Determining your customer and the value prop you offer them is essential early in the creation of your business. Without doing so, you really will struggle in hitting product market fit. Below are two videos to really jog your thinking about the process.
This first video is by Michael J. Skok, long time entrepreneur, lecturer at HBS, Startup Secrets blogger, and currently Partner at Northbridge Ventures.
Another great video is of “Understanding the Job” your product is hired to do by Clayton M. Christensen. He is the Kim B. Clark Professor of Business Administration at the Harvard Business School (HBS), with a joint appointment in the Technology & Operations Management and General Management faculty groups. He is best known for his study of innovation in commercial enterprises. His first book, The Innovator’s Dilemma, articulated his theory of disruptive innovation. Christensen is also a co-founder of Innosight, a management consulting and investment firm specializing in innovation. (Wikipedia)
Just as driving with your eyes closed is dangerous to your health, so is acquiring customers without knowing what it costs you to acquire them. Both can lead to disastrous outcomes.
Whilst acquiring new customers is always something to be happy about, it doesn’t mean, however, that you should throw out common sense in how you account for your time and human resource efforts in acquiring them, typically referred to as your CAC (customer acquisition cost). Most startups understand that if they pay Google for advertising, that should be included in my CAC costs, but many other items add up as part of the CAC that are less obvious.
In tldr format: Companies typically under-account for time costs in acquiring a customer; don’t forget to include your staff’s time in your CAC.
Before going any further, I should caveat that this does not mean you need to go nuts on excel getting this perfect to the nth degree. In a pre-product market fit company, you will likely be experimenting on how to sell quite a bit. The point here is to approach things with a rational sense for what can scale and what cannot and doing a back-of-the-envelope calculation on how this might affect your CAC down the road.
Ideally, everything you did in order to get that shiny new customer would be accounted for if you want to get a true snapshot of what that new customer cost you, how much need to charge to cover your costs, and what it might cost to get, say 100 more or 1000+ more similar customers. One tool that we can borrow from the accounting world to help you visualise this, is what is called Activity Based Costing. In the words of Wikipedia: Activity-based costing (ABC) is a costing methodology that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each. This model assigns more indirect costs (overhead) into direct costs compared to conventional costing methods. For more reading on ABC click here.
You might feel you have ‘acquired’ your new customer for ‘free’ but when you account the time that it took and some of the additional efforts, you might find that your new user is costing you more to acquire than you are charging them and thus, you are accidentally creating an imbalance in your company’s cashflow and experimenting with a non-scaleable method for customer acquisition.
To help illustrate, let’s walk through a few examples:
A customer that wants to buy your product says they only will pay if you help to integrate your product into their current systems and help them migrate their data from their old systems onto your new one. Because you are a hot-shot coder, you oblige and bang out the necessary code changes quite quickly and import their data into your system’s formatting. Within 6 weeks, you have finalised onboarding this new customer and you are happy as your first pay check comes in… was this truly a ‘free’ customer acquisition process if this is something you plan on implementing as an ongoing way of acquiring customers? How should you account for that time you spent integrating systems and migrating data?
You have a team of 5 people who are in charge of communicating with the outside world via social media and provide them with lots of ideas and communications about your company and its products, because of this, your product gets lots of mentions on the inter webs for a great customer experience. Is this truly a ‘free’ customer acquisition process or do these people act like a quasi-PR / sales team?
If we take an activity based costing mindset when assigning costs to your customer acquisition model, what you will find is that it takes more than just a website and some Google Ads to convert customers into paying customers. It requires the time of people, initially you, but later perhaps sales people or sales engineers to get the deal over the line.
The time you spent helping someone use your software or installing it or deploying it within their network or employees is part of that cost because you will not be the one doing this for the rest of your company’s life. You will likely have to hire someone to do this later.
As a starting point to kickstart your thinking, the following list includes time and/or other items that you may be ignoring as part of your acquisition costs:
The time you spend on getting people onto your sales pipeline – typically may become the job of a sales person down the road
The time you spend on Social Media outreach
The time you spend Networking at Events
The time you spend converting a customer from warm to paying – typically may become the job of a sales person down the road
The time you spend on support or install calls to help a customer roll out the product within their network – might become the job of a sales engineer down the road
Integration work to include your product into their system or data flow – might become the job of a consultant, or sales engineer down the road
Supplier calls or deals (with minimums to help provide you with the necessary inventory to sell onto your new customers.
Sales Channel calls or deals – do you need to spend time setting these up or actually even splitting revenues?
As I mentioned before, these time based costs need to be considered for inclusion onto the more ‘traditional ones’ such as paid Ads & PR which startups usually associate with CAC calculations. Once you have determined what your rough aggregate CAC is, then you can figure out if it works for you vis-a-vis how you plan on monetizing your proposition.
In conclusion, the concept of accounting for your actual customer acquisition costs isn’t a difficult one to grasp, however, avoid getting caught not thinking through the impact of your time and other efforts in getting that customer! Driving while not looking is dangerous!
If you want a good starting point to start getting a better feel for how to model and visualise a SAAS KPI funnel and its related costs, refer to Christoph Janz SAAS KPI Dashboard on Google Docs (http://christophjanz.blogspot.co.uk/2013/04/a-kpi-dashboard-for-early-stage-saas.html ) Keep in mind, however, that his model is meant to be just that, a starting point; you will likely need to adapt it for the particular circumstances of your business.
Product / Market fit can be loosely defined as the point in time when your product has evolved to the point that a market segment finds it attractive so that you can grow your product / company scalably. In many ways, finding Product Market fit quickly allows you to focus on company growth rather than spending a lot of time and money on iterating your product to find that fit. Many companies linger in that limbo for quite some time unfortunately. Without this product market fit, it’s hard to inject nitroglycerin to generate the desired growth rate that all investors want when they invest.
Having spent time with several companies that have gone through the process of finding product market fit, I have observed that many get hung up on iterating only the ‘product’ part of product / market fit, rather than thinking of ‘product’ in a larger context. Speficially, the three things I notice are being omitted by several companies that have been religiously using the “Lean Methodology” product dev model alone to achieve PM fit, but failing to find it are:
1) A definition of a Minimum Viable (customer) Segment – As originally defined by Michael J. Skok
2) The testing of a well thought out positioning strategy alongside the testing of an MVP
3) The testing of a complimentary go to market / marketing strategy that tests your product vis-a-vis the chosen positioning strategy above
If you think of the three above as a bullet, visualise them as the lead pellet (product), the shell (positioning), and the gunpowder (go to market) that makes a bullet work. They only work when tested all-together, not separately. Testing only the lead pellet, doesn’t get your bullet very far.
In order to fit these three points into a more familiar framework, I have borrowed the Lean Methodology’s Build-Measure-Learn loop and expanded on it to create a larger loop designed specifically to help guide you achieve a series of test loops to achieve product/market fit. This isn’t perfect (and would appreciate any feedback on how to improve it) but I figure it’ll help provide a framework by which to test all in conjunction.
Here is the Product/Market Fit Cycle Model I propose (see attachment for illustration at bottom of post):
Start with a Product Hypothesis / Idea
This is effectively the way YOU think of your product the day you conceived it.
This should also have the rudimentary aspects of a defined value proposition for a set of customers.
Identify a Minimum Viable Segment (Customer Base)
The concept of an MVS comes from Michael J Skok’s observation of one of the flaws of the standard Lean Model. You can see his work on this here: http://www.mjskok.com/resource/gtm-segmentation. In summary, a Minimum Viable Segment allows you to test your product on a focused segment rather than leaving it too open ended across several segments, each giving your potentially different outcomes. The benefit of identifying a minimum viable segment is it allows for better differentiation of your product within your market segment, thus, you get easier referrals from this group as well as more efficient use of capital to acquire them.
Questions to ask yourself as you define your MVS:
*Who are my potential customers?
*How do I find them? (which blogs, which media, which social networks, which retail locations, which distributors, etc)
*What will they be willing to pay? (you may not know this off the start, but you’ll be able to determine this as you test it in the next step)
Build a Minimum Viable Business Model
The Business Model Canvas helps a lot in identifying a lot of the components needed for a fully operational Death Star, but what we are trying to test here is more ‘does it work’, rather than filling in all the components of the Business Model Canvas too early, and which you may not know at a start.
The three parts to the Minimum Viable Business Model include: A positioning strategy, an MVP, and a Go 2 Market Strategy.
*Build a Positioning strategy
As you create your positioning strategy, make sure it will resonate with your MVS and product hypothesis, or otherwise iterate these so that they are harmonious with each other. No point in having your positioning not be something that your MVS values, for example.
If you are not familiar with what a positioning strategy is, read the following book, it is the gold standard: Positioning by Jack Trout & Al Ries
*Build an Minimum Viable Product that fits the above positioning strategy
Most tech founders generally rock at this bit, so nothing I can really add here. However, take a look at my previous post on growth hacking summarising Traity’s experience in optimising their product to yield better conversions if you want to optimise your product for growth and reduce the potential of your product getting in the way of conversions: http://thedrawingboard.me/2013/04/15/on-growth-virality-loops-and-customer-acquisition/
*Build a Go 2 market strategy
A Go 2 Market Strategy is, simply put, a strategy that attempts to cost-effectively deliver the value proposition to the selected target segment(s). It is a strategy to help get the product or service out in the marketplace and includes pricing strategies, sales strategies, and marketing methods (internet marketing, direct marketing, PR, etc). It can include things like identifying key distribution channels and key partnerships required to get your product to the identified minimum viable segment. Clearly this will be different for B2B companies than B2C companies. The aim is to build a Go 2Market strategy that targets you MVS with your selected positioning strategy for best effect.
Once having completed and packaged the above three in a minimum viable form, assign a “cost” (what money you are going to spend on validating it) to the combination and set some expectations around target figures upon which to analyse your resulting metrics. How many users are you expecting, what constitutes an ‘active’ user? A churned user? A conversion? etc. Effectively, you want to have ‘targets’ for what you experiment will yield.
Test & Measure
As you know, a key part of understanding forensically whats happened after a test, you will need to have set up good tests to start with and also adequate data. A good book on this is: http://leananalyticsbook.com/ I’m in the middle of reading it, but so far it seems in line with what I’ve seen several startups doing.
Tests will include quantitative (Kissmetrics & http://newrelic.com/) and/or qualitative tests about how the product is perceived based on people that didn’t activate. Using the output from your tests find out how your users are behaving to gain intelligence.
However, keep in mind that testing will be different between the different phases of startups in how you can test. In the words of Andreas Klinger (co-founder of Lookk):
I personally see product dev as a spiral. The further you go outside (mature) the more quantitative your approaches can be, the further you are yet on the inside the more qualitative. You repeat the same phases (build,measure,learn etc) but you use different tools.
Most startups are in that inner core of that spiral but play games of outer ends. We can call this premature scaling or just inefficient behaviour (e.g. using metrics when there is no clear data). Many product hypotheses/ideas and especially customer segments can already be eliminated very cheaply before MVPs – eg by qualitative approaches (eg customer interviews).
Metrics are for me personally a bit further down the spiral.
* Arrivals & Acquisition – How many people landed on your website coming from a marketing campaign that you are tracking and then you acquire the user. For a SaaS product, this usually means a sign up.
* Activation – The user uses your product.
* Retention – What is your churn? How many of the users you have in your userbase are active? How many stopped being active and why?
* Referral -How many of the users that are using your product are willing to refer to others?
* Revenue -How many users are willing to pay you of the ones that are using the service?
Learn/Debug your Minimum Viable Business Model (MVB – yeah ok, too many MV* acronyms, but too long to spell out)
Questions to ask yourself as you are reviewing the metrics:
Are you having high arrivals but poor Acquisition/Conversion? – Perhaps your Positioning is working, but your product isn’t living up to expectations. Think about this as you talked about a great party but when people showed up they thought the party (product) was lame.
Are you having high acquisition/conversions but poor arrivals? – Perhaps your positioning/marketing strategy is not working, and for those few people that are in your MVS that land on your site by luck, convert because they find the product useful. Perhaps you didn’t allocate enough cash to your Go 2 Market, or rather the cost of acquisition of the chosen MVS is higher than expected so you are just aren’t getting enough eyeballs on the site, but when they do they convert.
Are you having so-so arrivals, and acquisition at your target figure? – Perhaps your Go 2 Market strategy is not cost effective, or you didnt find the most efficient channels. Perhaps you didn’t allocate enough money to the Go 2 Market strategy.
Are you having high Arrivals, high Acquisition & Activation, but poor Retention? Then likely your product is failing in delivering ongoing value. There is something wrong with it. Use product analytics to find key churn out points and qualitative studies to find out what is pissing people off.
Are you having a hard time monetizing? – Perhaps there isn’t enough value in the product hypothesis for the MVS if you can’t get anyone to pay even if they are engaged (not enough of a pain).
No referrals? Well, likely a function of the above as well. Perhaps you haven’t build enough virality into your product (see Juan Cartagena’s work on this).
Decision point & New Ideas
Now that you have the output and a series of metrics and potential red flags as to where things went wrong.. you can consider various options before you go through the loop again:
Do I iterate on one of the factors of the Minimum Viable Payload? (try a different positioning strategy, go 2 market strategy, or product revision?)
Do I pivot to a different product hypothesis?
Do I pivot to a different minimum viable segment?
In conclusion, I hope you find this framework useful in helping you diagnose what you should try out. Let me know what you think and if you’d add/subtract anything to it.
Everyone loves a personality test. Whether for fun, or to better asses our skills as part of choosing a career, we all love hearing about how others perceive us, how we function, and how we are likely to react in situations. We are all naturally narcissistic (up to a point) and it is at this point that Traity, a Seedcamp company that specialises in helping its users figure out how they rank in a variety of psychometric test (think of them as a more thoroughly complete Myers-Briggs test), helps users identify their core attributes as ranked by people in their social graph.
For the purpose of simplicity when speaking of Traity’s technology, I’ll use the term ‘personality test’ loosely, however, what was confusing for the founders was that while ‘personality tests’ are generally well received and actually fun for many (as in magazines or online for example), Traity struggled quite a bit, in their early days, in converting people to use their service because their personality test, while far more accurate and useful than those you take online where you assess yourself, requires you to have had your friend assess you as part of their process.
Traity was having a classical conversion/acquisition problem. Traity’s CEO, Juan Cartagena, could funnel people to his website, but couldn’t get them to go through the sign up process and then get others to sign up (which he needs as part of his product). So he went on a mission to find out how to optimise this. Here the video of Juan sharing his story of discovery (it is embedded at the bottom of this post for your convenience).
After this video came out, I recently had the chance to catch up with Juan and ask him if he could help me summarise how he worked his way through to where he is now. Firstly, he told me it all started with a chat with social games guru Blake Commagere (http://www.crunchbase.com/person/blake-commagere), who pointed him in the right direction…
Next, he identified the key metric he wanted to optimise around. In his words: “There is generally one key metric for every business that matters- optimise around that metric.”
He then decided to experiment with design as a key growth driver vs. the traditional MBA-type solutions which, until then, had not been working for him. For the record, Juan has an MBA from the Chicago Booth School of Management. One of the top MBA programs in the world, so for him to make a jump like this, really does mean a lot in terms of not adhering to ‘traditional-type’ thinking.
He then further committed to this path of experimentation by reading two books which greatly influenced his thinking on how to further evolve his customer acquisition process:
After having read both books, he went through each one of the key influence factors outlined in the book and scoured through his product to see how we could apply the concepts. Once identified, he then went about applying the appropriate design principles to yield the ultimate effect on the influence factors.
For your reference, the key influence factors highlighted in Caldini’s book on Influence include:
Commitment & Consistency
Before proceeding any further, I should state that in order to better apply these concepts, that you understand what your Minimum Viable Segment (MVS) is. Without understanding your MVS, any optimization of design or messaging will likely not be targeted enough to yield directionally measurable results. For a primer on an MVS, go to Northbridge Partner, Michael Skok‘s site here: http://www.mjskok.com/resource/gtm-segmentation
The design process Juan subsequently followed, included not just the obvious making of buttons, bigger, correctly placed, or prettier or red (one of the points he mentioned about colors and engagement) or choosing a different logo, but more importantly in coming up with the correct messaging to convey the influence factors he was trying to exploit. This is crucial. The messaging is just as important, if not more, than the more traditionally-experimented visual elements of design. Although not from the books that Juan mentioned, two good books to get you thinking about how messaging matters for positioning and differentiation are:
As far as Juan’s design focus, think about it this way, he moved away from just building a more explosive gunpowder to thinking more about how to package and propel it forward (otherwise all you have is explosive gunpowder that will explode in your face).
Although it seems obvious when you read this, Juan discovered that a key aspect of using both influence and design as part of evolving his process, was understanding that his costs of user acquisition would go down the more his viral acquisition would go up, and in order to scale this virality he would need to leverage the emotions of users to have a stronger reaction. However, I’d venture to say that many don’t consider this as part of their design process, Juan admits he didn’t at first.
Specifically, Juan saw how, via design, narcissism and voyeurism was used by sites like Facebook & LinkedIn to yield frequent use, fear of missing out by sites like Instagram, Twitter, and Groupon, and Inspiration by brands like Coca-Cola. He set out to understand how he could leverage these feelings as part of creating better copy on his site’s messaging to both yield better conversion but also more virality.
Lastly, because without metrics you are just flying blind, Juan used Kissmetrics to analyse his efforts and truly understand whether his changes across the board were yielding his desired results. Build, Measure, Learn… Build, Measure, Learn.
In summary, if you have identified a real need within a market and built something awesome (gunpowder) but you just can’t seem to reach your customers, perhaps go through the journey Juan went through and assess whether perhaps the issue isn’t what your product does, but rather how you are presenting it to your users.