YCombinator just released their semi-annual application for companies to incubate. One of the new questions this time around is “How will you get users?” I think that is a great question to think about for everybody in business — perhaps the great question to think about. Customer acquisition is one of the easiest places to screw up as a startup, particularly for technical founders (who, in their previous lives, have probably never had to do it for anything).
I’m not applying to YC this time around, but I always fill out the application to force myself to talk through my business strategy. I had one thought which sounded worthwhile enough to share: customer acquisition can be hacked. You can take the current conventional wisdom in the market of how to get customers to use solutions, identify it’s weak points, and aggressively target them. That can, potentially, be as important (or more important) than the same applied to the actual product.
Enemy #1: The Technology Adoption Cycle
Let’s assume that you’re capable of successfully identifying a problem customers have and solving it. Those are both highly non-trivial, but put them out of scope for the moment: people’s hair is on fire, you’re selling fire extinguishers, life should be grand. Life is often not quite so grand, because you can produce a wonderful product which creates value and fail to sell it to folks.
Most startups are not creating an entirely new solution out of whole cloth. Somewhere out there people are currently experiencing the problem you are solving, and they’re dealing with it somehow. They might be ignoring it or gritting their teeth. They might be using some inferior solution which they got from your competitors, you have competitors (you should have competitors — if you don’t, you probably aren’t doing something people care about).
Your competitors had to see people through a product adoption cycle:
- Identify people with the problem
- Teach them that the solution exists
- Successfully sell them on the solution
- Prevent them from leaving the solution for a competing solution
In actual practice, this adoption cycle is frequently long and arduous. (If it were short and easy, there wouldn’t be any money in it.)
Your competitors, if they are established businesses, are probably very good at maneuvering customers through the technology adoption cycle as it exists in the market today. For example, if grading students is a problem, your competitor might very well be successfully selling school districts on their gigantic consultingware grading solution which costs six figures an installation. Since they can still make the rent and keep the lights on, you can infer that their business probably works. Their marketing team is generating sufficient leads, their sales team converts some of them.
But you probably don’t want to do what they’re doing, because they’re better at being them than you are.
Hacking The Product Adoption Cycle
Startups are not the world’s most obvious choice of employment for people who enjoy coloring between the lines. If you execute the competition’s playbook for acquiring customers, you are probably going to get crushed by them, because
- they know more about the market than you do
- they have a commanding head start
- they have large amounts of resources to throw at the problem
On the other hand, it is entirely possible that:
- they have stopped learning about the market
- they have a commanding head start running in a suboptimal direction
- they have large amounts of resources which, for reasons of switching costs and politics, can’t be reallocated to more efficient approaches
These statements aren’t just true about the product — sure, they might have a crufty old VB6 app and you have the new Node.js hotness. They are equally true about the customer acquisition process. You’re competing with their business, not with their product, so you could possibly either focus your innovation on customer acquisition or, more likely, use innovation on both customer acquisition and product in a mutually supportive manner.
Examples Of Hacking This
Freemium isn’t a business model so much as it is a customer acquisition tactic. In markets dominated by expensive solutions with huge switching costs and uncertainty about success with technology changes, freemium can be very compelling: the self-serve model allows you to do less consultative sales (with the multi-month purchase cycles, large sales teams, and politicking that entails) and instead focus your efforts on getting leads and converting them. This plays to a very different skill set versus traditional enterprise B2B sales, and it is a much more forgiving of small teams, since you’re deputizing your free users as internal sales champions and praying that they can do the consultative sales that your non-existent sales force isn’t doing. This also lets you crack into markets where any model which requires consultative sales automatically is priced out of the market — essentially, anything where customer lifetime value is less than $75,000, give or take.
Monthly billing is another hack. Customers are irrational and their processes are broken. One artifact of those practices is that there is a stepwise increase in difficulty if prices increase by $1, as long as the price was already at whatever the company’s magic number is for maximum to be put on a corporate credit card or signed for on a non-manager’s authority. Monthly billing defeats this step function because even if the total lifetime cost of the solution goes up the largest amount ever billed at once might well cross under that critical threshhold again. This means that there is no longer a total no-man’s land between $1,000 and $75,000 in lifetime value. (Is this a hack? Yes. If you bill a Fortune 500 company product manager $80 a month, you are essentially conspiring with him against his accounting controls. Not that there is anything wrong with that. You can even explicitly sell that as a benefit to him, just like you sell SaaS as allowing him to avoid having to talk to IT to get the stuff he needs to do his job.)
Online marketing expertise hacks through the ridiculous inefficiencies of offline marketing. Many startups can run rings around their traditional competitors in online marketing, for example due to savvier SEO that leverages their strengths in execution speed, technological savvy, and community ties. For example, my wee little business competes directly with Scholastic Publishing, who has 10,000 employees and access to public capital markets. They also couldn’t spell SEO if you handed them a set of alphabet flash cards, which is good news for me. You would think that “Well, a business which doesn’t have online marketing expertise could just hire for it”, but after you get past the level of “let’s make a website — it should probably have title tags and some of those keywords, too”, everyone who tries this finds that it is murderously difficult to hire competent SEOs right now. (If you disagree, I have some clients who would love to meet you.) At the same time, I couldn’t possibly compete with the relationships which get their competing products on shelves at tens of thousands of retail locations… but then again, I don’t have to pay 50 cents of every dollar of sales to the retailer, either.
Taking A Hack From Tactic To Strategy
I think this isn’t exactly a new insight. There are lots of folks who, when asked for their marketing plan, will say “Oh, we’re going to get lots of search traffic” (indeed, that is probably second only to “it will grow virally” in terms of signaling “has probably not thought this through.”) What separates hopes and dreams of future success from very valuable businesses is a strategy which, with execution and refinement over time, will actually achieve the goals.
We often hear products described using something like “It’s like Facebook, except for dogs.” How about, instead, describing businesses like “It’s like Quicken, except Quicken sells primarily through boxed software channels and we’re going to sell primarily through banks which will deal with us for a cut of the sale price and the ability to deepen relations with small business customers, who consume lots of high margin services and stay locked in for decades at at time.” (That may or may not actually be true.)
We often accept previous experience or minimal proof-of-concept prototypes/MVPs in lieu of a functioning product when evaluating whether someone is capable of executing on building something. Why not do essentially the same for proving that one is likely to get customers? A previous background in revenue maximization through negotiating cross selling deals for banks, or evidence that you have enthusiasm from a few bankers who like the concept and want to hear more when you have something to show, demonstrates a certain likelihood that marketing challenges will be overcome like technical challenges will be overcome.
Similarly, for a startup hoping to make inroads for SEO, I’d be thinking less along the lines of “we’ll sprinkle some SEO on our website” and more along the lines of specific plans for scalable content generation, securing backlinks at scale, and winning the support of influencers either in the niche or in other addressable niches which your competition may not be aware are relevant to that facet of their business.
Product Supports The Marketing And Vice Versa
I have a wee little heresy as an engineer: I think that you can make a perfectly viable business out of a product which is not better than competitors, solely by improving on the method of selling it. Farmville (and whatever Zynga has reskinned it as this week), for example, is not superior to all other options for entertainment… it just beats the pants off of most of their viral spread patterns, because promoting your use of the game is the core gameplay mechanic. (You can also do this in more socially beneficial ways than Farmville, don’t worry. I have a competitor in the bingo business whose product is very close in quality to my product. They sell to schools via a catalog. I sell to teachers via a website. Despite solving the same problem for the same end-users our businesses are like ships passing in the night. Hilariously, at least a few of my customers actually own both pieces of software, because the people who buy from the catalogs never bothered telling the people who use the websites.)
However, this doesn’t mean you can’t innovate on both the marketing and the product. Indeed, since they feed off each other, that is probably substantially more effective than innovating on one or the other. Imagine what a juggernaut World of Warcraft would be if they nailed their game’s quality as much as they did and also had Zynga’s viral loop and monetization model. That hypothetical WoW could probably deal with Chinese net regulators by buying China.
(It’s easy to say this in retrospect: empirically, millions of employed adults with lots of disposable income spend much of their free time playing WoW. They spend huge amounts of money on buying status for themselves — cars, diamonds, big houses. They clearly value their experience in the game. Therefore, they should be willing to buy status in the game, too… and since buying status is more being seen as having paid lots of money than it is about any particular artifact received, this should go over very well. I mean, crikey, in a world where encrusted mollusk discharges say “I love you” anything is possible… anyhow, it is easy to say that in hindsight. The challenge for startups is identifying that sort of synergy between customer adoption and the product in advance, and communicating that it is likely enough to happen to risk betting on.)
Hacking A Non-Computer System Whose Source Is Closed And Updated Continuously
We all know the first iteration of the product is going to suck (hopefully in the sense of “not meet customers needs” more than “a broken, unreliable mess”). The first iteration of the marketing strategy is also going to suck (hopefully in the sense of “fail to generate the expected level of success” rather than “like shouting to an audience of deaf ants during a hurricane”). Just like you can use the Lean Startup principles to modify your product and marketing message such that it comes closer to achieving a match with what some people actually need, you can also use spiritually similar disciplines to iterate on customer acquisition strategies. There is as large a solution space in them as there is in the product space. Maybe you need to try SEO and see that it doesn’t do a great job in your market, for your customers, while an affiliate channel performs better. If you’re experimenting, measuring, and moving with a purpose as opposed to the traditional method of “throw stuff at the wall and see what sticks”, you will hopefully have a bit of success.
I’d love to hear if you have comments.
[Memo to self: Prior to ever actually applying for YC, I should practice thinking big thoughts and then writing small thoughts. Those form fields are tiny!]