Chapter 5 - Sales & Commercialisation
IN THIS LESSON
How to Get Users and Grow
Scalable Channels
Scaling growth is difficult, but there are several proven methods to achieve it. When you study some of the most successful mobile or web products, you start to see a pattern on how they grow. It turns out there’s usually not too many ways to reach hundreds of millions of users or revenues. Instead, products mostly have one or two major growth channels, which they optimize into perfection. These methods are commonplace and predictable.
Here are the major channels that many companies use to drive traction:
Paid acquisition. If your users give you money, then you can buy users directly through ads. Companies usually try to maintain a 3:1 CLV:CAC ratio (CLV=LTV; Customer Lifetime Value and Lifetime Value) to keep their margins reasonable after other costs. (eBay, Match, Fab, etc.)
Virality. If your users love your product, then you can ride on “word of mouth” virality. If you can get your product to spread because of users engaging with the product, you can further optimize the viral loops using A/B tests to generate even more virality. (Facebook, Instagram, Twitter, etc.)
SEO. If your product creates a ton of unique content in the form of articles, Q&A, long-form reviews, etc., you might end up with plenty of unique pages that can in turn attract millions of new users who are searching for content via search engines. (Yelp, Rap Genius, Stack Overflow, etc.)
Sales. For start-ups targeting SMBs or the enterprise, they often end up fielding a large sales team to handle both inbound and outbound. This is especially true for companies targeting local SMBs, where telesales becomes the only option. Of course, to make this work, you’ll need to generate a multiple in revenue of what you pay them.
These channels work and scale because of two reasons:
They’re feedback loops. Each of these channels creates exponential growth because when you make money from customers, you can use that money to buy more customers, which will eventually get you more money. In the virality scenario, a cohort of new users will invite even more users, who then invite even more on top of that.
They have a high ceiling on saturation. Part of why paid acquisition will always around be because people like free products, which cause these products to monetize using ads. If people love free products (which they will, forever), there will be advertising to buy. The biggest ad networks reach a billion users or more. Similarly, SEO works because almost everyone uses Google, so as long as you’re dealing with a high-volume base of searches (like products or music lyrics), then you’ll be able to reach hundreds of millions of users.
To determine which of these channels work best for your company, you will have to do some testing. To figure out if your CLV and CAC match up, you need to buy some users, then wait a few months to see how well they monetize. If you want to see if your product is viral, you need to build your app, then wait to see if you have the retention and frequency to support a strong viral loop. SEO is hard because after the content is built, Google must index it and you must build PageRank. This can take months and even years.
Non-scalable Channels
Attacking one of these scalable channels is high-risk but also high reward. Every start-up must discover which channel is the best for them to scale their business, but also gain enough traction to not run out of money during the meantime.
Prominent entrepreneur and venture capitalist Paul Graham offers some guidelines:
A good growth rate during YC is 5-7% a week. If you can hit 10% a week you’re doing exceptionally well. If you can only manage 1%, it’s a sign you haven’t yet figured out what you’re doing.
Small things can drive a high percentage growth when the base is small. When your company is in the early stage, there’s a whole list of other tools you can use which don’t scale but are nevertheless low risk.
Getting your friends & family to use the product.
Emailing/posting among your local community, whether that’s college or an alumnus mailing list.
Guest writing on niche blogs – often seen with mommy blogs, etc.
Cold emailing potential users and influencers
Engaging with potential users over Twitter, Reddit, forums, and other communities
Contests and giveaways, partnering with a blogger/YouTuber.
Getting covered in niche press outlets, like the tech press.
All these activities require hustle but are low-risk and fairly high-percentage. When a contest can generate a few thousand signups on a small base, that’s not bad at all. The other added benefit is that these methods put you in direct, close contact with your users. In the early phase, when you are still working on product/market fit, this can be an important way to learn if you have the right product.
But because none of these activities will scale for the long-term, you’d need to perfect one of the four main channels mentioned in the first section. How do you balance low-risk, unscalable activities with high-risk, scalable strategies? Let’s talk about the barbell strategy.
The Barbell
The barbell strategy is a way that investors can split their holdings between some high-risk/high-return investments as well as low-risk/low-return conservative investments.
According to Investopedia:
Put your eggs in two baskets. One basket holds extremely safe investments, while the other holds nothing but leverage and speculation.
Do the Activities that Don’t Scale
During the early days sign up friends and family. And get those blog mentions and do all the content marketing you can handle. That’ll help create a base of engaged users, while you hit product/market fit. At each point, as what works caps out, go after the next marketing channel that can drive incrementally more users. In the early days, perhaps a contest partnership with a niche blog would do, but after a while, you might hire a permanent in-house marketing team to author long-term content marketing pieces to circulate.
Invest in Moonshots
The other end of the barbell (the high-risk/high-reward projects), should be taken with deliberate projects and analysis. If you need your user base to generate a lot more unique content for SEO, start experimenting with features that reward long-form content. Make sure to track what percentage of users write great content. When you have this information, start making the small changes needed for Google to index your site. After a few months of this, you can start to understand what it would take to create enough pieces of unique content to make an SEO strategy work.
Balancing Between the Two
It’s important to balance these short-term and long-term efforts. If all you do is work on non-scalable marketing methods, then inevitably the channels will tap out and your growth will slow. When you see the start-ups that are highly dependent on press hits for their traction, but seem anaemic otherwise, this is exactly what’s happening.
The barbell strategy helps your company make progress on long-term goals while still creating short-term momentum—you’ll need momentum to attract investor interest, but you’ll need the long-term scalable growth channels to really build your business.