Tag Archives: customer development

Don’t listen to your customers

The old adage that “the customer is always right” can have dangerous effects for your business, especially if you are engaged in customer development.

This notion was reinforced with me recently when looking at the problems encountered by my former employer Linden Lab (makers of Second Life). Chances are that you know the story by now: virtual world, caught up in hype cycle, experiences mass media attention before the product holds mass appeal.

Somewhere in this maelstrom Second Life acquired an active and and vocal userbase. These users felt a strong sense of ownership of the product and were encouraged to do so because it provided the company growth and revenue at a time when it was sorely needed.

Along the way, the company continued to innovate and roll out new features. Every single one of these features was trashed mercilessly by the users who felt betrayed on a regular basis. Now the CEO and most of the management that had brought about these unpopular products/features are out in the cold.

Could this have been avoided if Second Life listened to its customers? Absolutely. Could Second Life have succeeded as a business if it listened to its customers? Not a chance in hell. You can’t build a successful technology product AND be beholden to the whims of techno-anarchist BDSM furries. Interesting and smart customers, but not the users you build a tech IPO company around.

All too often web startups become virtually held hostage by a community that does want to see them grow. Sometimes, the result is Startup Stockholm Syndrome. Web startups are essentially held captive by their community and begin to think that they should, against their better judgement, listen to their current userbase.

This brings us to a very crucial point. The users help a web startup get from A to B are often not the ones who will help the company go from C to Z. It’s important to be clear to yourself what your ultimate target market is before you build for them. More important than what the customers want is who the customers are and whether they are the customers you want. If they are the customers you want and who will enable you to grow as you had envisioned, then by all means, listen to them. Many times, however, feedback from a web startups initial userbase will not enable growth.

The dilemma this creates for entrepeneurs, especially of the lean startup variety, is how to create a business with a strong, loyal userbase that doesn’t kneecap your aspirations. Digg is a company that was hamstrung by it’s userbase and was unable to meet the true need of valuable user-centric news discovery, a void eventually filled by Twitter. Unsurprisigly, you can’t build a great company based on a fascination with lolwut.

So as web startups reach milestones in terms of user growth and user engagement, they also need to be conscious that they build and innovate for the customers they want to have, not necessarily the customers they currently have.

Lean startup viability: how to know when to quit

This post was prompted in part by a discussion a few weeks back by former Joost COO Hedrik Werdelin’s post, “Twitter used to be a crappy idea”,  about Twitter and their viability as a startup based on user metrics. While I think the article was more linkbait than reasoned analysis, it did raise an interesting question. How do you determine the viability of a lean startup? Or more importantly, how do you know when to quit?

In a VC or even angel-backed startup your viability, assuming you are not profitable, is generally based on one thing…. The ability to raise additional funding. When the money runs out either you raise more funds or you go home.

In a lean startup however, there is no such Darwinian fate. By the very nature of a lean startup and its iterative customer development process, a lean startup can live virtually forever and perhaps never find success. Therefore it falls to the entrepreneur to decide when to cut bait.

In this post I have applied the customer ecosystem model below (also see examples for Zynga and Twitter) as a means of determining lean startup viability.

Wederlin’s point was that Twitter had poor user acquisition growth and user numbers in the early years of the business.

Now, I think this point is debatable, but let’s assume for a moment that this is the case for StartupX.  StartupX launches and sees low to moderate user adoption. Despite this, there is no reason to necessarily throw in the towel. However (contrary to Wederlin’s assertions), mere faith in the technology or the team is not enough. You need to have strength in one of the following customer ecosystem areas: conversion, upsell, or retention.

Conversion

Almost more important than user acquisition is converting those new users once they arrive at the site. Obviously each type of web startup has has its own metrics, but  if conversion and usage is high it can more than make up for poor acquisition results. Consider the case of Twitter. Sure it’s user base may have been growing slowly, but is that how they were measuring success? More than likely they were looking at other metrics as being important:

  • % of unique visitors who register
  • % of users who send a tweet
  • % of users who follow someone
  • % of users who have followers
  • % of users who tweet 5 times a day
  • % of users who have more than 100 followers

Merely looking at the number of new registrants is a poor way of measuring success, but also growth. Internally, even though acquisition growth may have not been growing as they had hoped, my hunch is that metrics like those above were growing strongly, indicating that they were on the right path. They weren’t just flying blind.

Now let’s look at imaginary StartupX:

After a brief write-up in a techblog, StartupX gains 15,000 new users. Six months later they are adding only 500 new users a month and the active userbase is steady. Time to cut the cord? Not necessarily.

Consider:

  • 65 percent of unique site visitors register and create a profile (up from 33% just two months ago)
  • 35 percent of users post content on StartupX (up from 25% three months ago)

Metrics like these are good and would indicate that (contrary to the acquisition numbers) that StartupX is still viable. There obviously are acquisition issues (wrong target market, poor virality, etc.), but when one aspect of the customer ecosystem is executing well, it means that with a sufficient pivot, the startup is viable.

Upsell

Are people paying money for your product? Usually this excludes about 90% of web startups, but cash money can be an amazing salve for a startup which is not experiencing substantial new user growth. If you are able to get users to pay either a one-time fee or a subscription then you have something to build upon.

Let’s look at the StartupX upsell scenario.

StartupX has a premium service for active users which includes and enhanced profile and unlimited uploads. Despite the fact that user growth is slow, more than 5% of active users pay for the premium service. Not only that, only 1% of users paid for a premium membership 4 months ago. Growth in premium subscriptions is a much more valuable metric than total user growth. Some users are more equal than others.

The trick here is that if you are getting people to pay for your product, you need to work to identify how large the realistic addressable market is and determine strategies to get traction in this market. If you’re bootstrapping, it does you no good to be exaggerating your addressable market (as opposed to when you’re trying to raise VC). However it behooves you to look far wand wide and identify other groups that may pay for your product. The key here is to continue growth in this revenue stream.

Retention

Retention is the kissing cousin of conversion in the customer ecosystem model. For conversion, is the content/experience compelling enough to for you to register or participate? For retention, is the content/experience compelling enough to keep you coming back.

If, for example, 80% of registered users are coming back on a weekly/monthly basis, there’s a lot of potential in what you are doing. Even low to moderate user growth with high retention levels can be a success.

Overcoming Acquisition Issues

In order to be successful, every startup will eventually need to figure out the acquisition puzzle. Sometimes there are businesses where the acquisition costs are just too high for a viable business. The point however of this blog post is that startups need not initially live and die by acquisition numbers. Other components of the customer ecosystem model are equally important components to figure out and basing viability on initial acquisition efforts is foolhardy.

Knowing When To Quit

If your acquisition efforts are failing, there need to be signs from other places in the model (conversion, upsell, retention) that the business is on the right path. If you’ve been at it for a long time and acquisition is poor and everything else is muddling along, then it’s time to quit. However, if you have found that you can either convert, upsell or retain customers well, then keep plugging away.  The feedback from users is that your startup is on the right path…. now it’s time for incremental improvements in the other areas of the model to allow the business to reach the next level.