Growth Hacking is for Smart Marketers – Not Just Startups

Startups live and die by their ability to drive customer acquisition growth.  Of course many startups are doomed to failure and can’t grow because they never reach product/market fit.  But even with product/market fit, traction is tough. Startups are under extreme resource constraints and need to figure out how to break through the noise to let their target customers know they have a superior solution for a critical problem.

Breaking through the noise is very difficult when well-entrenched companies have the resources to dominate traditional channels.  The best a startup can hope for in traditional channels is to siphon off a few early adopters that are always on the look out for the latest emerging solutions.

This resource-constrained desperation is exactly the scenario that Malcolm Gladwell suggests leads underdogs to extreme innovation.

Desperation Leads to Innovation

For meaningful growth, startups must completely change the rules of traditional channels or innovate outside of those growth channels.  They are too desperate and disadvantaged to adapt to the old rules of marketing. They have to dig deep creatively, and relentlessly test new ideas.  If they don’t figure it out quickly, they will go out of business.

Some people would just call this marketing.  I call it growth hacking.  And the best growth hacks take advantage of the unique opportunities available in a connected world where digital experiences can spread rapidly.  Since most growth ideas fail, it becomes critical to test a lot of them.  The faster you can hack together an idea, the sooner you can start testing it for some signs of life.

Growth hackers don’t have time to waste around a white board strategizing marketing plans.  They are desperately testing trying to find something that works.

It was in this face of desperation that I was part of the team that invented the first viral embeddable widget.  We were a lightly funded online game company in the mid 1990s competing against the number one advertiser on the entire Internet – Sony Online Games.  Not only did they spend more money on banners than anyone else, they blanketed their television assets with promotion.  You couldn’t watch Jeopardy or Wheel of Fortune on TV without knowing that they offered the game play experience online for cash prizes.  And those shows had massive audiences.

At Uproar, we tried to spend on banner advertising, but even with obsessive optimization it was clear we would never catch them playing by their rules.   That’s when we decided to widgetize parts of our game play experience and make them free for any website.  We even offered to pay an affiliate bounty to those websites where people started the game and eventually played on our site.  These games spread virally to 40,000 websites.  Within a couple of years we were beating the 800-pound gorilla and had become the worldwide leader in online games (we were acquired by Vivendi Universal in 2001 who quickly killed the viral widget program).

Stories like this have been replicated in every startup that I helped build, from LogMeIn to Dropbox and Lookout.  You can also see similar patterns in the early days of almost any massively successful company to emerge in recent years.

How Traditional Marketers Have Reacted To Growth Hacking

The majority of traditional marketers like to say “that’s exactly what I’ve been doing – that’s just marketing.”  But rarely do I see any of them having a track record of building truly innovative, rule changing programs for driving growth.  Most just don’t have the need or motivation to change the rules or innovate new channels.  Unlike startups, big companies are rarely a magnet for risk takers who like to innovate.

However, some marketers at traditional companies and agencies have looked at the unprecedented growth rates that come out of emerging startups and have said: “Awesome! How can I build an innovative growth team in my organization and achieve similar transformative growth results?”  I don’t know the answer, but I’m certain that it is the right question for any large marketing team or agency.  Large companies have always looked for ways to improve their ability to innovate like startups (recently many have embraced lean startup principles).  I’m not surprised that the smart ones are now looking to replicate the innovative growth discovery approaches of successful startups.

Growth hacking was born out of startups, but it is something that every smart marketer should embrace.

Comments

The Risks of Growth Hacking and How to Build Authentic Sustainable Growth

It has been a couple years since I wrote the first post on growth hacking.  The term didn’t gain much popularity until Andrew Chen wrote this post back in April of this year.

Online Marketing Redefined

Some people love the term “growth hacker” and some hate it. The term is not important. What is important is that people are tuning into the fact that traditional marketing techniques are often not very effective for driving growth in online businesses.

When I first started advising startups on growth a few years ago, most startup founders asked for help with driving awareness.  I wrote this blog post in response: Awareness Building is a Waste of Startup Resources.

Occasionally I’d connect with the in-house marketing person at a startup and see a plan that looked like a template from a Marketing 101 text book.  That’s not surprising since most marketing job descriptions for startups also looked like they came out of a Marketing 101 text book.

Today people are realizing that the best startups have approached growth in a very different way.  There are now over 450 active openings for growth hackers listed on SimplyHired.com alone. Two years ago, most of these job descriptions would have been for traditional marketers. It’s very exciting to see this revolutionary change in the way online startups think about growth.  And it’s not surprising that more established online businesses are beginning to adopt these approaches as well.

Evolving Definition of Growth Hacker

I recommend that people don’t get caught up on the term “growth hacker” or even a specific definition for it.  Focus instead on the concepts behind it. The fastest growing companies on the Internet have a growth focus rather than a marketing focus.  Try to understand how businesses like Facebook, Twitter, Dropbox, Linkedin, Eventbrite and Groupon are driving growth and you’ll begin to understand the meaning of “growth hacker.”

I also recommend that you Google the term “growth hacker” and read the articles. Not everybody agrees on the exact definition, but most of the articles contain gold. The alternative is to read 1000s of pages in marketing text books, which will give you very few insights about how to drive growth in an online business.

Stay Authentic to Value Delivered

The best growth hackers are constantly testing and tweaking new growth hacks.  During this process it is easy to lose sight of the big picture.  When this happens, growth eventually falls off a cliff.

Sustainable growth programs are built on a core understanding of the value of your solution in the minds of your most passionate customers.  Your drive to develop growth hacks should be based on a burning desire to get this “must have” experience into the hands of more and more of the right customers.  Growth hacks built from this frame of mind are the ones that build large sustainable businesses.

Fully grasping your must have experience isn’t easy.  The presentation below is a step-by-step guide for uncovering your must have experience and calibrating your messaging and flows to that experience.  The process should put you in the right frame of mind to build sustainable growth programs.

Update Oct 2013 – If you want inspiration for developing effective growth hacks and would like to engage with other growth hackers, check out our new project at GrowthHackers.com.

Key to Sustaining Rapid Growth

 

After helping to bring several startups to market including Dropbox, LogMeIn and Lookout, I found that the key to sustaining rapid growth is understanding your “must have” experience and then aligning the entire business around that experience. This includes aligning the product roadmap, funnel optimization, and messaging.

Process for Uncovering Your Must Have Experience

With each new startup, I immediately started working to uncover the “must have” experience before I formed preconceptions about how and why a product would be useful.  This involved a rigorous process for identifying the most passionate users and then getting their unstructured feedback about how they were getting value.  With each new cohort of users that I engaged, I began to get more structured feedback to converge on a signal of the “must have” experience.   Once I had a clear signal, I could work with the team to start aligning the business around the “must have” experience.

I also found that it was important to monitor this “must have” experience over time.  Each new product update can change it.  Shifts in the competitive landscape can also affect it. For an experience to be a “must have” it should be both valuable and unique.  The emergence of a new competitor can instantly turn your “must have” experience into a “nice-to-have” experience.

MustHaveScore Makes it Much Easier

Working with the team of engineers at CatchFree, we’ve been able to not only productize the approach but also improve it.  The result is MustHaveScore.com. Our feedback widget requires no customization and intelligently evolves as more users provide feedback.  The user input is simple and requires less than a minute of their time. While the backend data processing is complex, the output is simple and easy to understand. We provide a comparative overview of all use cases that shows the relative popularity and passion around each use case, and then we segment user feedback to give you the context to understand why the use case is a “must have.”

Given my background with freemium, it’s not surprising that we decided to offer the most valuable analysis for free (everything described in the previous paragraph).  Over time we plan to offer additional premium services to help with positioning, targeting and eventually customer acquisition.

This is not a pivot.  MustHaveScore is part of our broader goal of helping people get more value out of innovative technology solutions.  After we help you identify your must have use cases, we want to eventually work with you (optionally) to help expose these use cases to prospective customers.

Not a Replacement for Customer Development

This toolset is really for transitioning to growth and then maintaining a strong growth rate after you have achieved product/market fit.  It is not a replacement for early stage customer development, which is all about “getting out of the building” to reach product/market fit.  In the early days, it is essential to meet face-to-face with existing and prospective customers.  There a couple key reasons why early stage startups must meet face-to-face with existing and prospective customers:

  1. They help you form insights that you could never get through structured, automated feedback.
  2. A startup generally doesn’t have enough users to automate the customer feedback function via surveys.

And even when you do have enough users to automate it, face-to-face interviews should always complement surveys. My best epiphanies that led to big boosts in growth have always followed concentrated face-to-face engagements with customers.

Benefits for Early Users

We’ve been slowly rolling out MustHaveScore over the last couple months and now have about 50 companies on the service. This slow rollout has been mutually beneficial since early companies have gotten hands on help interpreting and acting on the data, and we’ve gotten direct feedback to help us improve the service.

Note: MustHaveScore.com is now in private beta while we focus on our recent acquisition of KISSinsights.

Getting to Product-Market Fit

I’m very excited about this guest post and confident that it will be a huge help for anyone struggling to find Product-Market fit. Enjoy! Sean

Guest Post By Patrick Vlaskovits

Sean asked me to write a guest post to help startups achieve Product-Market Fit since he primarily advises startup after they’ve already reached it (during their transition to high growth businesses). Actually getting to Product-Market Fit is an important topic since the vast majority of startups never get there, making it virtually impossible to drive sustainable growth.

I’ve just completed what amounts to a comprehensive study on the topic of getting to Product-Market Fit with Brant Cooper, culminating in our book called The Entrepreneur’s Guide to Customer Development. The most important insights were gained from successful serial entrepreneur, Steve Blank, who encouraged us to write the book as a primer to the first step of Customer Development. Customer Development is the startup framework he codified in his landmark book, The Four Steps to the Epiphany. If you haven’t read the book (you really should), Steve’s many insights are deep, but the core takeaway is that most startups fail not because they don’t manage to develop and deliver a product to the market; they fail because they develop and deliver a product that no customers want or need.  The ramifications of this deceptively simple observation are manifold and underpin much of what you will read below.   Sean has provided a free survey that should be helpful in validating if you have created a product people want or need.

The Entrepreneur’s Guide to Customer Development also folds in the work of Eric Ries.  Eric has built upon Steve’s work and expanded it with his concept of “The Lean Startup.” A Lean Startup is one that combines fast-release, iterative development methodologies (e.g., Agile) with Customer Development concepts.

Wherever you are in the process of taking your product to market, the following Lean Startup and Customer Development concepts can help you achieve Product-Market Fit.  Nothing else really matters to a startup other than getting to Product-Market Fit as fast as possible.   Below is a brief outline, based on The Entrepreneur’s Guide to Customer Development, which will hopefully help you do just that.

Identify and document your assumptions

The sooner you understand and accept that you, as a entrepreneur at somewhere pre-Product Market Fit with your startup, are operating in near-chaos, where all your assumptions/hypotheses about how you gratify your users, who they are, how you will acquire and monetize them – are simply that, untested assumptions, the better off you are.

With your assumptions documented and in-hand you will:

“Get out of the Building” to validate (or invalidate) your assumptions

You must find, meet and speak with prospective customers about your product and ascertain the validity of your assumptions. This is the crux of Customer Development.  Only by speaking to these people will you have any sort of understanding about “their reality” as Dan Martell likes to put it.  What problems do they face?  How do they solve them?  What matters to them?  What is a must-have for them?

As you speak to potential customers, you should:

Identify the risk factors in the opportunity

Are you facing significant technology risks?  Or more of market risk?  How can you test and validate these (starting with the most risky)?  What market testable milestones can you build that would result in sufficient evidence to induce you to pivot or move forward? A proof of concept? A letter of intent?  A prototype?

As your understanding of the market betters, the risks will begin to crystallize, if certain risk factors prove insurmountable, you must:

Pivot but not jump

By changing an element of your customer-problem-solution hypotheses or business model, based on actual learning from a customer. As Eric Ries writes “by testing, each failed hypothesis leads to a new pivot, where we change just one element of the business plan (customer segment, feature set, positioning) – but don’t abandon everything we’ve learned.

The way to test and learn from your market is to build an:

MVP (Minimal Viable Product)

Don’t forget that an MVP is a product with the fewest set of features needed to achieve a specific objective and that you should require a trade of some scarce resource (time, money, attention) for the use of the product, such that the transaction demonstrates the product might be “viable”.

For non-paying milestones, you must define the currency (the scarce resource) and your objective (what you are trying to learn). For example, intermediate MVPs might include: landing page click-through that prove there’s some amount of interest in a product; a time commitment for an in-person meeting to view a demo that shows the customer’s problem being resolved; or a resource commitment for a pilot program to test how the product fits into a particular environment.

Once you have users using your MVP, listen for and tune into the:

Must-have signal

that demonstrates the core product functionality that your customers absolutely must have, while testing your assumptions and learning the characteristics of your market segment that will allow you to reach out and acquire them efficiently.  Sean’s survey, mentioned earlier, can be useful in finding your must have signal.

Once you successfully developed a minimal viable product and have found the must have signal, it is time to:

Double-down and strip away the unnecessary

Now you know what your customers want, you need to focus with laser-like intensity in building a gratification engine that does not disappoint.

If you can do all of the above successfully and throw in a hearty amount of luck for good measure, there is a good chance you can get to Product-Market Fit.  It may take a significant amount of time and persistence, but potential customers always hold the answer to creating a must have product.

A Lean Start is Smart

Lean Vs Fat Startups
When I read Ben Horowitz’s article “The Case For The Fat Startup” http://bhorowitz.com/2010/03/17/the-case-for-the-fat-startup/ I expected to be in violent disagreement with most of it.  However, I was surprised to find myself mostly nodding in agreement.  Many of the moves he describes that led to the survival and success of Opsware/Loudcloud were similar to the ones I advocated as an executive in a post dotcom bubble public company (Uproar.com).  Cutting was important, but it was even more important to protect and build on the value that we had created.
So how can I find myself agreeing with Horowitz, when he seems to be such a vocal critic of Lean Startups?
Well first, he’s not against running leanly.   He simply suggests that lean shouldn’t be the end goal.  Instead, he claims startups should be focused on survival and market leadership – both of which benefit from more money.  However, his examples mostly center on companies that have significant traction.  Take Facebook, which he touts as a “fat startup” because they have raised over $700m.  The fact is that they didn’t start out fat; in their first year they only raised $500,000.
This mirrors my experience at multiple successful startups.   Most maintained a very low burn in the first year, investing funds carefully to create a valuable product.  Only after early users validated that it was a must-have product, did we start loosening the purse strings.  Speed of execution to fully capture the opportunity became the primary objective.  At this point, most of the companies were able to successfully attract additional financing (often very large rounds).
Perhaps the most important realization that I’ve made as a result of this debate is that: Lean Startup principles are most critical in the early stages of a startup before product/market fit.  If you have not created a “must-have product” your ability to attract future rounds of financing will be limited if not impossible.  Your best chance of survival is to create a must-have product on your first round of financing – with the overwhelming majority of funding going into R&D.  Once you have created a must-have product, it will be much easier to raise enough money to capture and lead the market.
Of course, this could be an argument for a big first round of financing.  I rarely advocate raising a small round if you can raise a big one.  But it’s important to recognize that the best VCs invest small before traction and big after traction.  They realize that overinvesting up front rarely improves a startup’s ability to create a must-have product.  If you are fortunate enough to raise a substantial round up front, you’ll need discipline not to spend in areas that aren’t essential to creating a must-have product.  If you have the right discipline, your only important risk of raising a big early round is limiting the potential for lucrative small early exits.  But more likely you won’t be able to raise a substantial round until you have created a must-have product.  Once you can prove an ability to scale cost-effective growth for this must-have product, smart VCs will be knocking down your door to invest as much as you can realistically absorb – and often more.

When I read Ben Horowitz’s article “The Case For The Fat Startup” I expected to be in violent disagreement with most of it.  So I was surprised to find myself mostly nodding in agreement.  Many of the moves he describes that led to the survival and success of Opsware/Loudcloud were similar to the ones I advocated as an executive in a post dotcom bubble public company (Uproar.com).  Cutting was important, but it was even more important to protect and build on the value that we had created.

So how can I find myself agreeing with Horowitz, when he seems to be such a vocal critic of Lean Startups?

Well first, he’s not against running leanly.   He simply suggests that lean shouldn’t be the end goal.  Instead, he recommends startups should be focused on survival and market leadership – both of which benefit from more money.  However, his examples mostly center on companies that have significant traction.  Take Facebook, which he touts as a “fat startup” because they have raised over $700m.  The fact is that they didn’t start out fat; in their first year they only raised $500,000.

This mirrors my experience at multiple successful startups.   Most maintained a very low burn in the first year, investing funds carefully to create a valuable product.  Only after early users validated that it was a must-have product, did we start loosening the purse strings.  Speed of execution to fully capture the opportunity became the primary objective.  At this point, most of the companies were able to successfully attract additional financing (often very large rounds).

Perhaps the most important realization that I’ve made as a result of this debate is that: Lean Startup principles are most critical in the early stages of a startup before product/market fit.  If you have not created a “must-have product” your ability to attract future rounds of financing will be limited if not impossible.  Your best chance of survival is to create a must-have product on your first round of financing – with the overwhelming majority of funding going into R&D.  Once you have created a must-have product, it will be much easier to raise enough money to capture and lead the market.

Of course, this could be an argument for a big first round of financing.  I rarely advocate raising a small round if you can raise a big one.  But it’s important to recognize that the best VCs invest small before traction and big after traction.  They realize that overinvesting up front rarely improves a startup’s ability to create a must-have product.  If you are fortunate enough to raise a substantial round up front, you’ll need discipline not to spend in areas that aren’t essential to creating a must-have product.  If you have the right discipline, your only important risk of raising a big early round is limiting the potential for lucrative small early exits.  But more likely you won’t be able to raise a substantial round until you have created a must-have product.  Once you can prove an ability to scale cost-effective growth for this must-have product, smart VCs will be knocking down your door to invest as much as you can realistically absorb – and often more.

Note: Eric Ries clears up some of the common mis-perceptions about lean startups in this post.

Milestones to Startup Success

Update added to end of post

When your startup accepts outside money (such as venture capital), you are obligated to focus on maximizing long-term shareholder value.  For most startups this is directly based on your ability to grow (customers, revenue and eventually profit).  Most entrepreneurs understand the importance of growth; the common mistake is trying to force growth prematurely.  This is frustrating, expensive and unsustainable – killing many startups with otherwise strong potential.

Most successful entrepreneurs have a good balance of execution intuition and luck.  This was definitely the case at the two startups where I ran marketing from launch through NASDAQ IPO filings.  While we didn’t follow a specific methodology, our CEO was intuitive enough to know the right time to “hit the gas pedal.”  We didn’t accelerate until verifying that the team had created a great product that met real customer needs and we could generate sufficient user revenue to support sustainable customer acquisition programs.  It’s taken years for me to realize that our growth was less a function of clever marketing tactics than beginning with something that customers truly needed.  Some growth would have been automatic; the marketing team simply accelerated this growth.

Several startups later I have a much better understanding of the key milestones needed for a startup to reach its full growth potential.  These are based more on observing universal truths than inventing some type of methodology.  Reaching the full growth potential of your startup requires focus, specifically focusing on what matters when it matters.  In my post on the startup growth pyramid I talk about the high level milestones you must achieve in order to unlock sustainable growth.  This post looks at it on a more granular level with links to several of my previous blog posts and other resources that provide additional details.

Day 1: Validate Need for Minimum Viable Product (MVP)

Before any coding begins it is important to validate that the problem/need you are trying to solve actually exists, is worth solving, and the proposed minimum feature set solves it.  This can best be achieved by meeting with the prospects most likely to need your solution.  Steve Blank published a great post on this today.

Eric Ries offers more details on the minimum viable product concept in this post/video.

Where’s the Love?

Vinod Khosla, one of the most successful Silicon Valley VCs in history, once suggested to me that startups should think of their early users as a flock of sheep.  He explained “the flock always finds the best grass.”

For you this means you should start looking for a signal about who loves your product and why as soon as you release your MVP.  Most products have at least a few people that truly consider it a must have.  These people hold the keys to the kingdom.  Learn everything you can about them including their specific use cases and demographic characteristics.  Try to get more of these types of people.

A good place to start collecting this information is the survey I’ve made freely available on Survey.io (a KISSmetrics product).    You can read more about this product/market fit survey in this blog post.

If you’re lucky you’ll be able to use this early signal to find the product/market fit.

Expose the Core Gratifying Experience

The majority of our project focus at 12in6 recently has been helping startups find their core user perceived value and exposing it in messaging optimized for response.  Your objective should be to remove complexity from the initial user experience and messaging in order to highlight this core user perceived value.  Often this means burying or even completely eliminating features that don’t relate to this gratifying experience.

Metrics

Metrics don’t matter until you achieve product/market fit – then they are critical to your success.  Dave McClure has a great video on startup metrics that matter (relevant part is at about minute 2:20).

Most of the tools out there provide way too many irrelevant metrics and miss the essential few.  Both Dave McClure and I are advising KISSmetrics on a solution to this problem.

Start Charging

Another key step before growing your business is to implement a business model.  The ideal timing for implementing your business model is discussed in this blog post .

I’ve often heard the argument that startups are focused on user growth and prefer to delay revenue in the short term.  I believe the fastest way to grow is with a business model and explain why in this blog post.

Extreme Customer Support

Now that you have a business model in place, your first marketing expense should be to expand the customer support team.  Anyone that cares enough about your solution to contact customer support is a great source of insight about your target market.  Also, customer support will uncover issues that will help you grow faster without spending.  And fixing these issues will make it much easier to grow when you do start spending.

If your customer support team is overwhelmed now, I don’t recommend trying to grow until you address the issues driving most support calls. Once you’ve addressed these issues you’ll have fewer barriers to adoption and will be able to grow without overwhelming customer support.

This will enable customer support to go above and beyond expectations, which is an important way to drive customer loyalty and enhance word of mouth.  This approach pays more dividends today than ever before – as I explain in this post on Social Media.

Update: See comments for additional thoughts on extreme customer support.

Brand Experience Over Brand Awareness

Back in the “Dotcom Bubble” days billions were wasted on brand awareness campaigns for startups.  Today most entrepreneurs understand that brand awareness campaigns are a waste of money for startups.

Instead, it’s much cheaper and more effective for startups to focus on creating a fantastic brand experience.  While startups often realize the importance of brand experience, they focus on it too early, fine tuning things that customers don’t care about.  Instead, wait until you understand why certain customers love your product; then obsess over every element of this customer experience.

Apple is probably the best tech company out there on coordinating a perfect brand experience for its target users. I cover more on brand experience in this blog post.

Driving Growth

Once you’ve achieved all of the previous milestones, then you can focus on driving growth.  CEOs must take an active role in driving customer growth whether or not they have an interest in marketing. Nearly all of the risk and upside in a startup is in your ability to gain customer traction and then drive scalable customer growth. The CEO should not abdicate this responsibility to the marketer.

It’s important to stay aggressive and take all slack out of the market (make it completely uninteresting to pursue the market for any other competitor).  Your early advantage is the ability to iterate on the customer feedback loop and leverage strong customer loyalty to drive word of mouth.

While ROI lets you know if a user acquisition channel is sustainable, the key focus should be on exposing lots of the right people to your fantastic product experience.  It’s much easier to get passionate and creative about this than purely thinking about things from an ROI perspective. Of course positive ROI is essential for any customer acquisition program to remain in the mix.

When it’s time to hire a marketing leader to partner with the CEO, this post explains my recommendations for an ideal startup marketing leader.  The most effective startup marketers are relentless about experimenting with channels until finding things that work.

Start by building out free channels such as listing in directories and basic SEO.   When you begin building paid channels, extra effort should be put into channels that show strong potential for scale.

Unfortunately you can’t count on effective online tactics working forever.  I’ve seen many hot online marketing tactics lose their effectiveness over time.  This is because 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 online tactics get saturated, as explained in this post.

Business building

Fast growing businesses are difficult to manage.  This is the point where you should bring in some experienced operations people if they aren’t already on the team.

It Won’t be Easy

Finally, the top three risks to growing via these milestones are:

  1. You lose patience and decide that one or more of the milestones really aren’t that important.
  2. VCs and/or board of directors lose patience because you did not achieve conceptual agreement on this approach from beginning.
  3. You delude yourself into believing that for “our type of business” customers really don’t need to consider our product a “must have”.  For us, “nice to have” is good enough.

Building a successful business is hard.  Hopefully this milestone driven approach to growing your startup will make it a bit easier.

Update: It’s hard to write a blog post on “milestones to startup success” that covers every type of startup.  Some startup types may need to reverse the order of some of these milestones.  For example, with marketplaces (EBay, social networks, eduFire, dating sites, etc.) user gratification increases with more users so there is a bit of chicken and egg here…  Ad supported sites also benefit from early scale. Many of the articles linked to from this blog post also cover exceptions such as when a startup should start charging (it’s different for enterprise targeted startups).

When Should a Startup Start Charging?

I’ve recently changed my long held belief that all startups should charge immediately upon the release of a new product.  I now believe that non-enterprise targeted startups should only charge once you have achieved product/market fit.  As explained in this earlier post, I define product/market fit as at least 40% of your active users saying they would be “very disappointed” if they could no longer use your product.

The evolution in my thinking to charge only after product/market fit is based on finally working with some “normal startups.”  The first five startups I helped take to market all amazingly achieved product/market on the initial release.  For these startups it was right to encourage a quick implementation of the business model.  However, for startups that haven’t yet found product/market fit, a business model can hinder the process of figuring out how to deliver value.  Users are forced to quickly decide if the product is worth the financial investment (and we already know it’s probably not since most wouldn’t be “very disappointed” without the product – when free).

It is safest to assume you won’t have product/market fit right out of the gate.  If your initial release hits (think winning the lottery), then you can quickly implement your business model as you transition to a growth company.

If however, you are like most startups, you will spend an undefined period of time engaging users and evolving your product to better meet their needs.  When surveys tell you that you’ve reached product/market fit, the final validation is charging for your product (or a version of it).

It’s Different for Enterprise Targeted Startups

For startups targeting enterprises, it actually does make sense to charge before reaching product/market fit.  This is the best way to help the enterprise figure out how to get value from your product (somebody on the inside will be motivated to work with you to unlock value since they’ve already spent the budget).  If you haven’t charged anything, your attempts to engage the customer and find value are likely to be perceived as an aggressive sales annoyance rather than genuinely helpful.

Growing Your Startup with a Business Model

Startups often delay implementing a business model claiming “we’re focused on growth right now.” But once you’ve achieved product/market fit, most startups will grow faster with a business model (I wrote a post on this earlier).  A business model gives you rational constraints within which you can execute very aggressively – otherwise you are held back by fear that you may be wasting money on paid marketing programs.

Without a business model, you don’t know if your business is real.  Of course some prefer to hope that a business model implemented in the future might work rather than know that one implemented today doesn’t work.  If you are truly offering value (have achieved product/market fit), then there is a business model that will work.  The only way to find it is to start experimenting.

Great Resources for Achieving Product/Market Fit

A few people have asked for more guidance on getting to product/market fit.  I updated my previous blog post with another quote from Marc Andreesen, but recommend that you read his full full post via archive.org (it has been removed from his blog).

Here is the quote that I added to my previous post:

“When you are BPMF (before product/market fit), focus obsessively on getting to product/market fit.

Do whatever is required to get to product/market fit. Including changing out people, rewriting your product, moving into a different market, telling customers no when you don’t want to, telling customers yes when you don’t want to, raising that fourth round of highly dilutive venture capital — whatever is required.”

Andrew Chen also has an excellent post on the same subject.

The Startup Pyramid

Every six months I rethink the optimal startup go to market approach based on new insights gained at recent startups. Lately I’ve been using a pyramid to represent the process I’m using. Startups require a solid foundation of product/market fit before progressing up the pyramid and scaling the business.

 

Achieving Product/Market Fit

Product/market fit has always been a fairly abstract concept making it difficult to know when you have actually achieved it. Yet many entrepreneurs have highlighted the importance of creating a product that resonates with the target market:

  • Paul Graham: The mantra at Paul’s successful startup incubator YCombinator is “make things people want.”
  • Steve Blank: In Steve’s book Four Steps to the Epiphany he writes: “Customer Validation proves that you have found a set of customers and a market who react positively to the product: By relieving those customers of some of their money.”
  • Marc Andreesen: A couple years ago Marc wrote the following on his blog: “…the life of any startup can be divided into two parts – before product/market fit and after product/market fit.”  He goes on to write: “When you are BPMF, focus obsessively on getting to product/market fit.  Do whatever is required to get to product/market fit. Including changing out people, rewriting your product, moving into a different market, telling customers no when you don’t want to, telling customers yes when you don’t want to, raising that fourth round of highly dilutive venture capital — whatever is required.”

I’ve tried to make the concept less abstract by offering a specific metric for determining product/market fit. I ask existing users of a product how they would feel if they could no longer use the product. In my experience, achieving product/market fit requires at least 40% of users saying they would be “very disappointed” without your product. Admittedly this threshold is a bit arbitrary, but I defined it after comparing results across nearly 100 startups. Those that struggle for traction are always under 40%, while most that gain strong traction exceed 40%. Of course progressing beyond “early traction” requires that these users represent a large enough target market to build an interesting business.

You should measure your product/market fit as soon as possible because it will significantly impact how you operate your startup. If you haven’t reached product/market fit yet it is critical to keep your burn low and focus all resources on improving the percentage of users that say they would be very disappointed without your product. Avoid bringing in VPs of Marketing and Sales to try to solve the problem. They will only add to your burn and likely won’t be any better than you at solving the problem. Instead, you (the founders) should engage existing and target users to learn how to make your product a “must have.” Sometimes it is as simple as highlighting a more compelling attribute of your product – but often it requires significant product revisions or possibly even hitting the restart button on your vision.  For more on getting to product/market fit, I recommend reading Marc Andreesen’s full post via archive.org (it has been removed from his blog).

Race up the Pyramid

Once you have achieved product/market fit, it’s time to accelerate through the next steps of the pyramid and then begin scaling your business. Here’s a brief description of what to do at each of the steps before scaling:

  • Promise: Highlight the benefits described by your “must have” users (those that say they would be very disappointed without your product).
  • Economics: Implement the business model that allows you to profitably acquire the most users.
  • Optimize: Streamline a repeatable, scalable customer acquisition process by testing multiple approaches and tracking to improve the right metrics.

Effectively executing these pre-scale steps often improves the conversion rate to transactions by 5X or more. This directly boosts the effectiveness of every future marketing initiative by the same proportion. Just don’t rush into this fine-tuning phase until you have first achieved product/market fit.

I recommend reading this post on Milestones to Startup Success for additional details.

Don’t Hire a Marketer before Product/Market Fit

This must seem like heresy coming from a guy who had the title VP Marketing for 10 years and writes a blog called Startup-Marketing.com. But the fact is marketing is not appropriate for startups in the initial stages of customer development.

A newer model is emerging originally sparked by Steve Blank, author of Four Steps to the Epiphany and teacher of customer development at both Berkley’s Haas business school and at Stanford University’s graduate school of engineering. I consider Steve Blank to be the world’s foremost expert on customer development. Through his experience as CEO, Founder or VP Marketing at 8 startups (5 of which resulted in $100m+ exits – the last was E.piphany) and advisor/board member to numerous other startups, he has concluded that the ideal model is very different from the traditional startup approach of abdicating customer development to a VP of Marketing. I completely agree with his claim that none of the traditional VP Marketing skills are relevant in the first two customer development steps of a startup’s life (page 215 Four Steps to the Epiphany).

Given the high VP Marketing turnover rate at startups and more importantly the extremely high failure rate of startups, his model is definitely worth considering vs. the traditional startup marketing approach. His recommendation is to form a customer development team led by a “head of customer development.” The team should include the CEO and spend a considerable amount of time in the field with prospective customers validating/refining hypotheses about their target customers and the problems they are solving. He says this team “must have the authority to radically change the company’s direction, product or mission and the creative, flexible mindset of an entrepreneur.”

After five years in the VP Marketing role at LogMeIn, I too recognized that the initial stages of customer development are very different from marketing in the later stages of a startup or especially a large established company. In fact, I concluded that much of my success as a later stage VP Marketing (both companies filed for IPOs) was the result of momentum we had built in the early stages of customer development. I decided that going forward I would specialize in early stage customer development.

I was first introduced to Four Steps to the Epiphany when I was Interim VP Marketing at Xobni during the first half of 2008. I had been looking for resources to help me understand how to drive adoption of this innovative market-creating product (a very different challenge than we had at LogMeIn which disrupted an existing market). The book provided a great framework to follow as we worked to drive early customer adoption. Since then I have helped to accelerate market adoption at two additional startups, while continuing to advise at Xobni.

Given my obsession with startup customer development, I was thrilled for the opportunity to meet with Steve Blank for coffee earlier this week and was flattered when he invited me to present to his class at Haas on March 10th. We agreed that my approach really begins at his Customer Validation step.

There are two key twists I’ve made to his framework. The first is that I drive the entire process with metrics. In fact I’m working closely with KISSmetrics (where I am an advisor) to define all the tools and reports needed to build a complete Customer Development Platform.

The second twist is that I add a customer development specialist when the Validation Step begins, which is the role I fill with startups. I belive eventually many people will specialize in this critical stage.  Without a specialist, startups waste critical time and resources deciding where to execute. It’s surprising how similiar the process of uncovering the critical information needed to drive customer adoption across different types of startups.

One place where my views diverge a bit from Steve Blank’s is that he suggests that a good candidate for the Head of Customer Development is someone with a product management or product marketing background. The key issue I see here is that experienced product marketers suffer from the “curse of knowledge.” They know enough about product marketing to want to focus efforts on areas that are usually irrelevant to startups. Having the discipline to follow the right process at this stage is much more important than experience. The good news is that I’ve found ambitious, analytical recent college graduates to be ideal candidates. They are easy to find and their salary and equity requirements are also much lower than a VP Marketing – freeing up resources to bring in a customer development specialist. This combination accomplishes more results faster than an experienced product marketer by themself, and generally costs the startup less cash and equity. Of course if you already have an experienced marketer I wouldn’t advocate replacing them.  This guidance is really directed at startups that are trying to hire an experienced marketer – and a warning that you will be paying a premium for skills that aren’t critical at this point.

Once the startup has discovered how to drive customer adoption and begins building momentum, it should be easier to attract the long-term VP Marketing (or promote the head of customer development).