Startup Marketing Blog – By Sean Ellis

Quick Thoughts from TC50: ToyBots

It’s a bit strange that I’ve picked another “kids targeted” startup from the second batch of  startups as my favorite – kids are a notoriously difficult market to acquire online.  But in the case of ToyBots, I believe they are targeting a fantastic opportunity. It is likely that connected toys will be the next generation in toys and I love their example of having grandma read a story to the grandkids through the toy. 

I believe Webkinz laid out a good marketing roadmap for this type of startup.  My kids couldn’t walk into a Justice (previously called Limited Too) without asking for another Webkinz.  I didn’t mind buying a stuffed animal, but am a little more hesitant to offer the kids my credit card for online purchases.  From a business perspective, I was intrigued when my kids ripped off the virtual currency and threw the toy into the corner – never to be played with again.

ToyBots can create a tighter link between toys and a web experience than Webkinz, but leverage the same types of marketing channels. My recommendation would be to link the licensing to the marketing opportunities.  The toy makers already have great distribution, but very few subscription opportunities.  ToyBots can improve the ongoing engagement with kids for each toy manufacturer – increasing monetization opportunities and possibly creating a direct customer acquisition opportunity for manufactures to cross promote new toys.

It’s difficult to know how much progress they’ve achieved, but announced partnerships suggest that this isn’t a half baked idea.

Posted in TechCrunch50
4 comments

Quick thoughts from TC 50: ToonsTunes

I’m at TC50 and plan to write quick thoughts about demos that catch my attention.  This is very “on the fly” so it will be pretty rough. I’ll try to clean it up later.   Videos of the demos will be posted online, so I’ll add links when they are available.

ToonsTunes is my first… 

• Who needs it/why?(They claim to be targeting Tweens, but the demo looked like it would appeal to a younger demographic.  I think children 7-12 would probably enjoy this product, but would want to validate with research.) 
• Product progress? (Great graphics, looks well developed.)
• Are they willing to pay for it/how/how much? (business model)
  • Freemium (enhanced), Sponsorship, Merchandise
  • I’d recommend premium subscriptions to save music
• Are there realistic ways to acquire users within economic constraints? (marketing)
  • Viral (via parents social networks) – this is a great idea.
  • I’d also recommend marketing via popular sites for kids. 
• Is the likely cost of acquiring users plus marginal cost of service less than value per user? (business economics) - This would require a lot more exploration.  But I like their idea of giving parents the ability to display their kid’s work via FB, etc.  Not sure about licensing costs to music labels if they “borrow” from popular songs.

Posted in TechCrunch50
3 comments

When Should a Startup Start Charging?

I’ve recently changed my long held belief that all startups should charge immediately upon the release of a new product.  I now believe that non-enterprise targeted startups should only charge once you have achieved product/market fit.  As explained in this earlier post, I define product/market fit as at least 40% of your active users saying they would be “very disappointed” if they could no longer use your product.

The evolution in my thinking to charge only after product/market fit is based on finally working with some “normal startups.”  The first five startups I helped take to market all amazingly achieved product/market on the initial release.  For these startups it was right to encourage a quick implementation of the business model.  However, for startups that haven’t yet found product/market fit, a business model can hinder the process of figuring out how to deliver value.  Users are forced to quickly decide if the product is worth the financial investment (and we already know it’s probably not since most wouldn’t be “very disappointed” without the product – when free).

It is safest to assume you won’t have product/market fit right out of the gate.  If your initial release hits (think winning the lottery), then you can quickly implement your business model as you transition to a growth company. 

If however, you are like most startups, you will spend an undefined period of time engaging users and evolving your product to better meet their needs.  When surveys tell you that you’ve reached product/market fit, the final validation is charging for your product (or a version of it).

It’s Different for Enterprise Targeted Startups

For startups targeting enterprises, it actually does make sense to charge before reaching product/market fit.  This is the best way to help the enterprise figure out how to get value from your product (somebody on the inside will be motivated to work with you to unlock value since they’ve already spent the budget).  If you haven’t charged anything, your attempts to engage the customer and find value are likely to be perceived as an aggressive sales annoyance rather than genuinely helpful. 

Growing Your Startup with a Business Model

Startups often delay implementing a business model claiming “we’re focused on growth right now.” But once you’ve achieved product/market fit, most startups will grow faster with a business model (I wrote a post on this earlier).  A business model gives you rational constraints within which you can execute very aggressively – otherwise you are held back by fear that you may be wasting money on paid marketing programs.  

Without a business model, you don’t know if your business is real.  Of course some prefer to hope that a business model implemented in the future might work rather than know that one implemented today doesn’t work.  If you are truly offering value (have achieved product/market fit), then there is a business model that will work.  The only way to find it is to start experimenting.

Posted in Business models, Product/market fit
18 comments

Great Resources for Achieving Product/Market Fit

A few people have asked for more guidance on getting to product/market fit.  I updated my previous blog post with another quote from Marc Andreesen, but recommend that you read his full full post via archive.org (it has been removed from his blog).

Here is the quote that I added to my previous post:

“When you are BPMF (before product/market fit), focus obsessively on getting to product/market fit.

Do whatever is required to get to product/market fit. Including changing out people, rewriting your product, moving into a different market, telling customers no when you don’t want to, telling customers yes when you don’t want to, raising that fourth round of highly dilutive venture capital — whatever is required.”

Andrew Chen also has an excellent post on the same subject.

Posted in Product/market fit
2 comments

The Startup Pyramid

Every six months I rethink the optimal startup go to market approach based on new insights gained at recent startups. Lately I’ve been using a pyramid to represent the process I’m using. Startups require a solid foundation of product/market fit before progressing up the pyramid and scaling the business.

Achieving Product/Market Fit

Product/market fit has always been a fairly abstract concept making it difficult to know when you have actually achieved it. Yet many entrepreneurs have highlighted the importance of creating a product that resonates with the target market:

• Paul Graham: The mantra at Paul’s successful startup incubator YCombinator is “make things people want.”
• Steve Blank: In Steve’s book Four Steps to the Epiphany he writes: “Customer Validation proves that you have found a set of customers and a market who react positively to the product: By relieving those customers of some of their money.”
• Marc Andreesen: A couple years ago Marc wrote the following on his blog: “…the life of any startup can be divided into two parts – before product/market fit and after product/market fit.”  He goes on to write: “When you are BPMF, focus obsessively on getting to product/market fit.  Do whatever is required to get to product/market fit. Including changing out people, rewriting your product, moving into a different market, telling customers no when you don’t want to, telling customers yes when you don’t want to, raising that fourth round of highly dilutive venture capital — whatever is required.” 

I’ve tried to make the concept less abstract by offering a specific metric for determining product/market fit. I ask existing users of a product how they would feel if they could no longer use the product. In my experience, achieving product/market fit requires at least 40% of users saying they would be “very disappointed” without your product. Admittedly this threshold is a bit arbitrary, but I defined it after comparing results across nearly 100 startups. Those that struggle for traction are always under 40%, while most that gain strong traction exceed 40%. Of course progressing beyond “early traction” requires that these users represent a large enough target market to build an interesting business.

You should measure your product/market fit as soon as possible because it will significantly impact how you operate your startup. If you haven’t reached product/market fit yet it is critical to keep your burn low and focus all resources on improving the percentage of users that say they would be very disappointed without your product. Avoid bringing in VPs of Marketing and Sales to try to solve the problem. They will only add to your burn and likely won’t be any better than you at solving the problem. Instead, you (the founders) should engage existing and target users to learn how to make your product a “must have.” Sometimes it is as simple as highlighting a more compelling attribute of your product – but often it requires significant product revisions or possibly even hitting the restart button on your vision.  For more on getting to product/market fit, I recommend reading Marc Andreesen’s full post via archive.org (it has been removed from his blog).

Race up the Pyramid

Once you have achieved product/market fit, it’s time to accelerate through the next steps of the pyramid and then begin scaling your business. Here’s a brief description of what to do at each of the steps before scaling:

• Promise: Highlight the benefits described by your “must have” users (those that say they would be very disappointed without your product).
• Economics: Implement the business model that allows you to profitably acquire the most users.
• Optimize: Streamline a repeatable, scalable customer acquisition process by testing multiple approaches and tracking to improve the right metrics.

Effectively executing these pre-scale steps often improves the conversion rate to transactions by 5X or more. This directly boosts the effectiveness of every future marketing initiative by the same proportion. Just don’t rush into this fine-tuning phase until you have first achieved product/market fit.

I recommend reading this post on Milestones to Startup Success for additional details.

Posted in Business models, Positioning, Product/market fit, Steven Blank, The Four Steps to the Epiphany, Y Combinator
12 comments

Big Picture Customer Development Revisited

Working with four startups at the same time has steepened my customer development learning curve (and also explains why it has been a month since my last update).   To help balance the load, I’ve brought on a conversion designer and a researcher; we’re finally firing on all cylinders. 

Our customer development goal with every startup essentially boils down to a race to be able to focus on growing the business.  But in order to avoid wasting effort and money on tactical growth drivers, the following steps need to be completed first:

• Validate the product/service is gratifying a reasonable percentage of users.
• Create a value proposition that will attract the right type of users and pull them through the conversion funnel to gratification (and ultimately a transaction). 
• Eliminate friction from the conversion funnel. 
• Fine tune a business model that supports scalable customer acquisition channels. 

If these steps have been executed well it is relatively easy to grow a sustainable business.  But many startups skip these steps and jump right into trying to grow the business – making their job much harder or even impossible.  Some will get lucky, but most will fail.  

Given the importance of getting customer development right, I’m certain that eventually most startups will contract a specialist to help them navigate the challenges of this pre-scale phase.  I’m often asked how I plan to expand 12in6 to help more startups.  Most people are surprised when I tell them I don’t have a desire to expand the business.  I really enjoy being able to work hands on with two new startups per quarter.  If I built a large team to fill the current void of specialists, I’d be too busy managing the team.  This would mean less time learning how to improve my customer development approach. 

As I explained in my last post, I’m now validating that a startup’s product is gratifying users before I commit to working with them.  While I love to hear from as many funded startups as possible, I can barely scratch the surface of the number of startups that need help.  If I don’t have the capacity to help you, here are a few others that specialize in customer development:  (I haven’t dug into their approach enough to be able to endorse them, but I encourage you to check them out)

• Brant Cooper (San Diego)
• Rajiv Kapoor (New York)
• Sean Murphy (SF Bay Area)

If you are specializing in customer development or know someone else that you can recommend, please add names/recommendations in the comments. The main things to consider when evaluating a specialist is their track record building successful companies.  And be sure to check references (especially around chemistry with the team).

I have been sharing discoveries on Twitter (follow me @ http://twitter.com/seanellis) and hopefully  I’ll resume regular blog posts next week (after I get back from a short vacation in Hawaii).

Posted in 12in6, 12in6 Methodology, Acquiring Customers, Customer Development
8 comments

Free Customer Development Help – Survey.io

I’m excited to announce a project that I’ve been working on with KISSmetrics called Survey.io, which provides startups with a free and easy way to prepare, distribute and analyze an initial customer development survey. It includes the content of the survey I use to verify that a startup is ready for the 12in6 Metrics Driven Customer Development Program (which begins at the validation step in Steve Blank’s Four Steps to the Epiphany). 

Determine if you are ready to scale

For startups, this survey is an ideal way for you to determine if you should begin the final preparations before aggressively scaling customer acquisition.  Some VCs have also started using Survey.io as part of their diligence before making Series B investments – so don’t be surprised if a VC asks you for your Survey.io results.

The most important question for determining how well your product is resonating with early users is question 2:

2) How would you feel if you could no longer use [product]?

• Very disappointed
• Somewhat disappointed
• Not disappointed (it isn’t really that useful)
• N/A – I no longer use [product]

If most of your respondents are saying that they would only be “somewhat disappointed” without your product, they are really telling you that it is only a “nice to have”.  When asking users why they selected this answer, I often find that they are focused on commodity aspects of the product and they know of a replacement product.  It’s very difficult to build a business around a “nice to have” product, so you should keep burn and customer flow low while you iterate your core experience. 

If however, you find that around 50% or more of your users are saying that they would be “very disappointed” without your product, there is a great chance you can build a successful business on this “must have” product.  This is the time to reallocate some development resources to optimizing first time user flows and building the tracking/reporting systems needed to effectively scale customer acquisition initiatives. 

Survey.io to develop value proposition

The survey also provides some useful early feedback for verifying use cases, developing your value proposition and positioning against the most common alternative solutions.  This feedback is directionally useful, but I recommend significantly more research (via customer surveys and interviews) before finalizing your value proposition and positioning.

I strongly encourage you to setup and run your own customer development survey via Survey.io.  It only takes a few minutes and it free.  Here’s the link again.

And here’s a link to my customer development survey for Startup-Marketing.com .  I’d really appreciate it if you could take the time to complete it.  This will help me tailor the content of this blog to better meet your needs.

Posted in 12in6, 12in6 Methodology, Acquiring Customers, Competitors, Customer Development, Research, Steven Blank, The Four Steps to the Epiphany, VC
3 comments

What is the Lean Startup Approach?

It took a recession for entrepreneurs to finally start launching startups the right way. But in my experience, a lean startup approach is ideal in any economy.

The two key pillars of the lean startup are customer development and agile product development. Both involve a systematic process of learning through feedback and driving improvement through metrics driven testing. Contrast this to the traditional startup approach of bloated budgets supporting large marketing and development initiatives based purely on intuition.

While I have been working hard to evolve and promote metrics driven customer development, Eric Ries has evangelized the complete lean startup approach. And he has included practical execution guidance (often to the annoyance of more guarded practitioners of agile development).

All startup founders and engineers should find the time to attend Eric’s workshop – if you can get in. You won’t be disappointed.

Posted in Agile Development, Customer Development, Eric Ries
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Keys to Unlocking Startup Growth

When a startup takes VC funds, they usually accept the premise that they need to “get big fast”.  VCs don’t fund lifestyle businesses.

Unfortunately desire for growth causes many startups to make poor choices.  There are generally two opposite mindsets that lead to the same mistakes:

1. Overconfidence: “We have lots of money, so let’s move fast (no need to be cautious).”
2. Panic: “We are running out of money, so let’s move fast (get traction before we run out).”

For an entrepreneur focused on growth, it seems natural that they should “get the word out” about their new innovative solution. Thus many startups quickly launch awareness building initiatives ranging from advertisements in a tech magazine to exhibiting at tradeshows.   Generally this is a complete waste of money.

While experienced marketers recognize the need for some positioning work upfront, they still generally lack a broader understanding of where to focus resources and in which order. 

The first time I saw an effective go to market roadmap was when I read Steve Blank’s Four Steps to the Epiphany.  His roadmap consists of the following four steps:

1. Customer discovery
2. Customer validation
3. Customer creation
4. Scale company

He warns that a company should not kick into growth mode until reaching the fourth step.  By this point they have figured out a sustainable and scalable process for acquiring and monetizing customers.  If you haven’t read the book, I highly recommend it.  For a more detailed overview of the book see this post from Eric Ries.

The approach I’ve used to attract 10s of millions of users to startups is similar, but allows growth a little earlier (click graphic below for full size).  

 
Within a few weeks of initiating the understand phase, we generally have enough user insight to baseline allowable acquisition costs of a new user and begin iterating.  It can be tempting to start building all customer acquisition channels that fall within this allowable acquisition cost, but finding and managing these channels takes too much time to already be a priority.  Instead, we just want to generate enough new user volume to iterate landing pages and sign up flows.  These iterations can increase the allowable acquisition cost by more than 10X in only a few months. 

At the completion of the iteration phase we can put all of our energy into building profitable customer acquisition channels.  With a much higher allowable acquisition cost, the process of building profitable channels is relatively easy (and even fun).  I recommend starting with free channels first and ultimately spending up to your allowable acquisition cost.  This recent post gives more details on building these channels.

Posted in Acquiring Customers, Customer Development, Steven Blank, The Four Steps to the Epiphany
2 comments

The Lean Startup Era?

Steve Blank and Eric Ries presented their lean startup approach to a very receptive crowd at last night’s Startup2Startup dinner in Palo Alto.   Here’s a link to the must watch video.

Highlight’s of of the presentation include:

• Startups fail from lack of customer – not product failures
• Fail fast and often on the path to success
• Decide on a business model early
• The correct customer development approach changes by market type

Following the presentation each table discussed the topics over dinner.  I was pleasantly surprised that  the entrepreneurs at my table had all implimented some form of customer development and agile development.

Posted in Agile Development, Customer Development, Eric Ries, Lean Startup Entrepreneurs, Steven Blank
1 comment