Don’t pay for customers for years
(at minute 12:37)
One of my first blog posts was called "Paid advertising is the tax you pay for not being remarkable." I got so many "what the hell are you taking about?" comments from this early post that it fueled my desire to continue to blog about counterintuitive/advanced startup concepts.
This notion that great products don't pay for customers (through paid advertising) is one of the most counterintuitive startup concepts. This podcast caught my attention because it's the founder of StichFix - a high-profile B2C startup that recently went public - who says that it was five years before they paid for any customers.
A few thoughts on this topic...
I spend all of my time working with consumer startups. I would guess that B2B startups (like Slack and HubSpot) also get lots of word-of-mouth growth, but this isn't my area of expertise.
I've heard people say "you need to get a few hundred (or thousand) users" through your product in order to get enough feedback and - especially in the beginning - this isn't possible without paying for users. My thoughts here are that the value prop can be tested with a much smaller group and then some form of viral/word-of-mouth/PR/hustle can take you from there if your product & brand are great. If you get stuck and need to pay for users, I would first closely examine the product & brand.
When a founding team is truly product-focused then they force themselves to have patience with the product/experience. As the product experience gets better, the startup is rewarded with ongoing usage (loyalty) and word-of-mouth growth (raving fans). The founder in this podcast mentions that one of the reasons that they didn't turn-up paid advertising was that they wanted to get the matching right for every new user...a huge operational challenge for their business. Repeat after me...engagement is better than growth...engagement is better than growth...engagement is better than growth...
There is a myth that consumer startups are expensive to launch. This just isn't true. From everything that I've ever heard, great B2C startups get lots of initial users for free because customers talk about their amazing experience with their friends. This causes their customer acquisition costs (CAC) to be so low that it's easy for them to raise capital to increase their growth. Then these startups spend lots of money to grow...and the myth is reinforced that B2C is expensive. It's only possible to spend so much money because so many early customers were free and this allowed those teams to raise lots of capital. Don't let big raises fool you...those early flywheels where way more powerful than you think. On the other hand, are consumers startups with average brands and products expensive to launch? Yes. These startups are painful and expensive to launch. Don't be one of these.
Customers that you buy are much less valuable customers than customers that come from the word-of-mouth of existing customers. They spend less. They churn at higher rates. And they take-up many more resources (like customer support). Eventually you'll need to go down this path to be a mass-market product, but don't assume that these customers will behave like your initial customer group. They'll be way more expensive to acquire and be way less valuable.
If you are a B2C startup founder I would encourage you to spend all your limited calories making a 10x better product with an eye towards free growth. The longer that you remain in this phase the stronger your startup will be.
Get Right to the Lesson
I’d recommend listening to the entire thing, but to get right to the point go to minute 12:37 of this podcast.
Thanks to these folks for helping us all learn faster
Katrina Lake (@kmlake), founder/CEO of Stitch Fix (@stitchfix)
Kara Swisher (@karaswisher) of Recode (@Recode)
Please let me and others know what you think about this topic
Email me privately at email@example.com or let's discuss publicly at @davempayne.
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