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I was immersed in thoughts of my upcoming jaunt up to NYC for the World Innovation Forum when I received an e-mail from one of the entrepreneurs I featured in my book, Graham Weston. He is the Chairman of Rackspace Hosting, and hearing from him reminded me of a story that he told me about how his business started and the key to how they’ve grown, now to over $500M in revenues.

The founders of Rackspace actually started a different company in 1996 as an internet service provider which also did some application development. While customers were becoming savvier about developing their applications, few wanted to deal with the hosting part and preferred to outsource that. In 1998 they broke out the hosting into a separate company and Rackspace was born. Initially, they thought they were in the business of leasing hardware for their clients to put their applications on.

A significant number of new players began emerging in the ISP market forced the company to start looking for something to differentiate them from the competition. After talking with customers, they realized clients were buying more than just server space – they were buying peace of mind that their site would be up 24/7. All the other providers at the time focused on the technical side of the business but by understanding what their customers really wanted from them, the Rackspace management team realized an opportunity to win customers by focusing on customer service and support. This decision along with the successful execution of their strategy in implementing Fanatical Support^®, they were able to not only survive the ISP shake-out but have come out on top as a provider of application hosting, sporting a promise of 100% uptime and a unique culture geared towards customers.

Understanding what your customer is buying is not difficult, but few companies do it. It requires that you ask the right questions and then – here’s the key – openly listen to the answers. It also demands that you appreciate that there is often a misunderstanding between what companies sell and what customers buy, a gap that can mean the difference between success and failure. You have to be flexible – willing to change your business/product or what you think about your business/product. I have seen that this is where many entrepreneurs and companies stumble.

I’m looking for examples of other companies who have innovated based on finding out what they’re customers are buying. Send me your ideas and stories and you may be featured!