ethical Ocean, the decison to pivot didn't come lightly. Instead, it set up a series of experiments to test whether a pivot was the right way to go. "For example, if we cannot engage 50,000 new customers in the first four months, we are going to call the experiment a failure," explains Mr. Hamre. He believes other companies should follow suit, with experiments that have built-in thresholds; if they aren't being met, it may be time to pivot, he suggests.
Nathan Monk, a senior associate with MaRS Discovery District in Toronto and an adviser in the Web and mobile technology startup community, says pivoting may not be the answer for entrepreneurs that want to stay small, don't aspire to grow global enterprises or don't have to rely on investor capital, as that comes with its own set of expectations. Other strategies, such as a change in marketing tactics, location or manager, might be better solutions for some struggling businesses. "It's a tough decision," he says.
Especially for startups, he adds, it's important to constantly review and test business models or hypotheses. It may be necessary to identify a more viable market several times, he says. "We certainly don't look at it as failure; failure to us is experience," he says."A startup is really trying a series of testable hypotheses until they can find a successful and repeatable model."
If changing direction is the answer, there is "no shame in pivoting; it's part of startup life really. A pivot can apply to any business, but startups are much more nimble and can move more quickly than larger organizations."
Ethical Ocean had been an open marketplace, similar to Amazon.com, where anyone could go online and buy products anonymously. It used newspaper and magazine ads to generate sales. But that transaction-based model wa snot building relationships with customers, Mr. Hamre says.
Since the pivot, the product line has been scaled back to offer fewer items, and the new online model is based on subscription, catering exclusively to those interested in ethical shopping.
Following the pivot, sales initially plummetted, Mr. Hamre says. But at the same time, in the first three months, membership quadrupled, has since been increasing by 50 per cent a month, and individual sales have been for larger amounts.
"We are connecting to the right type of customer now," Mr. Hamre says. "In the old model, we were selling to people who may only have bought because we offered a discount. Now we are exclusively connected to people who care about ethical shopping and we are making better, larger sales. We were able to cut our marketing budget by 80 per cent.""
While the new model seems to be working, Mr. Hamre doesn't rule out another pivot in the future. "Six months from now, if we need a larger round of capital or need to look at how to take it from the scale it is now, it may require doing something dramatically different again."
Time to pivot ?
How to decide when it's time to change the course? Here are some signals that it might be time to pivot from Vancouver business consultant Barry Sharp and Nathan Monk, a senior associate with MaRs Discovery District in Toronto.
- You are doing regular reviews of your business, and finding that you are consistently losing revenues or customers.
- You have received negative feedback from focus groups or customer surveys.
- You are not solving a consumer problem in a cost-effective or profitable way.
- You have solicited an expert opinion and that expert agrees the best tactic is to change course.
- You have established a clearly defined business model with a series of ‘experiments’ with built-in thresholds and are not meeting those thresholds.
- You need funding from angel investors or venture capitalists and are required to meet their expectations.
- You aspire to scale your company to become a large enterprise nationally or internationally.