July 27, 2009

The Startup Pyramid

Here is a link to an updated version of this post

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.

June 18, 2009

Big Picture Customer Development Revisited

Working with four startups at the same time has steepened my customer development learning curve (and also explains why it has been a month since my last update).   To help balance the load, I’ve brought on a conversion designer and a researcher; we’re finally firing on all cylinders. 

Our customer development goal with every startup essentially boils down to a race to be able to focus on growing the business.  But in order to avoid wasting effort and money on tactical growth drivers, the following steps need to be completed first:

  • Validate the product/service is gratifying a reasonable percentage of users.
  • Create a value proposition that will attract the right type of users and pull them through the conversion funnel to gratification (and ultimately a transaction). 
  • Eliminate friction from the conversion funnel. 
  • Fine tune a business model that supports scalable customer acquisition channels. 

If these steps have been executed well it is relatively easy to grow a sustainable business.  But many startups skip these steps and jump right into trying to grow the business – making their job much harder or even impossible.  Some will get lucky, but most will fail.  

Given the importance of getting customer development right, I’m certain that eventually most startups will contract a specialist to help them navigate the challenges of this pre-scale phase.  I’m often asked how I plan to expand 12in6 to help more startups.  Most people are surprised when I tell them I don’t have a desire to expand the business.  I really enjoy being able to work hands on with two new startups per quarter.  If I built a large team to fill the current void of specialists, I’d be too busy managing the team.  This would mean less time learning how to improve my customer development approach. 

As I explained in my last post, I’m now validating that a startup’s product is gratifying users before I commit to working with them.  While I love to hear from as many funded startups as possible, I can barely scratch the surface of the number of startups that need help.  If I don’t have the capacity to help you, here are a few others that specialize in customer development:  (I haven’t dug into their approach enough to be able to endorse them, but I encourage you to check them out)

If you are specializing in customer development or know someone else that you can recommend, please add names/recommendations in the comments. The main things to consider when evaluating a specialist is their track record building successful companies.  And be sure to check references (especially around chemistry with the team).

I have been sharing discoveries on Twitter (follow me @ http://twitter.com/seanellis) and hopefully  I’ll resume regular blog posts next week (after I get back from a short vacation in Hawaii).

May 18, 2009

Free Customer Development Help – Survey.io

I’m excited to announce a project that I’ve been working on with KISSmetrics called Survey.io, which provides startups with a free and easy way to prepare, distribute and analyze an initial customer development survey. It includes the content of the survey I use to verify that a startup is ready for 12in6 to work with them.

I recommend sending the survey to a random sample of people who have:

  • Experienced the core of your product offering
  • Used your product at least twice
  • Used your product in the last two weeks

Determine if you are ready to scale

For startups, this survey is an ideal way for you to determine if you should begin the final preparations before aggressively scaling customer acquisition.    The most important question for determining how well your product is resonating with early users is question 2:

How would you feel if you could no longer use [product]?

  1. Very disappointed
  2. Somewhat disappointed
  3. Not disappointed (it isn’t really that useful)
  4. N/A – I no longer use [product]

If most of your respondents are saying that they would only be “somewhat disappointed” without your product, they are really telling you that it is only a “nice to have”.  When asking users why they selected this answer, I often find that they are focused on commodity aspects of the product and they know of a replacement product.  It’s very difficult to build a business around a “nice to have” product, so you should keep your burn low while you iterate your core experience to make it a “must have”.

If however, you find that over 40% of your users are saying that they would be “very disappointed” without your product, there is a great chance you can build a successful business on this “must have” product.  This is the time to reallocate some development resources to optimizing your funnel and messaging as described in this blog post on the Startup Pyramid.

Survey.io to develop value proposition

The survey also provides some useful early feedback for verifying use cases, developing your value proposition and positioning against the most common alternative solutions.  This feedback is directionally useful, but I recommend significantly more research (via customer surveys and interviews) before finalizing your value proposition and positioning.

I strongly encourage you to setup and run your own customer development survey via Survey.io.  It only takes a few minutes and it free.  Here’s the link again.

May 12, 2009

What is the Lean Startup Approach?

It took a recession for entrepreneurs to finally start launching startups the right way. But in my experience, a lean startup approach is ideal in any economy.

The two key pillars of the lean startup are customer development and agile product development. Both involve a systematic process of learning through feedback and driving improvement through metrics driven testing. Contrast this to the traditional startup approach of bloated budgets supporting large marketing and development initiatives based purely on intuition.

While I have been working hard to evolve and promote metrics driven customer development, Eric Ries has evangelized the complete lean startup approach. And he has included practical execution guidance (often to the annoyance of more guarded practitioners of agile development).

All startup founders and engineers should find the time to attend Eric’s workshop – if you can get in. You won’t be disappointed.

May 4, 2009

Keys to Unlocking Startup Growth

When a startup takes VC funds, they usually accept the premise that they need to “get big fast”.  VCs don’t fund lifestyle businesses.

Unfortunately desire for growth causes many startups to make poor choices.  There are generally two opposite mindsets that lead to the same mistakes:

  1. Overconfidence: “We have lots of money, so let’s move fast (no need to be cautious).”
  2. Panic: “We are running out of money, so let’s move fast (get traction before we run out).”

For an entrepreneur focused on growth, it seems natural that they should “get the word out” about their new innovative solution. Thus many startups quickly launch awareness building initiatives ranging from advertisements in a tech magazine to exhibiting at tradeshows.   Generally this is a complete waste of money.

While experienced marketers recognize the need for some positioning work upfront, they still generally lack a broader understanding of where to focus resources and in which order. 

The first time I saw an effective go to market roadmap was when I read Steve Blank’s Four Steps to the Epiphany.  His roadmap consists of the following four steps:

  1. Customer discovery
  2. Customer validation
  3. Customer creation
  4. Scale company

He warns that a company should not kick into growth mode until reaching the fourth step.  By this point they have figured out a sustainable and scalable process for acquiring and monetizing customers.  If you haven’t read the book, I highly recommend it.  For a more detailed overview of the book see this post from Eric Ries.

The approach I’ve used to attract 10s of millions of users to startups is similar, but allows growth a little earlier (click graphic below for full size).  

unlocking-growth
 
Within a few weeks of initiating the understand phase, we generally have enough user insight to baseline allowable acquisition costs of a new user and begin iterating.  It can be tempting to start building all customer acquisition channels that fall within this allowable acquisition cost, but finding and managing these channels takes too much time to already be a priority.  Instead, we just want to generate enough new user volume to iterate landing pages and sign up flows.  These iterations can increase the allowable acquisition cost by more than 10X in only a few months. 

At the completion of the iteration phase we can put all of our energy into building profitable customer acquisition channels.  With a much higher allowable acquisition cost, the process of building profitable channels is relatively easy (and even fun).  I recommend starting with free channels first and ultimately spending up to your allowable acquisition cost.  This recent post gives more details on building these channels.

May 1, 2009

The Lean Startup Era?

Steve Blank and Eric Ries presented their lean startup approach to a very receptive crowd at last night’s Startup2Startup dinner in Palo Alto.   Here’s a link to the must watch video.

Highlight’s of of the presentation include:

  • Startups fail from lack of customer – not product failures
  • Fail fast and often on the path to success
  • Decide on a business model early
  • The correct customer development approach changes by market type

Following the presentation each table discussed the topics over dinner.  I was pleasantly surprised that  the entrepreneurs at my table had all implimented some form of customer development and agile development.

April 30, 2009

Fast Vs Careful Decision Making in Startups

Reversible or Irreversible Decision?

Fast decision making is often the mark of a great entrepreneur.  But as Steve Blank points out in a recent blog post: decisions have two states: “those that are reversible and those that are irreversible.”  Entrepreneurs should take the time to make careful decisions when they are irreversible (such as accepting money from a VC).  For reversible decisions, he recommends starting “a policy of making reversible decisions … before a meeting ends. In a startup it doesn’t matter if you’re 100% right 100% of the time. What matters is having forward momentum and a tight fact-based feedback loop (i.e. Customer Development) to help you quickly recognize and reverse any incorrect decisions.” 

This is awesome guidance considering the countless hours I saw wasted at my first startup where people debated decisions that had little impact on results.  On my marketing team I quickly ended these debates with “test it.”  When debates extended across departments I abdicated the decision to others but measured the results to make sure they weren’t negatively affected.

Higher Velocity Testing Better than Perfect Certainty

At LogMeIn (my second startup) the goal was to start a testing and analytics culture on the marketing team right from the beginning.  Rather than hiring someone with a traditional marketing background, my first marketing hire had an actuarial background (the people that assess insurance risk).  Next we hired a super fast web designer/developer and an equally fast copywriter.  This team was able to rapidly iterate everything to determine combinations that generated optimal conversions. 

One warning before hiring a math wizard to lead your analytics is that they will often want sample sizes that almost completely eliminate doubt that you are making the right decision.  With the volume of users at most startups, this would limit you to very few tests.  When I suggest the following mental exercise to a mathematician, they usually come around to high velocity testing with lower certainty.   I suggest that they try modeling the results of 25 tests with 80% certainty compared to 5 tests with 95% certainty.  I also explain that we can always go back and test it again when we have higher volume.

Understanding User Motivations

But some decisions are a lot harder to test and require more up front traditional research.  For example, when trying to understand the motivations behind users’ actions (or lack of actions) I generally interview and/or survey them. But as Robert Cialdini points out in his latest book: “We know that people’s ability to understand the factors that affect their behavior is surprisingly poor.”  So in the past, this research often confused rather than enlightened me. 

It wasn’t until I read Four Steps to the Epiphany that I realized you could take a more scientific approach to understanding user motivations.  Steve Blank recommends starting with hypotheses around the key factors that will be important for building your business – such as the real problem you are solving and the people who are most motivated to solve this problem.  By engaging prospective and actual users you can validate and/or refine these hypotheses.  Unlike the previous approach to surveying, we now gain clarity with more user input. 

Still I know there is a lot of room for improvement in my scientific approach to understanding user needs and motivations, so I recently brought on someone to help me take my research and analytics to the next level.  He is Molecular Biologist as well as an entrepreneur who earlier in his career spent 10 years in biotech research.  It should be interesting to see what happens when he applies his rigorous research approach to customer development.  He’ll be joining me for my two projects that start next month.

At early stage web startups we have the distinct advantage over established companies of starting with a blank slate, making it possible to set up much more controlled experiments.  In addition to making better use of tight startup time and money, we also hope to leverage the blank slate to challenge some long held marketing beliefs regarding what really works.

April 20, 2009

To Pay Or Not To Pay To Acquire Users?

I recently heard a VC say that startups “should spend the least amount of money possible on marketing.”  This is a healthier attitude than the opposite prescription of undisciplined land grab, but a better approach is pure ROI marketing.  Marketing opportunities that offer a fast payback with additional profit margin are a key component for reaching your startup’s full market potential.

Work from Free to Paid Drivers

Ultimately my goal with any startup is to acquire the highest number of qualified users possible – at a positive return on investment.  But it often takes several months after “launching” to transition to aggressive scaling. 

I like to start with free customer acquisition channels since they obviously offer the best opportunity to generate a positive ROI. Free drivers may include viral marketing, self-implemented SEO and listing with any directories that are appropriate for your product.  Leveraging this early user flow we optimize the first user experience for the right target users and introduce a business model that generates sufficient revenue to fund future paid user acquisition.  When we start developing paid channels, we work our way through the lowest hanging fruit first, beginning with demand harvesting channels, later adding demand creation channels. 

Kill the Opportunity for the Competition

If your growth is accelerating, you will attract competition.  And this competition will likely be savvy enough to replicate the customer acquisition and monetization approaches that you worked hard to invent.  So it is important to make it as difficult as possible for them to get traction.  I know some of you are saying “but your recent post told us to ignore the competition.”  My point was not to ignore the competition forever, simply to ignore them while you are figuring out a repeatable, positive ROI way to acquire customers. Competition (especially those that are spending irrationally) will distract you from this critical task.

But once you have optimized the first user experience and introduced a business model that generates sufficient revenue to fund user acquisition, it’s time to focus your marketing efforts to aggressively build new customer acquisition channels and scaling existing channels – both free and paid.

April 14, 2009

Indifference is Your Real Competitor

Your Competitors are Clueless (initially)

If you are creating a new market (as is often the case for tech startups) your best chance of success is taking the time to figure out how to become relevant to the right people.   Most startups spend way too much time obsessing over their clueless competition. If the competition is going for a land grab, they feel compelled to do the same.  The likely result is mutually assured destruction. 

Take the Time to Understand Early Users

It’s OK to passively monitor your competition (in case they figure something out), but spend the majority of your time getting to know your early users.   They hold all the answers for reaching your full market potential.  If you don’t have any users, get some.  Acquiring several hundred users is relatively easy for a funded company.  Don’t worry too much about the acquisition cost on these initial users (but don’t go too crazy either). 

Once you have around 1000 users, shift all your energy to engaging/understanding them.  Who is most/least satisfied with your product and why?  What is the primary benefit they are getting from your product?  Why did they decide to try your product?  Did they have a problem that they thought you might be able to solve?  Or are they early adopters that often try interesting new software even if it isn’t likely to have a real practical application?

Context Creates Relevance

The key to effectively scaling customer acquisition is applying this understanding through the entire customer acquisition process.  And remember, a person isn’t actually acquired until they have a gratifying experience with your product. Start by trying to reach prospects when they’ll be most receptive to your message.  Obviously the most receptive users are the ones that are actually searching for a solution like yours.  Of course if your solution is truly creating a new market, don’t expect much relevant search volume. 

Next, look for other contextually relevant ways to reach prospects.  Getting their attention through the clutter is much easier if you reach them at a time they are likely to be experiencing the problem you are solving.

Be sure to have the relevant messages through the entire acquisition process (from landing page to actually using the product).   This post gives more insight on getting the full user acquisition flow right.

April 7, 2009

User Growth Vs Revenue (Why “Free Only” May Limit Growth)

Last week I wrote about finding the right business model for your startup.  But many startups aren’t convinced they should even have a business model (yet).  They claim “our current priority is growth.”

In my experience, the right business model not only supports sustainable growth in the long run, it can drive faster growth today.  I’ve found three primary reasons for this:

  1. “Free only” offering freezes prospective users  Site visitors often face a “what’s the catch?” moment when downloading free software  that doesn’t have a visible business model.  This is particularly the case when users respond impulsively to an advertisement – without the assurance of press or a trusted referral from a friend.  I discovered this dynamic a few years ago when I sent visitors to a landing page that made no mention of our premium product. I had no idea why these users were dropping out of the acquisition funnel at such alarmingly high rates.  Bigger download buttons and snappier headlines didn’t solve the problem.  It wasn’t until we surveyed users from impulse sources that we realized the primary problem was that people didn’t trust our claim of having a free product.  Once we knew the cause, solving this problem was easy.  By simply giving these users the alternative to download a trial of the premium product we were able to triple the download rate of our free product.  This experience demonstrates the risks of a startup that makes no mention of a premium product anywhere on their site.
  2. Business customers looking for sustainable solutions It takes time for a business to implement a new IT product or service throughout an organization.  This implementation cost often exceeds the direct financial cost of buying the product.  So when a business sees that you have free offering, they will be hesitant to standardize on your offering if they worry you don’t have a sustainable business.  Even worse, they may fear that you are generating revenue through more nefarious ways such as selling their information.   Business buyers are usually more concerned with eliminating risks than saving the company a few dollars on a free offering. 
  3. Hard to get aggressive on unproven assumptions Committing to aggressive acceleration is difficult when your business is loaded with unproven assumptions.  For example, imagine you get an opportunity to bundle with the next release of a popular complementary product.   They want you to pay $4 per user (free or paid) and your Excel model predicts upgrade rates that will give an average lifetime value of $6 per user across your entire free and paid user base.  Great, this looks like a safe bet.  But when the company tells you they’ll drive 1 million new users per month, you start worrying.  If your assumptions are right, you’ll generate $24 million in annual ROI – enough to put you well on your way to an IPO!  However, if your assumptions are wrong, you’ll probably go out of business.  Generally you won’t decisions on this scale, but the example demonstrates why it’s a lot harder to aggressively grow your user base on unproven monetization assumptions.

I realize it can be a bit nerve-racking to implement your first business model, particularly if you have strong organic growth.  But it’s not a moment of truth you should dread – instead it is a baseline that you will work to improve over the life of your company. Business models can and should be honed over time to increase the value of your users whether or not the first iteration is fruitful. 

Of course, if you have an extremely viral product, then a business model may in fact hamper your growth.  But ultimately you’ll still need a business model to monetize this growth, so you might as well figure it out early.