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Becoming customer obsessed

Why you should grow organically, not artificially

Lessons learned from investor by Howard Marks
August 19, 2013
Short URL: http://vator.tv/n/315c

In early-stage tech startups, there are two major phases your business goes through.

First up, there’s that portion during which you figure everything out, "Discovery mode." And after that’s done you can progress to "Growth mode," the time when you - you guessed it - grow your business.

Discovery mode is the period in which you figure things out, often by trial and error. After that, your business goes into growth mode, where you acquire more customers, and scale your business until you (hopefully) become profitable.

Today, I’d like to focus on discovery mode, which I break down into two stages: the Idea and the application.

The idea stage is where you and your founders sit down and think, talk to your mentors, draw things on bar napkins and code late at night. The Idea stage is when you’re first trying things out. This the point where that you have found the problem you want your business to solve, you have formed your team and you’ve begun to work, but you don’t yet have a product.

The Idea stage is where you and your founders sit down and think, talk to your mentors, draw things on bar napkins and code late at night. The Idea stage is when you’re first trying things out. This the point where you’ve found the problem you want your business to solve, you’ve formed your team and begun to work, but you don’t yet have a product.

Those are some of the most exciting times. What comes after is the grind.

The next portion of discovery mode is the application stage. This is the point at which you have a product you can begin testing. The most important item on the agenda in application stage is discovering your metrics, what works, and what doesn’t.

If you didn’t already pivot in the idea stage, it’s almost certain you’ll pivot during the application stage. Most people don’t really know what they need they’ve gone through both stages of discovery mode. The important thing is to be flexible.

The application stage is especially important because it will help determine when to upgrade to the next mode of your company, scaling mode. But more on that later.

By the time the application stage rolls around, you should have gone through your Angel/seed round, and have at least a little money in your pocket. This point is critical. I’ve said it before and I’ll say it again: if you’re a young entrepreneur and you get handed that first fat check, you don’t have to shift right into growth mode.

The Application stage is also where your company goes through an Angel/Seed round, and also where many companies make a mistake: If you’re a young entrepreneur and you get handed that first fat check, you don’t have to shift right into growth mode.

No one is going to take that million away from you just because you don’t spend it all in the first month. No investor will be disappointed that you decided to save, or spent your time building a better product. No mentor will tell you that the trick to success is spending as soon as you have it. So don’t do it. Stop even thinking it’s an option because it isn’t.

No one is going to take that million away from you just because you didn’t spend it all in the first month. No investor will be disappointed that you decided to save, or that you spent your time building a better product. No mentor will tell you that the trick to success is spending as soon as you have it. So don’t do it.

The most disappointing path that I see young entrepreneurs take is the one that leads right through Google Adwords or Facebook or other PPC. Stop deluding yourself. Don’t think that impressive ‘traction’ (users you acquired unprofitably through paid traffic) means you’re doing something right. It doesn’t.

What I hate – Artificial Growth

To make a great company, you need to create something people actually want. People want something that’s helpful to them, that they can’t live without.

That’s not a problem you can solve by throwing traffic at it. It’s like dating. You can’t buy the right person, you need to go out and find them. Subconsciously we know this.

Still, I’ve seen it too many times – a young entrepreneur will take their newfound money and buy up users like crazy. And for what? A false sense of security? Impressive but artificial growth numbers do not a sustainable business make.

There are better investments out there than buying artificial growth. You could buy the Boston Globe. You can try to revive Pets.com. You could give all your money to a Nigerian Prince. You could come to the rescue of that guy at the bus station who needs $27.50 to get back to Bakersfield, at which point he will find his mom’s pursue and promptly pays you back by mailing a check. You could give your money to a rapper and ask them to open a restaurant or a hotel. You could give your money to Donald Trump.

Am I saying paid traffic is always evil? No. But for startups it’s usually the wrong choice.

Here’s the issue: You’re just getting started. You are not sophisticated enough to know your metrics. How are you going to wisely pay for traffic if you don’t know that information?

Think about it. The idea behind paid traffic is to spend $1 and have someone pay you $2 upon visiting your site.

To make that magic happen you need to set up your campaigns correctly. That means you need to know your metrics – what percentage of users convert to paying customers, what traffic sources are referring them, what an average visitor is worth so you can bid properly on your campaigns. As for intangibles, you need to know what pain brings them to the site, their typical psychology, demographics, etc.

But brands we admire are doing it…

Big brands have the resources to buy traffic, run test campaigns and play around with conversion rate optimization.

In the best cases, the brands that buy traffic profitably are only able to do so because they didn’t skip discovery mode, which is what you’re trying to do right now if you want to pack on artificial growth and skip application mode.

In the worst case, they’re wasting their money. You’d be shocked to know how many big brands are actually running unprofitable campaigns but don’t even know it (or care).

All this is to say – you can admire and learn from big companies, but you can’t play the same game they play. They’ve been doing this a while.

You, on the other hand, are new and have limited funds. Even if you have a successful series A under your belt and $5M in the bank, it doesn’t mean you’re big. Erase that train of thought from you mind.

Leave delusions of grandeur to the growth hackers. You’re now going to become a discovery hacker.

How to become a discovery hacker

Post this on your refrigerator door, tattoo it all over your body like you’re in Memento and it’s the only way you can remember things. I don’t care how you remember it, but remember this:

I WILL BE CUSTOMER OBSESSED. I WILL DISCOVER MY METRICS SO I CAN LIVE TO SCALE ANOTHER DAY.

That is the core of the Application Stage. How big is your team? 2 people? 4 people? I don’t care if it’s you and your cat or half the graduating class of Harvard, take at least one competent person and make them your customer liaison. This person will act as the primary correspondent with the customer and will be there to find out some of your most important information. If the CEO isn’t out raising money, this should be the CEO’s job until the shift to Growth Mode is made.

Whoever has been designated the customer liaison must become customer obsessed. Don’t think about it as customer service, consider it the bread and butter of your business. This person must find out all the elements of the product are the right elements for your targeted user. Whoever handles the customer must exceed the customer’s expectations. Whoever handles your product must know exactly what the customer expects from your product, inside and out.

 

Step 1: Find out who your customer base will be.

How do you find these things out about your customers?

What pain do you solve? Who will purchase your product and why? Have a good answer to these questions.

The only way to find the right answers is to have ESP about how your customers think and behave. To get to that level of knowledge, your customer liaison must grind day and night. They must personally go out to find the users at conferences, meet-ups, and industry-specific shindigs. They must post flyers on bulletin boards in the backs of coffee shops and other community centers.

When I first started a business selling software, this had to be done in “high bandwidth” mode, aka in person. One time I sold software at a conference by saying “Steve told us so,” referring of course to Mr. Jobs. But that’s a story for another day.

Things are different today. Now we have the benefit of the internet. Take advantage – check out blogs and forums. These are the gold mines. Cover every single niche and micro-niche blog you can find.

How to use blogs to discover your audience

If searching blogs and forum is gold prospecting, then bigger blogs and forums are pyrite veins. Avoid targeting the mass blogs at first. It’s a shotgun approach to getting customers when what you really want is a sniper rifle. You’re looking for the smaller, more focused publications early on.

The same principle applies to blog outreach when you’re a startup. A lot of new entrepreneurs put too much stock in the “TechCrunch-Bump”, the idea that if you get onto TechCrunch you’ll instantly become legitimate and get thousands of users, just the users you’re looking for.

It doesn’t work that way.

Why? Two reasons. First, that and other blogs like it are so broad. Any sort of bump in traffic from there will cause a bump in users that probably aren’t fanatical. Second, if you’re early stage it’s unlikely they will want to write about you.

How I did it

When I ran Acclaim, I got my first and most important users through blogs. No, I didn’t buy placement in the big ones. I got the best results by going on smaller, more obscure ones.

Did you know there are some blogs that have very few readers, but the people that read it tend to be influencers? Find those. These blogs get less traffic, but the traffic they get consists of the people you want.

I found the editors and the content producers of niche publications. I asked them to come talk to me, and assured them it would turn out to be great content for their readers. I sent them early invites to the games I was making, asked them questions constantly and, more importantly, I interacted with the readers and users of their websites. I also went onto forums and asked questions.

By listening to them, I learned how to make my product better. I listened to their questions and concerns and I worked to produce a product that continued the dialogues I had opened.

Which is a better outcome – getting one person to read, or getting an influencer to read about you and then talk about you with their whole audience?

Here’s how to play it cool on the blogs. Be honest and invite the audience of the blog, or niche to try your service. Help whenever you can, even if it doesn’t help you. Find experts and open a dialogue as quickly as you can. Talk to everyone. Be polite.

 

Step 2: Cater to your first 1000.

Kevin Kelly, former editor of the Whole Earth Catalogue and a founding executive editor of Wired, wrote a fantastic article called “1000 True Fans”.

If you haven’t already, go read it right now. Don’t worry, I’ll wait.

You should be searching for your 1000. Absorb what he says. He was referring to creatives, but it also applies to entrepreneurs. After all, we’re creating things too.

I know what you’re thinking to yourself right now. “1000? We got into this game to be the next Zuckerberg.” (Bonus points if you’re doing this while reciting your favorite line from The Social Network: “A million dollars isn’t cool. You know what’s cool? A billion dollars.”)

Slow down big boy. Big trees start as small seeds. I like the way Paul Graham puts it:

The other reason founders ignore [organic growth] is that the absolute numbers seem so small at first. This can’t be how the big, famous startups got started, they think. The mistake they make is to underestimate the power of compound growth. We encourage every startup to measure their progress by weekly growth rate. If you have 100 users, you need to get 10 more next week to grow 10% a week. And while 110 may not seem much better than 100, if you keep growing at 10% a week you’ll be surprised how big the numbers get.

 

Where to find your first 1000

Finding the 1000 true fans isn’t easy. You have to go to other startups, other founders, your mentors, your investors, and other people in your community. But it will be worth it because if you can harness those first 1000 users and make them happy they will never leave you. They are the early adopters, the crazies. They’re your new best friends. They will be the ones to bring their friends, family, and other fools along.

You’re being strategic here. Don’t ruminate over what you lack vs. a bigger operation, remember what you have. You have the time to actually pay attention to users, to talk to them, to listen. Use it to your advantage.

Whoever handles your first 1000 customers needs to be completely hands on. Your customer liaison needs to meet with early users often and listen very carefully.

Early users need to be given the entire customer service experience with a smile and then some. You need to be able to give them a service that is so unique and so personalized that the customer is more than happy. If you do it right, your consumer must be 100% satisfied, even if the problem that user is encountering can’t be fixed.

 

3. Take the next step

If you made it this far, you’re in a good position. Most never do.

With your first 1000 users, the shift from discovery to growth mode will be made significantly easier. If you follow my framework, much of the hard work will be long behind you when you decide to shift gears. You’ll be able to scale simply because you have 4 things going for you:

  1. You know your customers.

  2. You know what they want and expect.

  3. They debug your product for you

  4. They promote you via word-of-mouth.

Once you have these, raising money and scaling becomes possible. That inflection point is bittersweet, because by then you’ve learned to love dealing with your customers. There comes a point when it will no longer be possible as you start to grow quickly.

Not being able to cater to the few because I’m serving so many is a problem I’d deal with any day of the week.