Monthly Archives: May 2014

Your Three Types of Customers

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When you design the user experience for your products, it is important to remember that every product actually has three different 6774634275_73b52d6267_zuser experiences. These three experiences exist because you have three types of customers and each of them will use your product in different ways. The three types of customers are:

  • Newbies: People who are using your product for the first time, right now.
  • Students: People how have used your product a few times and have mastered the basics but have not yet decided if they will be dedicated customers.
  • Experts: People who use your product as frequently as possible, ideally part of their daily routine.

Each type of customer has different needs, different expectations and requires different strategies to win them over. Let us review them one at a time.

Newbies: Winning on Day Zero

Day zero begins the first moment that a new customer touches your product. You should assume that, on day zero, Newbies know nothing about your product or what it is supposed to do. Hence, your challenge is to simultaneously educate them about the product while demonstrating how useful the product will be once they master it.

Your primary goal with Newbies is to get them to come back a second time. Customers that only try a product once are lost and almost impossible to recover. You want to find a way to bring them back often enough to increase the chance you convert them to a loyal customer.

To win over the Newbies, there are some key things you need to provide as part of your Day Zero experience:

  • The Wow Factor. Newbies need to see something exciting and memorable during their first time using the product, without requiring them to do a lot of work. Something that is so impressive that they will have an incentive to learn more and put up with the natural frustration that exists when learning something new. This initial payoff will set the tone for their interaction with the product.
  • Goals over Tools. Many products have their interface built around capabilities of the product, exposing everything the product can do. Newbies don’t yet speak the language of your product so they won’t know how to translate their goals into the features and tools you provide. You should focus instead on the goals of a first time user and map those into features for them. It gives you a great chance to demonstrate the power of the product, while helping a customer achieve a goal during their first time using the produce.
  • Limit Choices. While it might be great that your product can do a lot of things, you don’t want to expose these all at once to a new user. Instead, you are best to reveal only the minimum necessary to use the product and reveal additional complexity later. Providing too many options and too many paths will only serve to confuse.

Remember, your goal with a Newbie is not to turn them into an expert but to get them to come back again. If you are successful, your Newbies will become Students.

Students: Getting Over the Hump

Student customers are already familiar with your product and have used it a few times, so hopefully they have experienced the Wow Factor and have achieved at least a few of their goals using the product. You managed to convince them to come back multiple times, now your challenge is converting them into an Expert.

Getting over this hump, and turning them into loyal customers, will define how quickly your business will grow. Some common ways to help turn Students into Experts:

  • Always show them something new. Don’t overwhelm customers with power tools all at once, but encourage them to explore something new every time they come back. If you see them attempting to achieve goals, you can coach them with better or faster ways to achieve the same goal. You can also introduce features and tools they haven’t used before to expose them to everything the product has to offer. Constantly being exposed to new things will give them a strong incentive to keep coming back and learning more.
  • Watch out for warning signs. If customers show signs of frustration or lack of engagement, proactively engage with them. For example, if they try the same action multiple times with no success, you can prompt them with help on how to achieve their goal. These friction points also become the top priority for you to improve in the user experience.

Make sure that you are closely tracking your Students because they will be at risk of loss until they become Experts.

Experts: Rewarding Your Evangelists

Experts are the most active customers you have. They use the product constantly, hopefully everyday, and know all of the features inside and out. Since they are already as active as possible, your challenge is to keep them that way and not lose them.

The best way to keep them engage is to stay ahead of any reason they might have to leave. While you can’t force someone to be happy, you can remove reasons for them to be unhappy. Anticipating reasons they might depart and removing them ahead of time is hard but there are some general ways to do this:

  • Constant Improvement. Constant and consistent improvement to the product is critical. It provides customers with a sense that the product is always getting better, which will translate into patience when they encounter things they don’t like. If they get frustrated and feel that the product is stale they are more likely to give up and walk away.
  • Open lines of communication. Solicit and listen to feedback from these customers, giving them a feeling of ownership in the product. You should have special lines of communication available to Professional users which will make them feel valued. It will also allow you to prioritize their concerns and improvement requests.

You will lose customers, even Experts, that is a fact of life. However, minimizing that loss is critical for maintaining your business. It is significantly cheaper to retain an existing customer than to acquire a new one.

Conclusion: The Perfect Product

There is no such thing as a perfect user experience, as it is difficult to balance the needs and interests of all three types of customers at the same time. Some products are very simple to pick up and use the first time but are not useful for experts. Other products are powerful for experts but very difficult for first time users to learn. You cannot make everyone happy at the same time, but you can alleviate as many problems as possible. Just because there is no such thing as a perfect product does not mean you should not aspire to create one.

By taking all three customer types into account when designing your user experience you will get as close as possible to your ideal product.

Photo made available via Creative Commons by Flickr user Henriksent.

What Investors See When They Look At You

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If you’ve gotten far enough in building your mirror business to think about raising investment, then you’ve worked very hard and survived some near-death experiences. It’s been a tough road and you should be proud of the progress you have made. Well done!

However, when you sit down to talk to a venture investor about your business you need to put all of that aside. When a venture investor looks at your company they don’t see it as it is today, they are trying to envision what it might look like in 5-10 years.

Wait, let’s take a step back: How do VCs work?

If you’re not familiar with how venture capital funds work, they are easy to explain. A group of partners (known as the general partners) form an LLC to act as an investment fund. They then raise capital for the fund from large institutions like pension funds, endowments and other funds (known as limited partners).  The size of venture funds varies wildly from $20M to $1B, but almost all venture funds have a 10 year lifespan. For the first 3-4 years of the fund, the general partners are making investments in new companies and the remaining 6-7 years is spent managing those investments and making follow-on investments in the same companies. At the end of 10 years, the fund is closed and, assuming there was a positive return, the limited partners get their rewards. (For a much deeper explanation of venture funds, read Venture Deals).

Keeping that in mind, the primary motivation of a venture investor is to produce returns on their fund in 10 years. Considering the high failure rate of start up companies, out of a portfolio of investments in 10 companies they can expect 7 to go out of business, 2 to be moderately successful and one to be hugely successful. In order to produce a return on the entire fund, they need those successes to be huge (return 20+ times the money invested).

Okay, so how does that affect how they see me?

Venture investors, because of how their funds are set up, are constantly looking for companies who have the potential to produce a 20x return on investment. That is very difficult to achieve and not many companies will have that kind of potential. A neighborhood grocery store will never produce that kind of return, nor will your local bookstore.

Not only do venture investors need a 20x return, they need it within 10 years. There are businesses you can grow slowly over 20 or 30 years to produce those returns, but to do it in less than 10 years means that your business needs to grow extremely quickly. To grow that quickly, you need a quickly growing market, a well thought out plan, some critical strategic advantage and the right team to execute your plan.

So, when you sit down with a venture investor, they are looking for signs that your business can produce 20x returns within 10 years.

Ah, that makes sense. So what does that mean for me?

The most important thing for you to convey to venture investors is the potential of the problem you are solving and how large the market is that has that problem. You cannot produce a 20x return on $10M of investment if your market size is only $50M, but you can if your market size is $1B. If the venture investor can envision your company in 10 years operating at that scale, you will get their attention.

After you convince them that your problem/market is big enough, it is time to convince them that you can make that happen. It is very hard to convince anyone what will happen in 10 years, especially investors that hear similar things everyday, but there are some keys to doing it well:

  • Present a plan. Your plan might change, but you need to have a credible long-term plan for getting to the large outcome. If you can’t build a credible plan at the beginning, it’s unlikely you will be able to come up with a new one as the market changes. The plan you present will also serve to identify the key risk factors that your business will face as it grows.
  • Show you mean it. You have already been following your plan in building your business, so show off how well you have executed. Remember, your progress so far is not why they will invest in you, but your progress so far is proof that your plan is credible and that you can execute against plans you create.
  • Sell the team. 10 years is a long time. If your company is going to be very successful, it will be a long and difficult road. Your team is critical because it is those people who will steer the company through those hard times and the venture investor needs faith that you can do it. In the end they are investing in you.
  • Don’t play fair. If you really have found a big opportunity that can product 20x returns, it is likely that many others have as well. You need to show a distinct competitive advantage that will allow you to win when faced with dozens of competitors going after the same goal.

Hopefully, at this point you are starting to realize why many companies struggle to ever raise venture funding at all. It is great that you have 5 paying customers today, but can you convince an investor that you will get to 5,000? You have 2 brilliant developers writing code, but who is going to sell your product to Fortune 500 companies? You have a great plan and team, but without any customers how can you be sure your product will work in the market?

Time to Focus

The good news is that, assuming you’ve followed at least some of the advice on this blog, you have already built the foundation for a great company that can produce the kinds of returns that venture investors want. In order to successfully raise investment, you just need to make sure to present your company in the way the potential investors need to see it. Focusing on where you can go, and not on where you’ve been, will go a long way towards that goal.

Besides, after all the hard work you’ve put in, it’s fun to think about how successful you can be in 10 years.

Thanks to Leo and Beth for reading a draft of this post. Image copyright Graham Hogg and made available via Creative Commons.

The Science of Creating Demand

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If you gave a random person your product for the first time, do you think they will immediately become a loyal customer? Maybe not for most products but definitely for your product, right?

Right.

Creating demand for your product is more than just building a great product. People have to know about it, understand what it does and have a problem that it fixes. Every year thousands of fantastic products fail because no one (or not enough people) knew they exist.

Whether you are building a physical product, writing a new blog or starting a consulting company you start with an audience of zero. Building an audience for your product starts on the same day you start working on the product. In fact, building demand for your product is often more important than building the product itself.

So, how do you build demand?

Step 1. Recruit Your Customers

Even before your product is ready for use, you should start recruiting customers. In fact, whether or not you can recruit customers for your not-yet-existent product is a great way to test market demand (the Lean Startup methodology is built around this). If you have a hard time convincing people that they need the product then it might not be very valuable, but if people can’t wait for it to be ready you might be on to something.

Initially, you should have a guess as to what kinds of customers are most likely to love your product. You should test that hypothesis by going after a wide variety of customers, including the ones you guess will be your target segment, and using the feedback you gather to narrow your focus.

How do you recruit customers? Here are some examples:

  • If you are starting a new blog you should try to build relationships with other bloggers and readers by commenting on similar blogs, joining topical conversations on Twitter and answering questions on Quora. Watch for who engages with you and what topics they are interested in.
  • If you are building a new mobile application, you can easily set up a beta test where you distribute early builds to a few hundred people and watch their behavior using the app. You can also set up a landing page using LaunchRock (http://launchrock.co/) and run some test advertising campaigns to measure interest by how many email addresses you collect.
  • If you are building a new physical product you can easily recruit people on Craigslist (example) for $20 or less to meet with you for 30 mins to test a prototype. I have even seen people set up tables at Farmer’s Markets or Flea Markets to do product testing live with strangers.

An important trap to avoid is recruiting customers only from your personal network. If you cannot convince strangers that your product will be valuable then your business will not succeed.

At the end of your customer recruitment you should have a list of dozens or hundreds of customers who are eager for you to launch your product, and a very detailed understanding of your target customer.

Step 2. Go Where They Go

Now that you know who your customers are, it’s time to figure out where they congregate. Yes, you could try to contact all of them individually but you will go out of business very quickly. Instead, you want to understand where and when your customers will be in the same place so that you can reach them all in that place.

The easiest way to figure out where they congregate is to become one of them (if you aren’t already) and go through all the motions they go through. Some common places customers congregate:

  • Enterprise Customers (big companies) frequent trade shows and conventions. You need to understand what conventions are important for your target customers.
  • Developers (engineers) love learning new things and will frequent topical Meetups and Hackathons. They also use forums like Stack Overflow.
  • Consumers spend their time on social media (Facebook, Twitter, Pinterest) and reading the news. However, standing out against the noise will be tough so try to find interest-specific forums and outlets where your potential customers are more likely to hear you.

Some customer segments, like small businesses, never congregate in the same place which makes reaching them very difficult. That is why Groupon spends so much on a tele-sales force to call them all directly. Knowing that up front will help you plan effectively.

Each congregation point you can find represents a channel for you to reach your customers. The more specific the better, so choose a popular topical blog over Facebook in your early days until you feel you have refined your message.

Step 3. Train Evangelists

Now that you have narrowed down your initial target customers and know how to reach them, you still have time before your product launches to make sure you increase your chances of reaching those customers. The most powerful channel for marketing your product will be word of mouth from customers who love what you do. You can’t be everywhere that potential customers will talk about you, but your existing customers can. The customers that will spread that word of mouth are your evangelists and you want to help them in every way you can.

Instead of just sitting back and hoping your customers will love you and spread the word, you want to create an environment where they feel rewarded for helping you. Since you can’t afford to pay them, the reward will have to be something else. Some common reward programs for evangelists:

  • Let Them Inside the Velvet Rope – Setting up a preferred customer or early access program where you test new features and gather feedback from customers is not only useful for you, it’s a great reward for customers. They will not only have access to features not generally available but feel that they have a say in shaping the product.
  • Make Them Look Smart – Everyone wants to look smart, and there is no better way to be smart than to know something interesting that no one else knows. Make sure your evangelists are up to date on your product, new innovations and upcoming events. Having an “insiders” newsletter that goes only to evangelists can not only help them feel smart, but encourage them to spread the news. Likewise, limiting access to invitation-only and giving your evangelists invites makes them the gatekeepers and the perceived insiders.
  • Recognize Them – Evangelists are volunteering their time and reputation to spread the word about your product, the least you can do is recognize them for the effort. Always respond to them quickly and gracious when they contact you in whatever method they prefer. Give them chances to guest blog or cite their comments when you talk about your product.
  • Give Them a Discount – In some cases it can make sense to provide a discount to your early evangelists. Be careful with this as it creates a strange dynamic to pay someone to spread the word on your behalf.

Identifying potential evangelists is easy, since they are the customers that are the most enthusiastic about your product and are the most active during your test period. Sometimes the best evangelists start out as detractors that you turn into evangelists through superior customer service and listening to their concerns.

Setting up your evangelists before you launch will give you a great network of people who will help you spread the word about your product.

Step 4. Measure, Measure, Measure

You still have not yet launched your product, but you have identified who your customers will be, how to reach them and how to incentivize them to spread the word. In the remaining time you have, be sure that you set up the right analytics to help you measure your customers when you launch your product. Everything prior to launch is a hypothesis and you want to be able to verify or disprove that hypothesis as quickly as possible.

Even after you have launched, you never want to assume that your customers are static entities that will be the same tomorrow that they are today. They will change over time, just like you will, and you need to be able to measure and adjust when that happens.

Step 5. Launch!

And then, after all that, you launch!

Yes, you did a lot of work to recruit, study and grow your customers before you even had a product. That work will pay dividends for the life of your product by giving it a much higher likelihood of success in the market.

You can reach more about running a successful launch in Go To Market To Win and how to grow pre- and post-launch in Growth Hacking.

There Is No Such Thing As Content

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“Bad conversationalists talk about themselves. Good conversationalists will talk about a common interest. Great conversationalists talk about the other person.” -Anonymous

When you need to bring attention to your new product, there are many tools in your marketing arsenal. You can pay others to promote your product (advertising), encourage existing customers to invite other customers (growth hacking) or have the press write about you (PR). Another option is called Content Marketing, where you write a blog, post on Twitter and try to start conversations that will catch on in social media to raise your profile.

In Content Marketing, unlike PR or advertising, you are not talking about yourself but instead on a related topic or field. For example, if you are running a tractor company you might write a blog about pricing trends in the farm industry. While you don’t talk about your tractors directly, you might attract a large number of readers in the farming industry that will then know your brand and explore your product line.

Content marketing is not complicated (or new). It generates leads in the same way as other forms of marketing, but with the potential to be cheaper than advertising and higher volume than PR. To be successful at it, you need to realize one thing:

There is no such thing as content.

Content is a word which is increasingly overused to refer to everything from movies to news articles to tweets. Today, content can refer to anything that was created in electronic format to be distributed (usually in a video, image or text). That makes the definition so broad as to be completely meaningless.

So, how do you launch a content marketing strategy if there is no such thing as content?

The key to content marketing is talking about something that interests people with a unique perspective. Your potential customers will not read your blog unless you are providing them with new information, providing an opinion on the news that they find insightful, teaching them some new skills or in some other way making their life easier. It might be easier to think of content marketing as “Information Marketing” or “Instruction Marketing” or “Analysis Marketing” depending on the approach you take and how you benefit your customers.

Most content marketing falls into one of the following categories:

  • Business Analysis. Analyzing a market, business or products can help attract an audience trying to understand those things themselves (analysts, reporters, etc.). If you are building a company you are naturally an expert on your industry so it’s likely that you can provide good, in depth analysis.
  • Tutorials or Instructions. Teaching is a great way to build relationships with your customers, or potential customers. You can teach them how to do something new, understand a complex topic or use product. If you go down this route, try to avoid only teaching about your own products since that will not appeal to the widest possible audience.
  • Opinions. You might offer your opinion on the news, products or other companies. Opinions differ from analysis in that you are not looking to use data to draw conclusions, but provide your own perspective. Many people have built entire careers off of their opinion, just make sure yours is interesting enough to stand out.
  • News. Breaking the news is a great way to get everyone’s attention. Good or bad, news attracts the full range of people from customers to analysts and reporters. Remember that even though you consider your new product launch news, no one else might.
  • Humor. People love humor, just make sure you are actually funny.

Some examples of very successful content marketing strategies:

  • Flurry (News/Analysis): Uses its unique market data to report on trends and changes in the mobile market.
  • Hubspot (Tutorials): Teaches people how to effectively use social media and content marketing to grow their audience.
  • Buffer (News/Tutorials): Runs their company completely transparency, allowing outsiders to see (and learn from) everything from their salaries to revenues.

Whatever you choose, the most important thing is to be unique. If you are analyzing a market, start from a new angle. If you are breaking news, make sure you have it first. You want to stand out from the crowd as well as giving your audience a reason to come back again in the future.

Content marketing requires time and patience. Even if your content is brilliant, there is no guarantee that your audience will find you right away. However, if you are unique, persistent,  and focused on quality, you can augment your marketing efforts and help grow your business.

The Most Important Characteristic of Successful Founders

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There are an infinite number of blogs (including this one*) that provide advice and insight into starting companies. Many of them will have flashy posts like “5 characteristics of successful entrepreneurs” or “10 things that make you a good founder”. Those lists often focus on the personal traits common in successful founders such as their personality, their work ethic or their prioritization process. They imply strongly that if you model yourself after these successful entrepreneurs you are more likely to be successful yourself.

I disagree with every single one of those articles. I think the most important characteristic of a successful founder is simply to be yourself.

Success is the only measure of whether you are a good entrepreneur, not who you are as a person. If the business you build is a success, people will attribute that success to who you are. If the business is a failure, it will be because of who you are. In either case you are the same person, but the opinion of you is shaped by your success of failure.

There is a phenomena called Survivorship Bias and it’s a well understood and common cognitive bias where we mistakenly attribute success to the wrong factors. It happens when you ignore failures and draw conclusions from only a group of successes. In this case, it means only looking at successful founders and drawing conclusions about why they were successful while ignoring all of the failures that might be comparable.

So, why do I think that it is so important to be yourself?

Building a business is hard enough as it is, but if you try to change who you are while building you are making your job even harder. Everyone, including you, has natural strengths and weaknesses. Your chances of success are much higher if you rely on your natural strengths than if you try to mimic the strengths of others.

Yes, you will need to learn new skills in building a business. Yes, you will need to overcome some of your weaknesses to be successful. But if you are to succeed it will be because of your strengths.

Remember that all of the entrepreneurs we idolize today have in some way broken the mold of what a “successful entrepreneur” was thought to look like at the time they got started. Bill Gates was too young, Colonel Sanders was too old.

Maybe if you don’t fit the mold you will break it too.

* Of course, of all those blogs this one is the best. Seriously, you should tell all your friends about it. And strangers on the street, they need to know as well. 

Not All Customers Are Created Equal

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You have finished the first version of your product. Congratulations! Now it’s time to start selling to customers and generating all important revenue. At this stage you are probably eager for any and all customers that are interested in your product.

Before you start selling, it is important to understand what kinds of customers you want to pursue. While any paying customer can be considered a good customer, you don’t yet have the resources to sell everyone on everything that you do. Focus is critical and to focus, you need to segment your potential customers.

A simple way to segment your customers is as follows:

Customer Segments

In this simplistic customer segmentation, we have three types of customers: Big, Medium and Small. Note that while the potential revenue for a Big customer is much higher than Small customers, there are many more Small customers than Big customers. The labels Big, Medium and Small will have different meaning depending on your business. Big might refer to the size of the company (large enterprise) or complexity of the customer needs (custom solutions). The important factor in this segmentation is the inverse relationship between potential customer value and number of potential customers.

While you might be able to pursue Small, Medium or Big customers, you are probably not capable of pursuing all at the same time. The sales strategy for each segment will be different:

  • Big Customers require large amounts of time in sales and account management by dedicated salespeople. The sales cycle (total time to close the sale) may be measured in quarters.
  • Small Customers require self service products and strong marketing. Since revenue per customer is low you cannot afford to have a salesperson talk to all of them. So, you need to rely on customers finding you and signing up entirely on their own.
  • Medium Customers require a combination of an outbound sales force and strong marketing to reach them cost effectively.

Your target customer segment will dictate your sales strategy and hence your business strategy for the near term. It is important that you choose your segment wisely since it is easy to fall into some common traps:

  • The Over-Reach: You focus on Fortune 500 customers because you want brand name reference customers for your company, but you only have 6-9 months of runway. That’s not long enough to both complete the sale to companies of that size and raise additional funding, since the sales cycle for large enterprises can be 12-18 months.
  • Going Too Big: You focus on consumers but you have a complex product that they can’t understand without someone explaining it to them. You spend a lot on marketing in hopes of reaching tens of millions of consumers but can’t convert any of them, burning through all your capital.
  • Too Much TLC: You focus on a small customer segment with the goal of providing perfect customer service and spend a lot of time with each customer. Unfortunately, the segment isn’t large enough to support your business model and your deep customer service prevents you from growing your customer base fast enough.

Remember that the example customer segmentation here is simplistic and you should decide on the appropriate segmentation for your potential customers. Whatever you choose, make sure the segmentation reflects the market data you have available and not just your gut instinct. There is nothing worse than choosing to pursue Big customers, only to find out they don’t exist.

It may feel like you are giving up a big opportunity when you segment potential customers and only focus on some of them. That is only true in the short term, while your resources are limited. If you are successful with your first few customer segments, you can eventually grow to tackling all potential customers.