About Sean Ellis

CEO of GrowthHackers.com. Previous roles include first marketer at Dropbox, Lookout, Xobni, LogMeIn (IPO), and Uproar (IPO). Also interim marketing exec roles at Eventbrite, Socialcast, and Webs.

January 12, 2009

6-Month News Vacation

I’m a news junky and have been since college. Recently I’m finding the damage of paying attention to the news far outweighs the benefits.

For the past two weeks I made a concerted effort not to read or watch the news. By this past Friday night I had reached my most optimistic outlook in years. The companies I helped take to market in 2008 are performing beyond my wildest expectations. Earlier in the week Xobni raised a $7 million Series B round and that evening Dropbox had been awarded runner up for best startup in 2008.

My H1 2009 workload is quickly filling up with fantastic group of well-funded startups. And most important – I’m really having fun helping startups figure out how to drive massive customer adoption. Through it all, I’ve managed to spend more time with my kids than at any other time in their lives.

What could possibly screw up this optimistic mood? The news. I woke up Saturday morning and decided to check in while I drank my coffee. Big mistake. After a few minutes of gloomy economic reporting, murders, and war I felt the pessimism creeping in. Then I picked up the remote and turned it off.

I decided I’d give it a break for 6 months. I’ll bet that I won’t even know there is a recession if I don’t watch the news. On July 11th I’ll check back in and see if there is any sign of the recovery that economists are predicting in H2 2009.

January 3, 2009

How to Determine the Optimal Price for Your Web Service

For the startups I help take to market, one of our most important projects is determining their optimal price. Unlike companies in established categories with high unit costs, optimal pricing for a software startup mostly relates to maximizing revenue. An optimal price allows the startup to grow at the fastest possible rate by maximizing profitable investments in customer acquisition programs and/or offering a free version to drive broad user adoption. Considering most software startups simply guess a price, determining your optimal price can become an enormous competitive advantage.

The optimal pricing project is part of the overall “optimization phase” I describe in my metrics driven go to market approach presentation.

There are three key factors to consider when determining your optimal pricing:

Price sensitivity– You want to find the price that generates the highest yield per 1000 trials (or visitors, DLs, etc.). You can find this number by determining how many units you would sell at each price. For example, if you have a 10% conversion rate at both $8/unit and $10/unit, then $10 is obviously the better price for you. But let’s say at $20/unit demand drops to 8%. Despite lower demand, yield is higher at $20 so it would be a better price than $10 ($1600 per 1000 users at $20/unit compared to only $1000 per 1000 users at $10/unit). I estimate max yield pricing first through surveys and then through experimentation at several price points. Around launch your volume will be too low for a meaningful sample size, so be sure to launch with “introductory pricing” which should be at the low end of your expectations. Adjust the price when volume allows you to hone in on the optimal pricing.
Marginal cost– For web services it’s important to understand your cost per unit to avoid pricing at a loss. This marginal cost is essentially a floor on your pricing. If you have bandwidth and storage costs that are $5/user/year, then your business would not be sustainable if you priced your service at $4/user/year. For most downloadable software, there is no marginal cost per user (beyond marketing costs).
Growth strategy– I generally prefer one of the following pricing strategies for innovative products. One is a Market Builder pricing strategy where the majority of your users are coming through your demand generation initiatives. Demand generation is expensive (unless driven through viral tactics) and therefore requires premium pricing to create a high allowable user acquisition cost. An example of a company that took a Market Builder approach to grow the personal remote PC access category is GoToMyPC, which combined premium pricing with aggressive radio demand generation. An alternative strategy is a Market Drafter pricing strategy. Freemium pricing is ideal for a market drafter. Essentially as the Market Builder creates awareness for the category, the Market Drafter swoops in and offers a much better deal (SEM is a good place to focus for a Market Drafter). This strategy only works when a Market Builder is aggressively investing to grow the category. I prefer the Market Drafter position when possible (see this post for more details on why). In the long term, the Market Builder must focus on differentiation to justify its higher prices (or reduce prices)

Once the optimal price has been established, there are many tactics that can used to boost response rates. These include:

Setting the price a bit higher than the optimal level and then frequently discounting it.
Using a decoy super premium version to make the version with the “real price” seem cheaper.

My favorite pricing model for driving demand is Freemium, combined with carefully researched max yield pricing on the premium version of the product – then applying the response boosting tactics listed above. An insightful read on Freemium pricing is Josh Kopelman’s post “The Penny Gap.” It is an exploration of the “power of free” in driving customer adoption and suggests that elasticity of demand is not linear. At the price of zero, demand soars.

Dan Ariely also makes this point in his book Predictably Irrational. He concludes “Zero is not just another discount. Zero is a different place. The difference between two cents and one cent is small. But the difference between one cent and zero is huge.” He supports this point through the following experiment: He first offered a Lindt Truffle for 15 cents and a Hershey Kiss for one cent. Participants (who could only select one) purchased the Lindt Truffle 73% of the time and the Hershey Kiss 27% of the time. When they were both discounted an additional penny (making the Hershey Kiss free), demand for the Hershey Kiss shot up to 69% and demand for the Lindt Truffle dropped to 31%.

There are several other great pricing psychology nuggets in Predictably Irrational; I highly recommend reading it. It goes well beyond the three basic pricing factors presented above. Some useful points include:

A higher price not only positions your product as superior, people may actually have a better experience using the product. He presents a fascinating experiment that shows people got more relief from a $2.50 pain killer than a 10 cent pain killer, even though they were both just vitamin C. He concludes “the perception of value, in medicine, soft drinks, drugstore cosmetics or cars, can become real value.”
When we encounter a new product, we accept the first price that comes before our eyes as the anchor. This price has a long-term effect on our willingness to pay for the product from then on. He uses the example of black pearls. Initially there was no demand for them, but when they were anchored to the finest gems in the world with premium pricing, demand shot up.
Differentiation gives more flexibility to increase price. His example here was that Starbucks differentiated the coffee shop experience allowing them to more than double the price of a cup of coffee compared to Dunkin Donuts.

Finally remember that technology prices tend to drop over time. Keep this in mind when determining allowable acquisition cost based on a user’s lifetime value. Lifetime value will probably be lower when considering future pricing pressure. It’s better to be ahead of the curve in driving prices lower, which often requires innovation that allows you to profitably offer the service at a lower cost than competitors (for web based services with marginal costs).

December 15, 2008

Y Combinator is Dead?

This post by Jamie Siminoff (CEO of PhoneTag) claiming “Y Combinator is Dead,” offers a good alternative view to my earlier post praising the Y Combinator model.

In my experience with both Xobni and Dropbox, I stand by my earlier claim that “Y Combinator hatches brilliant entrepreneurs.” Both have been funded by very reputable VCs and continue to thrive. But both started before the major economic meltdown.

Today all startups are having difficulties raising Series A funding – including Y Combinator startups. Jamie offers an interesting alternative model in his post that suggests incubators should provide more/longer help for their startups. Venrock’s Quarry is similar to the model that Jamie is proposing. The additional benefit offered by Venrock is that they often provide the Series A round of funding to the startups that they incubate.

Hindsight will tell us which model is best in the current economy – but for now I have no clue.

December 11, 2008

My Favorite Online Marketing Tactic – Doesn’t Work

That’s a pretty safe prediction for two years from now. I’ve seen many hot online marketing tactics lose their effectiveness over the last decade.

The key cause: Online tracking makes it easier for marketers to quickly figure out what actually works. As a result we start piling into the most effective tactics. Eventually they get saturated. An equilibrium is reached where most of the big profit potential is lost. SEM (Google Adwords) is the best example of this. A few years ago I was able to spend 7 figures per month on SEM with a tracked payback of three months. Today very few keyword categories offer that fast payback at any kind of meaningful scale.

The other reason that popular tactics fade so quickly is that popular tactics generate a lot of noise. Potential customers start tuning out the whole channel as it gets cluttered with advertisers. In the 90s, I used to get 20X higher click through rates on banners than what’s typical today. There were several months in the late 90s at Uproar where we ran the most viewed banner on the entire web (according to Nielson NetRatings). Today banners rarely appear in the marketing mix for my startup clients.

And now it appears Facebook apps are quickly fading as a viable marketing channel.

So what can startups, marketers and VCs do to combat the short shelf life of online marketing tactics?

Advice to Startup CEOs: Don’t pay a premium for a marketing veteran’s many years of tactical online marketing experience – only the last couple years really matter. And most of the critical go to market projects are very different from traditional marketing functions.

In fact I generally encourage startups to hire a complete rookie. The marketing leader is one of the most challenging roles for a startup to hire. The best marketing vets are looking for startups that have a bit of “wind at their back.” It’s the rookie that can create this momentum. Their lack of experience often means it’s easier for them to adopt new effective tactics as well as concentrating their efforts on the pre-tactical projects. In exchange for coming in early, give them a legitimate shot at the long-term marketing leadership role. After a year they will be intimately familiar with your customers. And they will likely be every bit as effective as a veteran marketer but available for a fraction of the equity and cash.

Finally encourage your VCs to hold regular marketing summits so your marketer can trade effective customer acquisition tactics with other marketers (share “Advice to VCs” below with your VC).

Advice to Marketers: Don’t specialize in a single tactic. This is counter to the advice of most people, but hopefully by now you understand the flaw in focusing on a single tactic. They fade too fast and then you have to start building a new specialty.

Instead, focus on developing marketing skills that will always remain relevant. These include things like marketing psychology, diffusion of innovation, company building, customer research methods, persuasive website architecture, actionable marketing metrics… Stay on top of the latest tactics, but always balance this with developing expertise that will remain important in the long term. And when you discover effective new tactics, really analyze them to understand why they work. Those principles will remain important and will help you create/spot the next effective tactic.

And encourage your CEO/VCs to arrange marketing summits with other startup marketers where you can learn from each other (and please invite me).

Advice to VCs: Encourage your portfolio companies to exchange their most effective tactics. Most VCs get their CEOs together, but rarely do I hear about VCs bringing together their marketing leaders (mine never did in any formal way). Marketers probably have much more relevant insights to offer each other than CEOs. Effective online marketing tactics are surprisingly effective across different business categories. The collective insight across your portfolio of what works is enormous.

I recently attended one of the rare marketing summits at a VC and found it to be extremely valuable. Expertise in the group ranged from viral marketing to creative ways of generating press. I was happy to share my insights at no cost – well actually in exchange for their insights. I also shared some of my tools/projects that can be leveraged to get better results out of every tactic. I’m sure the other marketers would agree that it was an extremely valuable use of a few hours of our time.

December 10, 2008

Is “Go To Market” Mastery Really Possible?

I had an interesting comment from John Gillett yesterday in response to my 10,000 hour post. As I understand it, the essence of his question is really: is it possible to master the go to market process for startups? In other words, are there enough similarities between startups for a universal approach to be relevant? And if possible, does it really take around 10,000 hours to master it? Others have also asked me similar questions. Since developing an effective, repeatable process is the core goal that drives my hyper focus on taking startups to market, I thought it would be useful to highlight our interaction.

Here is John’s comment:

10,000 hours seems a bit arbitrary, particularly when there are so many different types of tech startups.

Becoming an industry leader may rely more on perception than actual hours spent perfecting the craft. A powerful PR firm may be able to accelerate a launch 100 fold.

I can understand the typical startup cycle being close to 1,000 hours, but it still seems like a relative benchmark that is somewhat useless.

Here is the reply I posted:

John thanks for the comment. I would probably have had a similar reaction before reading Outliers, but Gladwell presents some pretty compelling evidence that mastery often happens around 10,000 hours of practice. I’m not sure if/how this specifically applies to startup marketing, but I do know that I’m still learning a ton with each new startup I take to market and each startup is making faster customer development progress than the last; Eventually this steep learning curve will flatten.

There are similarities in the optimal go to market process at each of the startups – particularly in the sequence in which marketing projects should be executed. It’s important to begin by generating an early flow of users and uncovering how they are gratified when using the product/service, who is gratified and how to position the product to attract more of these types of people. The process for uncovering this information is similar at each company I’ve worked with. Also the metrics systems and process for reducing barriers and improving conversion rates are similar. These and many other projects should all be completed before trying to scale the business. Here’s a snapshot of the current sequence I’m using http://www.slideshare.net/seanellis/marketing-plan-for-web-20-startups-presentation . For the foreseeable future, the process will keep changing as I discover better ways to make faster customer development progress.

December 4, 2008

10,000 Hours of Go To Market Experience: Who Will Get There First?

Malcom Gladwell’s Outliers has come up in most of my meetings with entrepreneurs and VCs over the last few days. The big question we ponder is “how does Gladwell’s 10,000 hour theory relate to startups – specifically executing the go to market process?” If you are not familiar with his 10,000 hour theory, Gladwell asserts that mastery of any field requires about 10,000 hours of focused practice (see my previous blog post for more details). The key to becoming the “foremost expert” in a field is to be the first to reach 10,000 hours of practice. This opens doors to even more experience, further enhancing the expert’s reputation.

In my meetings over the last few days we’ve concluded that no one has reached 10,000 hours of experience in startup “go to market” execution. The reason is that each startup only requires about 1,000 hours (approximately six months) of focused go to market execution before they are beyond the go to market stage. The marketing executive that effectively navigates this stage generally has stock options that vest over four years. They are fully rewarded for their successful execution at the end of this four year period, so very few leave early voluntarily. Occasionally they may get an early exit, but sometimes they’ll stay beyond the four years as well. If we average 4 years per startup, it would take 40 years to reach “go to market” mastery. Marketers don’t focus on early stage startups for 40 years – they either become startup founders/CEOs or go up stream to marketing roles at bigger, safer companies. Of course most startups fail, so you could potentially take 10 startups to market in a much shorter period of time, but after a string of failures the opportunities would dry up.

Why is mastery of the go to market process important? After my two startup marketing leadership roles from launch to NASDAQ IPO filing, I reached the conclusion that the key marketing contribution that led to our success was the first six to twelve months of execution. This is when we figured out our target users and the most compelling value proposition. It’s also when we implemented the measurement systems that allowed us to tweak the business model, products, user acquisition flow, etc. After we completed this process the marketing job transitioned to driving and managing customer growth, which is similar to the marketing role at any established company.

Most startups muddle through the go to market process and as a result fall well short of their potential. In fact I believe that along with funding challenges, poor go to market execution is the key cause of failure for startups. Considering that VCs invested over $25 billion In 2006 and only one in ten of their companies is considered a major success (10X+ return on capital invested), the value of fixing this problem is enormous.

After working on the go to market execution with six startups, I believe I’ve reached about 5,000 hours of go to market execution practice. I also feel like I’m a long way from mastery. There are substantial improvements with each new go to market role – and I often go back and apply those improvements to previous startups I’ve helped take to market.

Occasionally I get very lucrative offers to consult with a later stage startup or even public companies. While I’m confident I can add value to these companies, they will take my focus off the go to market execution and dilute the external perception that I’m focused on early stage startup marketing. Now that I’ve read Outliers, I also realize that they will risk my lead in getting to 10,000 hours of go to market execution first.

December 3, 2008

Malcolm Gladwell’s Outliers: The Source Code for Individual Success

Malcolm Gladwell’s latest book, Outliers, attempts to reverse engineer the world’s most successful people. He dispels the popular notion that successful people are simply more gifted than the rest of us. Instead he attributes their success to a combination of luck, hard work and time. Ultimately, he concludes that mastery of most things happens at around 10,000 hours of focused practice. Being the first to reach 10,000 hours of practice is an enormous advantage and often comes down to luck.

For example, most professional hockey players were born between January and March. This gives them a significant advantage since the most talented hockey players are selected for exclusive club teams when they are around 10 years old. At this time, hockey players born early in the year are around 10% older than those born at the end of the year. Therefore, they are bigger and more coordinated. Once they’ve been selected for the special club teams they receive better coaching and face tougher competition. Most importantly they practice significantly more hours every week – putting them on the fast track to mastery.

The same principle applies to software entrepreneurs born around 1955. These were among the first people to have the opportunity to use time sharing terminals – which made it possible to quickly rack up 10,000 hours of programming time. Because of several lucky coincidences, Bill Gates may have been the only 13-year old in the world with nearly unlimited access to a time sharing terminal in 1968. This gave him a substantial head start in getting to 10,000 hours. Similar stories explain other wealthy software entrepreneurs born around 1955 including Steve Jobs, Paul Allen, Steve Ballmer, Eric Schmidt, Bill Joy, Scott McNealy, Vinod Khosla, and Andy Bechtolsheim.

Gladwell doesn’t claim that successful people lack special talent; he simply concludes that being gifted alone is not enough for success. Mastery requires time, effort and lucky circumstances.

In my early years after college I embarked on a similar quest to understand how the most successful people achieved greatness. I read the biographies of Rupert Murdock, Richard Branson, Ted Turner, etc. Rather than being inspired, I was discouraged to discover that many entrepreneurs (especially Ted Turner) were miserable. I decided that it wasn’t worth trying to become successful.

But after reading Outliers, I realize that the ingredients for success were piling up around me. First I was probably born in the perfect year for an online marketer. Many of the best online marketers I know were born around 1970. Our lives were at the perfect stage in the mid 90’s to risk joining pioneering startups (we didn’t have mortgages or kids to feed) but we had enough experience to be given real responsibilities. Second, I was lucky enough to have the opportunity to run marketing at Uproar.com in 1996, a startup with significant VC funding. If the company had been started in the USA rather than Hungary, Uproar probably would have opted for a more experienced marketer. And finally I became obsessed with online marketing – I burned the candle at both ends pushing the online marketing envelop. I must have been among the first people to get 10,000 hours of experience with metrics driven online marketing.

This early head start helped us build Uproar into the world’s leading online game company using many pioneering online marketing programs. And my initial success at Uproar has continued to open doors to interesting online marketing opportunities that further enhance my skills.

Unfortunately mastery of online marketing is elusive. Online marketing is a moving target where the most effective tactics become irrelevant every couple of years. But I do believe mastery of the startup go to market process is possible. Look for more details on this in my next post.

December 2, 2008

Y Combinator Hatches Brilliant Entrepreneurs

Y Combinator may be the most important driver of high tech entrepreneurism ever. While smart software engineers have historically dreamed of becoming successful entrepreneurs, insurmountable hurdles often stood in the way. The biggest hurdle was fear: “Am I really good enough to do this?” Getting accepted into the Y Combinator program is enough to push many aspiring entrepreneurs off the fence.

The second major hurdle is execution. Y Combinator entrepreneurs are “hackers,” which is another name for scrappy software engineers. Engineers typically thrive on the challenge of “can it be done?” Before Y Combinator, this challenge spawned many useless companies. Y Combinator refocuses “hackers” on a new target which is closer to “should it be done?” Their mantra “make something people want” helps entrepreneurs create useful stuff that solves real problems.

Unlike overly exclusive VCs, the Y Combinator model is heavy on general guidance and light on cash. This makes it much more scalable – they can afford to make decisions after a 10 minute interview. Sure there will be more failures, but many more brilliant minds will be willing to take a chance on starting a company. In fact Y Combinator founders are among the smartest entrepreneurs I’ve met in 15 years of startup life.

Y Combinator gives these aspiring entrepreneurs the tools and subsistence funding to actually get a product to fruition. This significantly increases the likelihood that they can eventually get the funding necessary to build a company. Some will have the skills to lead this company while others will pass the leadership baton to a more capable CEO. But regardless, they will have executed the most important part of creating shareholder value – and if the company thrives, they will receive enormous financial benefit.

If you missed the Startup2Startup interview with Y Combinator founding partners Paul Graham and Jessica Livingston, I recommend you read my guest post recap on the Startup2Startup blog. There are also plans to post the full video of the interview.

November 19, 2008

Exploratory Project – Best Approach for Both Sides

UPDATE: I no longer offer an exploratory project.

I keep waiting for startup activity to slow down, but it remains strong. Several new VC intros to portfolio companies continue to roll in every week. Still the best new source of interesting startup introductions is from the CEOs of the companies I’ve helped take to market.

Given the breadth of opportunities, I’m very focused on trying to pick winners. Beyond the obvious benefits of more valuable equity, the other rationale is that I’ll get a bit more credit than I deserve for each success – but suffer more blame than I deserve for the failures. Of course if I had the ability to take a company that would have failed and make it a massive success, I’d be asking for a lot more than $40,000 for a six-month go to market project. The reality is that I’m trying to find startups that already have strong potential for success and help them reach even higher levels more quickly and with less burn.

While Series A VC funding is still flowing into startups, everyone recognizes that success is going to be tougher as businesses and consumers cut back their spending. I became so concerned in recent weeks that I began passing on projects I’d have been happy to take only 8 weeks ago.

It’s pretty easy to make a case for why startups will fail, but the winners find a way to succeed anyway. Success is based on a combination of access to financing, market need, exceptional product and marketing execution, tenacity, and let’s face it – luck. All these success factors are impossible to evaluate over a couple of lunches; and a full six-month go to market project is a big commitment on both sides.

So a few weeks ago I decided to start offering a mini starter project I call an Exploratory Project. For a quarter of the cost of a full project and no equity I assess marketing progress to date, conduct some research into target customer needs/product satisfaction and run an all-day executive workshop to draft the startup’s ideal go to market approach. This Exploratory Project gives both parties the opportunity to assess chemistry and determine the potential fit for a full six-month go to market project. If we decide to move forward, the entire Exploratory Project fee is credited toward the cost of the six-month project. And since there is no equity on the Exploratory Project, the contract is much simpler.

I’ll probably go forward on a full six month project with less than half of these exploratory projects. But even if we don’t move forward, startups still receive substantial benefit. In this short assignment I essentially hand over the keys discovered through 11+ years and millions spent marketing successful startups (and help them avoid the many costly mistakes we made along the way). While the six month project offers a more customized plan and guidance with execution, the exploratory project still provides a very actionable plan and defines metrics systems needed for the startup to focus time and resources on the highest impact projects. The ultimate result is stronger momentum with less cash burn – which is well worth the $10,000 investment.

But for those projects we do decide to extend to six months, I’ll be able to offer more focused execution guidance. And because of the selective filtering, I’m confident these startups will be the most successful.

If you are interested in discussing an exploratory project, contact me at sean (at) startup-marketing.com. Please note that the startups I work with have a full time person who’s sole focus is customer development (rookie OK, I can train), at least 1000 users, funding to last 12 months (about $500K for companies with cash flow, $1m for companies with no cash flow) and are still relatively early stage in customer development.

November 12, 2008

Eric Ries on The Four Steps to the Epiphany

I often recommend The Four Steps to the Epiphany as the best book available on taking a new startup to market. However I’ve never captured the essence of the book as well as Eric Reis did in his blog post this weekend. In addition to a great summary, he also relates the book back to his own experiences and provides practical guidance for applying the books lessons. If you don’t have time to read the book, at least read Eric’s post.

Author Archives: Sean Ellis