Lots of startups fail. Yeah, what a surprise. What may actually surprise you is that very often it’s not because of the inability of the founders to put together some sort of minimum viable product, or to gain some initial market validation, but rather because they don’t know what to do with it. I was recently asked for some help and support from some fellow founders’ friends, and what surprised me is that every single one of them managed to get some level to product/market fit.
One grew 3X in 6 months, and he’s generating now more than 300k pageviews monthly; another one managed to aggregate 28k merchants and 450k products. Here’s the thing: in “product/market fit” there is -yes- the product, but -hey- there is also the market… I know, kinda shocking, huh? The problem is that clearly they were able to built something valuable —or they wouldn’t have that initial market validation- but they are not able to materialize that value as flushing cash going into their bank account, and it’s kind of a shame. In 5 words: they suck at customer development.
It’s ok, I suck as well. But I’m a curious guys that likes to try new things, so I spent some time on this and found out some interesting easy tips. Let’s call it Customer Development 101. Why is it important? Let me think: because every potential investor worth your time will ask about it. Because every current investor will want to see progress on this side. Because your funding will eventually run out and you’ll be dead in the waters if you didn’t nail a decent business model. Because you could actually *not* raise money by having your initial users pay you, bootstrapping your way to profitability. Pick one. So here we go:
- Talk to your fuck*ng customers! Let’s put it this way: these are guys that found you in that ocean that is Google and that are using your shitty product instead of your competitors, regardless of the millions bugs and gigantic UX issues. But you don’t talk to them, no. You don’t know anything about them. NOT very smart. Ask for their phone and go talk to them… right now. You have to know everything about them: how old are they, what do they do, how did they find you, what do they like about you, what do they hate about you, what do they need from you, how much would they pay for it. Do not email them, do not survey them, just talk to them. Build a relationship, it’s the most precious thing you may ever do.
- Yet, do not trust them for a second. One thing is what your customers say, another one is how they behave with your product. The second thing being even more important than the first one. Measure them, track them, analyze them, verify what they told you, put their declarations to test. Take your top 25-30 users and give them early access as ‘beta testers’ to your new product’s features. Find out which ones are the most valuable and limit them. Your users will have to pay to use those ones. Once you identified the 2-3 key features that make your product stand out for your customers, focus on those and drive even more value by making those key features as strong as possible.
- Don’t be afraid of the paid plans. Money is good, being paid is the ultimate proof of value; whatever the amount… unless you are a consumer play, but that’s a different story. You think it’s too soon to activate the business plan? You’re wrong. Say it with me: it isn’t. In 6-9-12 months from now you’ll be likely dead, and you won’t nail it at the first try; so, the sooner the better. Also: if you’re not making money but you’re experiencing traction, the average investor will say “it’s easy to have traction when it’s all free”. Easy my @ss, but that’ll be the answer. Some founders would argue that you can/should get paid without even having a product, and nowadays I’m pretty much aligned with that thinking.
- What Business Model should you use. I already see the terror in your eyes, at this point most founders already are way beyond their Comfort Zone. The main thought here is: do not reinvent the wheel. Seriously, don’t. If a Business Model has been around for centuries, it’s because it works. Also: innovating on the Business Model is extremely hard, so just stick with one of the existing ones. Are you a SaaS Business? OMFG don’t go for the Freemium Model (it only works if your free customers are advertising for you, like Buffer and SurveyMonkey), use a Free-Trial Model. It will cut down the 85% of the users generating support’s requests but not revenue, and help you focus not on acquisition but on retention.
- How to identify the Pricing Points. Another easy hack to solve this further ‘black hole’ is the following: look at the competitors and create an Entry Price slightly lower of their Entry Price, but have a Premium Price slightly higher than of their Premium Price. You want to be competitive on the price, at least initially. And, trust me: users do compare the price. The vast majority of your users will go for the cheaper plan, some will go for the mid-tier plan, the absolute minority will go for the premium plan. Don’t look at the absolute number of users, it’s more interesting in this phase the ARPU (Average Revenue Per User), the Churn and how many new users you are adding on a daily/monthly basis.
- Do the basic financial math on this. Is it better to have lots of smaller users o fewer bigger ones? Well, like many things in life: it depends. To stick with the SaaS example: is it better to have 100 new customers per month at $19/mo or 50 new customers per month at $49/mo? The first case would generate $1,900/mo, the second case $2,450. It’s +29% ARPU for less support/load on the product/team. I don’t know about you, but I’d prefer to have fewer customers generating more cash, allowing me to laser-focus on supporting them and making them super happy. If you’re able to make them super happy (Churn < 5-6%) they’ll love you and pay you and do the marketing for you. Happily ever after.
- How you treat your customers is also key. Send them an email introducing yourself a few minutes after they upgraded to a paid plan. Touch base with them every now and then to get feedback on what you’re working on right now, or on how much value are they getting out of your product. Offer more help and support (“do things that don’t scale”, right?), ask how their needs are changing. Be human. If they cancel, write to thank them and to apologize because your product was not what they needed, asking for a specific reason and promising to let them know when you’ll implement what they need. Remember: retaining customers is way much easier and cheaper than acquiring new ones.
- As your product evolves, so should the pricing. Your pricing is not written in the stone, and the improvements of the product should be reflected by an increase in the pricing. Another good reason to start early with the pricing: the more you play with it and measure the results, the more you can reach “price/market fit”. Also because — not to be forgotten- pricing is a proxy for value in your customer’s eye. Not the other way around. But while you’re at it, do not piss off your initial customers asking for more money: they were early adopters, they contributed to your early traction and revenue, they deserve special recognition. Just create a “legacy plan” that’ll remain the same. Always.
- Finally, every contact is an up-selling opportunity. There are more ways to monetize the value you’re providing to your customers that you can immediately think of, and being a little creative always help. After having paid the third month, for example, a user will surely be interested in considering switching to a yearly plan with some discount (usually by paying 10 months upfront instead of 12 on an ongoing basis). Some users will be surely interested in paying for some dedicated better support on top of a self-service product, or by bundling together a set of standalone paid features you could create a subscription plan on top of them. Sky is the limit, the only driver here is what maximize your ARPU.
Did I miss something? Can I help you? Get in touch, happy to help!