Startup Marketing Blog – By Sean Ellis

Deconstructing Startup Growth

After product/market fit, driving sustainable growth is probably the most important/difficult part of creating value in a startup.

For most of the last 15 years of my startup experience, I’ve been the point person responsible for primarily one thing: driving growth.  Even after two IPOs, I didn’t really have a firm grasp of the essential elements of driving growth.  My view has evolved from externally focused metrics-driven marketing, to a more holistic approach built on a solid foundation of product/market fit.

Growth Foundation

Even the greatest marketers can’t sustain growth on a weak foundation.  Eventually, their growth curves crater.

So what is required for a strong foundation?

Must Have Product

The most important element is having a large percentage of users who consider your product a “must have” (over 40% is a good benchmark).  This gives you two key benefits:

1. The first is that your churn will be relatively low (if it’s a “must have” why would users leave?), so you won’t be wasting resources filling a leaky bucket.
2. The second is that “must have” products generally maintain strong word of mouth.

Together, these two elements give you a steady upward trajectory of your growth curve until you reach market saturation (hopefully you are in a big market!).

Must Have is Perishable

An important caveat is that your product will stop being a “must have” if a competitor offering a viable substitute enters your space. If they are really a good alternative to your product, then you’ve been downgraded to a “nice to have” and your foundation starts getting shaky.  Therefore, once you become a “must have” it is critical to get to the growth phase of your business as quickly as possible.

Check out my earlier post to determine if your product is a “must have.”

Conversion Optimization

Your ability to accelerate growth will be greatly enhanced if you optimize conversions.  There are many ways to define a “conversion” but for me, it’s a person who reaches the “must have” experience.  If 1000 new visitors come to your website and only 50 experience the “must have” benefit, it’s very difficult to efficiently grow your business.   However, with focused attention on fine-tuning the first user experience, startups often see a 2x – 10x improvement in conversions.

This immediately enhances your growth curve since word-of-mouth referrals begin “sticking.”  It also greatly enhances your ability to find viable, scalable ways to grow your user base (especially when combined with a good monetization approach).

Driving Growth

Most startups entering the growth stage obsess too much on finding a VP marketing capable of building and managing a large marketing organization.  At this stage your more immediate challenge is finding sustainable, scalable growth drivers to augment the organic growth achieved through solid product/market fit and conversion optimization.  If you are compelled to bring in a VP Marketing at this stage, make sure he/she has a track record of developing scalable growth drivers and is willing to make this their core focus until it is figured out.  Otherwise, I recommend instead bringing in a scrappy growth hacker to generate a strong flow of ideas for experiments that will scale if successful.

The faster you run high quality experiments, the more likely you’ll find scalable, effective growth tactics. Determining the success of a customer acquisition idea is dependent on an effective tracking and reporting system, so don’t start testing until your tracking/reporting system has been implemented. Once scalable growth tactics are developed, then a VP Marketing may be important for building and managing the marketing team that will execute these tactics.

One benefit that is emerging from advising multiple startups is that our rate of collective discoveries is accelerating across the non-competitive network of startups. With sharp, creative growth hackers in each startup we are able to brainstorm and test many more tactics.  The best ones are exchanged across the network for everyone’s benefit.

Growth

As the preceding paragraphs hopefully demonstrate, growth is a function of multiple factors.  Focusing on the right factors at any given time offers the best chance of ultimately becoming a high growth startup.  One exception to this rule are startups like eBay, Facebook, and Twitter, where “must have” status could only be achieved after critical mass.  In these startups, they did not have the luxury to focus on one element at a time – instead they had to work on the full growth ecosystem at one time.  But for most startups, you will approach your full growth potential by obsessively focusing on the most important goal for your particular stage.

Posted in Acquiring Customers, Analytics, Metrics Driven Marketing, Optimization
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Optimization Mistakes that Kill Startups

I once believed optimization was the secret weapon that could make almost any startup successful. It was certainly a critical part of reaching millions of users in each of my first five startup marketing roles. At a couple of startups we saw a tripling of conversion rates from a single experiment. When we tripled conversion rates, we tripled the effectiveness of every future marketing dollar.

I first became a fan of funnel optimization at one of my early startups where we had hit a wall trying to develop scalable customer acquisition channels.  We decided to temporarily stop trying to find new customer acquisition channels and focus instead on improving conversion rates.  A few months later we resumed channel building and were able to scale the same previously tested channels to support 100X the marketing spend with the same target ROI per dollar spent.  Beyond the clear benefit of enabling scalable marketing campaigns, the improved user experience also resulted in a multifold increase in free organic growth.  User growth immediately hockey-sticked and years later still  hasn’t diminished.  All the while, the company maintained cashflow positive results.

These benefits probably have you chomping at the bit to start your own optimization program. But be careful, optimization can easily kill a startup when not done right (or at the right time).

Here are the three most common optimization mistakes startups make:

1) Premature optimization – Optimization is about improving the path that users take to reach a certain destination within your website. For most sites it’s ultimately about getting people to experience and buy your product. While this seems like an important goal from the beginning, it’s not. If the value of your core product is weak, doubling the percentage of users that get there won’t help much. And it will actually hurt you because every unit of effort put into optimization is one less unit that you can put into improving your core product. Products that don’t become a “must have” almost always fail.

My recommendation for startups is not to begin optimizing until at least 40% of your randomly surveyed users say they would be “very disappointed” without your product. That doesn’t mean you shouldn’t try to have a great first user experience, rather it means you shouldn’t start iterating flows until the core product meets this threshold.  The only exception to this is if your value proposition will increase because of a network effect (like eBay). I’ll try to write a post on this scenario soon.

2) Not being deliberate –To execute full funnel optimization you test multiple changes at every step in the acquisition process. Since every change is also an opportunity to screw things up it’s extremely important to measure the actual results of a change. Unfortunately traditional analytics programs aren’t helpful here since they don’t track specific user cohorts moving through the funnel (AKA groups of users). In the early startups I worked with we spent months building systems internally to track conversions at the user level. Fortunately “off the shelf” systems are now cropping up that make user level funnel tracking much easier (I’ve been advising KISSmetrics on such a system for over a year and I’m now using it in a couple projects). With the right system you can track your “measures of success” and roll back any changes that havea negative effect on these metrics.

This presents a new problem. Anyone with a basic understanding of statistics will realize that optimization is a numbers game. If you test enough things you will definitely find something that improves your key measures. That’s the theory, but the reality is that you’ll never get past the first few tests if the early ones don’t yield improvements. People quickly lose faith in the process. Therefore it is essential to vet every test idea before asking the development team implement it. Prioritize test ideas so that the easiest and/or most likely to improve results are implemented first.

3) Killing the love – One thing that is rarely measured in an optimization project is a reduction in the core value perceived by your most passionate users. Your ability to deliver an experience that creates passionate users is your most important asset as a business and must be protected. It can be improved, but it must be done very carefully. The first step in protecting it is to understand it. I never attempt an optimization project without first doing a project that helps me understand the use cases of the most passionate users. After this initial project, which I combine with messaging optimization, I am in a much better position to safely optimize the full conversion funnel.

Effective optimization requires the right tools, qualitative research/understanding and a systematic approach to testing. When executed properly it can easily result in 2X – 10X improvements in conversion rates. No business will come close to its potential without a concerted optimization effort, but be careful to avoid the mistakes listed above.

For more context on where optimization fits into the overall startup marketing priorities, see this post on The Startup Pyramid.

Posted in Acquiring Customers, Metrics Driven Marketing, Optimization
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Iterating Without Understanding?

It seems there are two camps of “evolved” marketers these days. One group recognizes that it is critical to understand customer needs by engaging them at every opportunity. The other group is completely focused on metrics driven iteration. Until recently, few combined these powerful forces.

I started in the camp of online metrics and scorned the beanbag marketers who didn’t “get” analytics. At Uproar in the mid to late 90s, metrics were our competitive advantage. We tested, measured and optimized everything. We knew we couldn’t afford any waste if we were going to have a chance to beat the heavily funded Silicon Valley gaming startups and the established companies getting into online games (Microsoft, Yahoo, Sony). Ultimately, this obsession with leveraging metrics to track ROI and improve conversion through iteration was key to becoming the worldwide leader in online games and peaking at a billion dollar stock market valuation. Despite their much deeper cash war chests, the beanbag marketers couldn’t compete with our no waste metrics driven approach.

Today the Darwinian economy has killed off most web businesses that don’t leverage metrics, so this is no longer a competitive advantage – it’s a necessity. But many web marketers stop there.

In my next startup I was fortunate enough to have a venture capitalist who helped take our approach to the next level. We attracted his investment with our metrics driven online marketing approach and then he quickly improved it. He constantly grilled me with the question “Who is your customer?” During our weekly meetings he never failed to ask about the last time I spoke to a customer. I got extra brownie points for meeting with customers in person. To be honest I initially focused on engaging customers just to appease this VC. But it didn’t take long until I was able to use this information to improve results. Informed iteration helped us increase purchase transaction rates 10X in just a few months, which made scaling a profitable marketing spend infinitely easier. Later customer engagements uncovered revenue opportunities we never could have found through metrics driven iteration. These revenue opportunities eventually accounted for more than half of the company’s overall revenue volume – making possible the eventual IPO filing.

It wasn’t until I began the Interim VP Marketing role at Xobni that I discovered Steve Blank’s The Four Steps to the Epiphany. This book added a systematic process for uncovering the critical information needed to build a thriving business and keep improving results.  The great news is that Steve Blank recently started blogging at steveblank.com. Perhaps even better news is that Venture Hacks now records Steve Blank’s lectures at UC Berkeley and posts them online.

The same Darwinian forces that made metrics a necessity for online marketers are once again shaking up the web startup world. It has become a major competitive advantage to combine Steve Blank’s customer development approach with informed metrics driven iteration. And it’s only a matter of time until this approach becomes a necessity for survival.

So what’s next? I’m certain that eventually a platform will emerge that ties it all together. This platform will facilitate the process of collecting and analyzing actionable customer information and manage the iterations that deliver optimal results. Up to this point we’ve always had to custom develop these tracking and reporting systems, while using disconnected systems to drive understanding (surveys, Excel…). Off-the-shelf analytics programs have been bloated with data that is useless for improving results.

Rather than holding my breath for someone to deliver this dream platform, I’ve been advising KISSmetrics as they work to create it. I’ve given them total visibility into my approach and turned over reports that have evolved over many years of execution. Of course they have given me equity in the company – but I’d be passionate about this metrics driven customer development platform either way.

Posted in Analytics, Customer Development, KISSmetrics, Metrics Driven Marketing, Steven Blank, The Four Steps to the Epiphany
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Recruiting Startup Marketers from Wall Street

Rather than wasting their time on Wall Street, Mathematicians should be guiding online marketing for startups. 

For years Wall Street has used brilliant mathematicians to create investment models that they hoped would reduce risk and generate billions of dollars in investment returns. They increasingly leveraged their investments falsely believing that they had eliminated most of the risk – which of course added more risk.  Unfortunately most Wall Street investments are based on speculation which makes it is nearly impossible to remove risk regardless of the sophistication of the model.  Before I stopped watching the news CNBC was blaming these mathematicians for creating the complicated investment instruments that led to the recent collapse – claiming that even the CEOs didn’t understand them. And it’s not the first time that too much trust has been put into the abilities of these whiz kids. The financial crisis of 1998 has also been blamed on overconfidence in mathematicians ability to predict speculative markets.

I have zero confidence in really smart people being able to predict speculative markets. I’ve never trusted mutual fund managers with my cash – instead always putting most non-angel investments into S&P 500 index funds.

However, this is a place where mathematicians can create vast wealth – and that’s in startups.  The returns in online marketing are a lot more predictable than investment banking.  By knowing the lifetime value of your users, you know exactly how much you can pay to acquire new users with an acceptable profit margin.  As long as you don’t saturate a source, it generally delivers the same ROI with each campaign.  The beauty is that a very small investment can give you excellent guidance for the returns of a much larger investment.  Even with 7 figure monthly budgets, I’ve always insisted my teams test every new media with $5o0 buys.  I’ve used this approach to discover ways to spend millions with a very fast return on investment.

At my last long term VP marketing role, my first hire was a trained actuary (the guys that calculate risk for insurance companies).  And the marketers at two startups I’m working with now are both sharp mathematicians – one recently graduated from MIT with a math major.

I first witnessed the power of marketing number crunchers when I was at Uproar.  In 2000 we acquired a startup called iWin.  In a very short time they had created the second most popular casual game website in the world on cashflow positive results.  Their secret weapon?  Several math whizzes in their early 20s who had spent a year in investment banking before running the iWin marketing and product teams.  They were so effective that they took over the marketing and product leadership at Uproar (I had already moved on to President of Uproar Europe).

The math behind viral marketing is even more intriguing.  Read Andrew Chen’s Blog  for the inside scoop on how it works.  Viral Marketing has created some of the fastest growing companies in history and most have never spent a dime on marketing.  And who is dominating the field of viral marketing?  You guessed it – mathematicians. 

Unlike investment banking where leverage increases both risk and reward, in online marketing leverage only increases the reward.  The 12in6 Methodology is all about focusing on high leverage projects that improve the ROI of every future marketing initiative.

Looking to hire someone to lead your marketing?  Hire one of the recently unemployed Wall Street analysts (and show them this post to get them excited about the potential of their new job).

Posted in Acquiring Customers, Hiring, Metrics Driven Marketing, viral marketing
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What is Metrics Driven Marketing?

Metrics Driven Marketing is the marketing process that applies detailed metrics to every facet of marketing.  The goal of Metrics Driven Marketing is to better predict returns on marketing investments and thus drive superior overall marketing results.  Metrics Driven Marketing ranges from very quantifiable direct response marketing to more challenging measurement of brand awareness advertising. 

Metrics Driven Marketing can trace it roots to Claude C. Hopkins, who died in 1932.   His book, Scientific Advertising, was published in 1923 and was a major breakthrough in testing the effectiveness of advertising (Read it free at http://www.scientific-advertising.co.uk/ ).  Lester Wunderman was also a key driver of Metrics Driven Marketing, primarily through his advancement of direct marketing (a phrase he was believed to have coined in the early 1960s).  More recently Rex Briggs has carried the torch of better marketing accountability to broader reaching brand advertising.  His book “What Sticks” is a must read. 

The uniting goal of all these pioneers is a desire to push the tracking envelope in all marketing activities and drive better, more predictable results. 

To achieve this goal of predictability, it is important that the majority of marketing funds are invested into proven activities.  Only 10-20% of the monthly marketing budget should be allocated to testing. Ideally the investment in each new test will provide a large enough sample size to accurately assess the performance, but will be small enough not to burn though a significant portion of the testing budget.  The majority of the marketing team’s time should be spent executing these tests.  Proven marketing activities can largely run on autopilot with periodic reviews of the performance reporting. 

I am a big believer in the power of Metrics Driven Marketing.  It has helped my marketing teams overcome daunting odds to deliver back-to-back blowout successes at venture funded companies.  To understand the rarity of this, it is important to note that less than 10% of venture funded companies offer seed investors a return in excess of 10 times their original investment. The chances of doing it twice in a row are about one in one hundred. 

At my most recent venture, my first marketing hire was trained as an actuary (actuaries are the math wizards at insurance companies who calculate premiums based on risks).  This highlights the importance top level mathematical and analytical skills to try to push marketing tracking to its limits.  We are now recruiting our third marketing analyst to the team in addition to a database analyst.  It’s almost impossible to have too many analytical minds.

In an early stage startup it is relatively easy to apply the principles of Metrics Driven Marketing.  That is because the purest form of Metrics Driven Marketing is direct response marketing – which should be the primary marketing approach of all startups.   Direct response marketing is a low risk approach that has been around for decades.  It favors the small budgets available to most startups.  It also supports a startup’s discovery process of identifying the right target customers and developing a powerful value proposition.  Additionally, it allows a marketing team to focus on refining the brand experience and if applicable helps them optimize website conversion rates.  As customer acquisition conversion rates improve, the ROI from the direct response marketing initiatives also improves. 

Eventually a successful startups company will have to complement their direct marketing initiatives with more scalable branding campaigns.  That’s where Metrics Driven Marketing gets really tough.  Fortunately earlier efforts to refine the value proposition, brand experience and conversion metrics will pay dividends in broader reaching campaigns.  To track the effectiveness of these campaigns most savvy marketers use test markets and trend analysis.  Metrics Driven Marketing is not always about perfect ROI tracking – it’s about continuously pushing the tracking envelope and directing marketing funds to the most effective and accountable initiatives.  Rex Brigg’s book “What Sticks” provides excellent guidance for executing a Metrics Driven Marketing approach at scale. 

It is also challenging to analyze the marketing effectiveness of Blogs, viral marketing and word-of-mouth initiatives.  Fortunately most of these activities require relatively small finanicial investments, though the time investment can be quite large.  These activities require more creativity to determine appropriate measurable ROI targets than others.  For an example on tracking blogs see my post on measuring the loyalty impact of social media.  

What about marketing activities that provide important benefits that can’t be tracked?  I discuss this in another recent article.

Metrics Driven Marketing is surprisingly underused by many experienced marketers.  The marketing leaders who do use it (and succeed with it) generally have a good balance of analytical skills, discipline and a deep reservoir of creativity.  Not just the kind of creativity needed to come up with clever slogans, but rather business creativity to invent new marketing methods and tweak existing methods for cost-effectively reaching their target customers.  If this creativity runs dry, the testing halts and marketing results stop improving (and often start declining). 

Of course, Metrics Driven Marketing is just the foundation of a strong integrated marketing approach.  Market research, particularly in depth customer research, is essential.  As is customer segmentation strategies, enhancing the brand experience, PR, mapping marketing objectives/strategies to overall company objectives/strategies…  But, these can all be strengthened by a foundation in Metrics Driven Marketing.

Posted in Metrics Driven Marketing
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