Startup Pyramid v2 thoughts…
I’ve been talking to Lincoln Murphy a lot recently, as he’s working on an eagerly anticipated Freemium paper and it’s got me thinking about my update to Sean Ellis’s startup pyramid
The basic premise is that SaaS companies don’t put enough consideration into how they’re going to acquire customers when designing their product. I’ve shared this quote before from Josh Koppelman of First Round Capital:
I then ask them, “So, how are you going to acquire customers.” And that’s when it happens. That’s when I realize that they’ve spent all their time focusing on the product/site, and aren’t nearly as innovative when it comes to their customer acquisition plans. They view marketing as something they can “bolt on” afterwards.
The most disappointing answer is when they say “Oh, we’ll just make it viral.” As if virality is something you can choose to add in after the product is baked – like a spell checker. Let’s imagine the conversation at the marketing department of the wireless phone companies. “Let’s see. Should we spend $4 Billion on advertising this year…or should we just make it viral?”….
Customer acquisition (also called distribution) is the number one challenge facing consumer web properties. (Emphasis added- Ed)
And it’s not just consumer web properties- with the consumerisation of business software- this is especially relevant to SaaS. For those of you that follow Steve Blank- he would describe this as the market risk being greater than the technical risk.
At the bottom of the existing pyramid is the term Product/Market fit, which originated in this seminal blog post by Marc Andressen:
The only thing that matters is getting to product/market fit.
Product/market fit means being in a good market with a product that can satisfy that market.
You can always feel when product/market fit isn’t happening. The customers aren’t quite getting value out of the product, word of mouth isn’t spreading, usage isn’t growing that fast, press reviews are kind of “blah”, the sales cycle takes too long, and lots of deals never close.
And you can always feel product/market fit when it’s happening. The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can. Reporters are calling because they’ve heard about your hot new thing and they want to talk to you about it. You start getting entrepreneur of the year awards from Harvard Business School. Investment bankers are staking out your house. You could eat free for a year at Buck’s.
Lots of startups fail before product/market fit ever happens.
My contention, in fact, is that they fail because they never get to product/market fit.
But I don’t think Product/Market fit explicitly deals with customer acquisition- yes you can have great Product/Market fit but if you’ve got no acquisition strategy baked in, you’re going nowhere.
I’ve shared this too before by Mike Speiser- Forget the Tipping Point. Focus on Joe the Plumber:
“Duncan Watts from Yahoo thinks trends are more like forest fires: There are thousands a year, but only a few become roaring monsters. That’s because in those rare situations, the landscape was ripe: sparse rain, dry woods, badly equipped fire departments. If these conditions exist, any old match will do. ‘And nobody,’ Watts says wryly, ‘will go around talking about the exceptional properties of the spark that started the fire.’”
After working on numerous consumer web products and reviewing the data of hundreds of consumer web companies in my current role, I have come to appreciate Watts’ forest fire metaphor. Most entrepreneurs are sure that they have the right idea and continue doing the same thing, sometimes for years, in the hope of hitting a tipping point. ”Now that we have a product, we are raising capital for marketing,” is a refrain that I hear far too often. Most of today’s massive consumer web properties experienced exponential growth fairly shortly after launch. A few thousand users over a few months is probably sufficient to find out it you have hit a nerve. So forget the connectors. Any average Joe will do once you find some dry timber. (Emphasis added- Ed)
The key to the tipping point is that you have to have great Product / Market fit AND a way of acquiring customers, hence Customer Acquisition needs to be a foundation of the pyramid….
The reason I’ve been thinking about this is because Lincoln and I both agree that companies go too readily to Freemium without getting to grips with Product / Market fit adequately. Companies think they can make certain parts of their software free to gain traction without designing in free from the ground up and understanding the segmentation issues that arise with it even though free is only a marketing tactic. I’m not going to steal Lincoln’s thunder by discussing any more about Freemium, suffice to say I can’t wait for his paper to be released!
How you are going to attract and retian customers should be the number 1 priority when designing any SaaS application today- worry about everything else afterwards.
