The 2 Most Important Questions to Ask Before Launching a Startup

“Can this startup be marketed profitably?”
“Can the profitable marketing scale?”

Of course you can’t definitively answer these questions until you try marketing the product.  But, if you aren’t pretty confident that the answer to these questions is yes, you shouldn’t launch the business.   Too many people start trying to build a product and believe they’ll figure out the marketing piece later.  Some get lucky, but the majority fail.

If you start your business with these questions in mind, you are much more likely to build a successful business.

Hiring Unproven Talent for your Startup

Building the right team is critical to the success of any startup.  You can pay a significant premium for proven talent, or take a risk and get a deal on unproven talent.  My best hires have usually been relatively unproven when they joined the team.

But how do you gauge the potential of these people?  I may have figured out a critical interview question to ask when hiring unproven talent (and maybe proven talent too).  The question is: “How would you react if you felt like you were underpaid in your position?”

I came up with this question based on a conversation with my younger sister.  She was recently promoted and very disappointed that she didn’t get a pay raise with her promotion.   Most people would lose motivation and begin putting less effort into their work.  A few of us though would take the exact opposite approach.  Defying logic, we would actually work harder, figuring that our salary will eventually catch up to our valuable contribution.  We understand that being underpaid gives us enormous leverage and eventually a smart employer will give us a raise for fear of losing us.

From the inception of my career, I have always taken this approach when I felt underpaid.  And I’ve always preferred to be underpaid than overpaid (much better job security).  I have a feeling that this is a key characteristic of most people that have had success in their career.

It will be interesting to hear the reactions when I use this question in interviews.

Startup and Online Marketing Secrets Exposed

This presentation by Dave McClure is the best concentration of online marketing information I have ever seen.  It is a direct contradiction to my recent rant that startup marketers are too protective of their ideas. Dave is definitely open to sharing his very valuable online marketing insights.  Almost everything you need to know about online marketing is included in the presentation.

I wish I would have had a presentation like this when I began online marketing. Of course in the mid 90s no one had accumulated this knowledge yet.

It also expanded my existing knowledge – particularly the last few pages on viral marketing.

I plan to start following Dave’s blog very closely and I’m sure I’ll learn lots of new marketing tricks.

Startup Marketers Hoarding Mediocre Ideas

Why can’t marketing be more like the rest of Silicon Valley who have long shared ideas, resources and processes across startups?  Engineers have been doing this for decades and the open source movement takes this to a worldwide level.  Startup founders are also forming alliances (often facilitated by common VCs or groups like Y Combinator).  The startup stories of Apple and other companies show that many great technology companies came out of “clubs” of people that were passionate about technology.

But us startup marketers have stayed on the sidelines protecting our mediocre ideas and processes.  If we pulled together, we could dramatically improve our contribution to the success of startups.  Many of us have become complacent about accepting a flawed marketing process for bringing companies to market – as long as we’re better than the other guys we’ll always have a “job opportunity”.  But successfully bringing a startup to market is much bigger than any one job.  Knowing you’ve built a sustainable thriving company is a huge accomplishment and can put you in a financial situation that means you never have to worry about a “job” again.

In an earlier post I explained why I believe the startup marketing process is broken.  In a nutshell, today’s “long term” comp packages prevent effective startup marketers from specializing in the traction stage – the most important stage in building a valuable company.  Specialization and repetition are the ways to get really good at this “traction” process.  Shared learning will help all involved improve their processes much more quickly.

The startup marketing blog is my attempt to share my experiences and get the ball rolling on collaboration with other startup marketing leaders.  I really like that I’m now getting some great comments from readers.  Most of the comments begin with “I wholeheartedly agree” or something like that – which is great.  But what would be even more valuable is “I disagree and here’s where my experience has been different…”  Here’s an example of a really helpful comment from Rajiv Kapoor (scroll to bottom).

I’m also starting to connect offline with other startup marketing leaders who share my passion to develop a better startup marketing approach.  I share detailed process documents and get great feedback from these new friends.  Please consider this an open invitation to any other marketing leaders from VC backed startups that want to contribute to and learn from this effort.  I’m always open for a phone call or if you are in SF, a coffee.  Drop me an email at seanwellis (at) gmail (dot) com.  Of if you prefer to get a snapshot on my latest thinking on the key early startup marketing milestones, see this post.

Thanks Jay for your recent comment praising me for my openness.  It helped to remind me why I started this blog.

Brand Like Starbucks (for Startup Marketing Success)

Like millions of other people, I’m working at a Starbucks today (on my PC, not behind the counter).  Despite some recent financial hiccups, Starbucks has built an amazing brand over the last 20 years and rocketed the category of high end coffee shops into mainstream existence.

Starbuck’s process of building their brand is a great example for any startup.  There was no heavy spending on brand advertising.  At Starbucks it’s all about the brand experience.  They obsessed over everything – from the quality of the cups to the quality of the toilet paper.  The music, colors, furniture…  It’s all an orchestrated brand experience.

The cost of this brand building was nothing compared to the losses someone can incur on massive brand building campaigns.  Starbucks is a great concrete example of why spending a lot to build brand awareness is a waste of startup resources.

The Difference Between Word-of-Mouth and Viral Marketing

I often hear knowledgeable people say “that’s not viral marketing, it’s word of mouth.”  Rarely do they go on to try to explain the difference or why the difference is important.  I’m not sure why it’s particularly important, but I’ve tried to decipher the difference below.

The confusion probably stems from their shared potential for driving exponential growth rates by leveraging existing users.

Based on the two sources I’ve found that tried to answer this question (pasted below) and my own experience, I’ve reached the following conclusion.  The primary difference is that strong word of mouth is primarily based on a compelling customer experience while viral marketing is more “engineered” to specifically propagate a product.

It’s easier to “engineer” viral marketing into some environments than others.  For example, a few years ago my accountant in Belgrade asked me to download Skype so we wouldn’t run up a big phone bill.  Skype didn’t need to do a whole lot to drive this virality, but making it easier to invite friends improves their viral growth rate.  Like Skype, every new communication platform shares this viral characteristic (the first fax machines, early IM products or Facebook).  There is a strong incentive to tell other people to join the network, because it improves the value of your own experience.

Word of mouth, on the other hand, is really based more on doing a favor for the other person (clueing them into something unexpectedly cool).  TIVO is a great example of this.  There is no inherent usage benefit for telling other people to buy TIVO.  But it is such a surprisingly great experience that people tell their friends about it anyway.  Even if TIVO were to offer a free month of service for everybody you tell, I still wouldn’t consider this a viral growth driver.  It’s just incentivized word of mouth.

While they may technically be different, I’ll take either exponential viral growth or exponential word-of-mouth growth if I can get it.  Or even better combine the two.  Skype falls into this combo camp.  You’d probably be compelled to tell friends about the ability to make free phone calls (especially overseas) even if the software weren’t required on both ends.  The fact that you also benefit when they install the software only accelerates this growth.

Before you obsess over viral marketing and word of mouth, make sure you have completed these critical baseline marketing steps.

Here are links from other bloggers that try to answer this question:

Andrew Chen’s comparison is a response to the question I posted on his blog.  He mentions multilevel marketing and chain letters as a couple of great non-online examples of viral marketing (and MLM is an example of a non-communication form of viral marketing also).

Seth Godin’s post points out the decaying nature of word of mouth.  A great experience fades quickly when it reaches a couple links into the word of mouth chain.  However, this wouldn’t be the case if word-of-mouth referrals always result in a new user who also refers the product/service.

For more details on the process of engineering viral growth, see this earlier post.

Fremium Will Squash Premium

The biggest threat to an established premium only software business is the arrival of a fremium player.  The best way I can think of to demonstrate this is through the following hypothetical scenario:

You’ve built a premium subscription software business model.  Your sales dwarf competitive premium offers because you have very efficient customer acquisition and a great product with strong customer retention.  Your marketing metrics are strong.  You have 1 million customers, for which you paid an average of $50 each to acquire.  The average projected lifetime value for each customer is $100 with a typical subscription length of three years.  So you paid $50 million and will eventually generate $100 million.  Your marginal cost of providing the software is minimal, so you are now focused on acquiring as many subscribers as you can for around $50 each.

Now imagine a fremium player enters the space.   At first you don’t notice much decay in your business.  You’ve got a marketing machine that’s generating enough cash flow to efficiently outspend the fremium competitor 10:1. And you have the benefit of a high lifetime value to justify the high customer acquisition spending.  The fremium competitor only has an average lifetime value of $10 per user (averaging their free and premium users).  Their average acquisition cost is a fraction of that because of high response rates to their “free” advertising messages and strong word-of-mouth.

Fast forward a year or two.   The premium only company starts to see retention rates plummet.  A few subscribers are going for the competitors ½ price premium version but most just choose the free version.  It’s only a matter of time until the entire Premium only installed base learns about free offer.

What should this premium only company do?  If they launch their own fremium version, they will sacrifice much of their paid base to their own free offering.  They paid a lot to acquire these users with the expectation that they would recover the cost through a high lifetime value.  A fremium offer at this point become pretty hard to swallow.

If you believe Chris Anderson’s recent Wired article – this scenario will play out in every software category.  If you are thinking about launching a premium  only software product, consider going fremium now.  It will be a little harder to get traction, but you will have a much more defensible business down the road.

Awareness Building is a Waste of Startup Resources

 

It’s surprising how many CEO/Founders of startups tell me that they want to hire a VP Marketing to “build awareness.”

Consider this: according to Inc Magazine , the average US consumer sees about 3,000 advertisements per day.  Can a startup really spend enough money to break through that clutter and build awareness?

For at least the first year or two, online consumer/prosumer/smb targeted startups should focus 100% of their non-PR media budget on acquiring customers.  Rather than buying a microsecond of awareness, you can actually use your limited funds to engage users in a real brand experience. Even for users that don’t convert to paying customers, you create a deeper impact by engaging people on your website.  And you can gain intelligence about such things as where and why potential customers are abandoning your acquisition funnel.

Focusing on customer acquisition over ”awareness” takes discipline.  There is always some amazing advertising opportunity that could lead to explosive growth.  Your odds are probably better buying a lottery ticket.

Building a strong customer acquisition engine is the best chance you have of creating long-term awareness.  At a certain scale, awareness/brand building makes sense.  But for the first year or two it’s a total waste of money.

The Science Behind Viral Marketing

Many people don’t realize the advances in the science behind viral marketing.   Experts often known as ”Viral Tuners” are applying a systematic data driven process to creating viral customer acquisition drivers.  By testing and optimizing the viral elements of a widget or websites they are often able to push the viral coefficient above 1.0.  This essentially means that each new user generates more than one additional user.  In other words, growth accelerates geometrically until saturation.

Even if you can’t get the viral coefficient above 1.0, you can still greatly benefit from virality.  The echo effect of a viral coefficient that falls below 1.0 is still important. For example, if a tracked user from a campaign costs $1 to acquire and you have a .75 viral coefficient, you actually acquire about 3.5 customers for that $1 and therefore your average customer acquisition cost goes down to less than 30 cents. If you can find a way to generate an ARPU (average revenue per user) of $.50 you have a strong business – even if you spend $1 to acquire that first user.  The higher your viral coefficient, the bigger the echo effect of every dollar spent.

Again, if you can get the viral coefficient above 1.0, the echo effect is infinite and your cost per acquired user approaches zero.  Any time you can acquire users for free, a viable business model becomes almost inevitable.  As long as you don’t have a significant marginal cost per user outside the acquisition cost, you simply need to micro-monetize these people and you’ll easily be able to grow a profitable business.

All of the above is pretty abstract, so I’ll give you an example of the only viral growth driver I’ve ever created. Ten years ago I launched a YouTube sized game widget called Trivia Blitz that appeared on over 35,000 websites. Each widget carried an “add this game to your website” link, helping it to spread virally between sites.  We acquired several million users with this widget, paying the referring site 50 cents per user (a small fraction of the average lifetime value each user generated in advertising revenue).  To achieve a high average lifetime value, it was important to transition users from the referring site to the engaging multiplayer games on the Uproar.com website – which was already among the stickiest on the entire web.

During these irrational dotcom bubble years, our competitors were wasting millions on crazy marketing campaigns like expensive branding campaigns on TV or multimillion dollar AOL deals.  By focusing our resources on Trivia Blitz and tightly tracked direct response marketing drivers we were able to take leadership of the game category, surpassing Microsoft, Sony, Yahoo, and many gaming startups backed by leading Silicon Valley VCs.  Trivia Blitz was such an efficient customer acquisition tool that it eventually helped position Uproar.com for a NASDAQ IPO.  Among public companies, Uproar was able to achieve the lowest customer acquisition costs for a free registered user (about 1/6 of Yahoo’s cost which was considered pretty good at the time).

While we didn’t optimize the virality of Trivia Blitz, it is still illustrative of the results that are possible if you can create a viral coefficient above 1.0.  I’m now focused on learning the skills of viral optimization, so I can take something that is slightly viral and fine tune it into a major viral marketing driver.

If you are interested in reading more about viral marketing, I highly recommend Andrew Chen’s blog.  I’ll blog about any other great resources that I find.