Startups have become as common as mosquitoes in the summer, but very few will ever become billion dollar companies. But what makes that small percentage unique enough to succeed?
You don't need a revolutionary idea to have a successful startup. Google arrived on the scene after Yahoo was well established, Dropbox was the last cloud storage provider to jump on board and dozens of companies were making electric cars before Tesla was even an idea.
All of these examples prove one key point: you don't have to be the first to the market to succeed.
“Every startup begins with an idea, but from that point forward, it’s all about execution... success requires moving your passion quickly from the idea to the business implementation,” says Angel investor Martin Zwilling, identifying that the most successful startups quickly expand and scale their operations to reach specific audiences.
These high growth startups are executing their business plans in three critical ways:
- They focus on retaining customers
- Their marketing campaigns are created for viral impact
- They pick specific audiences and know when to change demographics
Let's consider each of these critical tactics individually.
Customer Retention: Habit Manipulation
Technology is a competitive field, with consumers dedicating 85% percent of their time on 5 primary apps. 80% of new users never open an app more than three days after they download it. Therefore, it is critical for new apps to focus on retaining users.
In the same way, startups have to differentiate themselves as necessary. They have to become part of the consumer's habits the same way a toothbrush or a car is perceived not as a product but as an obligation. Successful startups create products that a consumer feels they can't live without.
A habit has three parts according to "The Power of Habit" author Charles Duhigg: a cue, a routine, and a reward. The cue triggers the routine, which is a specific behavior. Completing the behavior causes some sort of reward that forms the neurological loop.
"Likes", "follows", "retweets", and other social media rewards system capitalize on the habit. These so-called rewards train the brain to engage in activities that cause them, such as posting pictures or creating content. As users engage more often, the task and reward connection is cemented. Cues to engage can be anything from a notification to a friend's vacation post prods the brain to react and reminds it of the dopamine reward available for engaging.
The habit model is what makes retaining users easiest, but it also makes it difficult to encourage customers to switch platforms. Someone who has spent only a few days on Dropbox is much more likely to switch to another provider than someone who has invested 10 months- even if the competitor platform is clearly more advantageous. The more Facebook friends you accumulate, the less likely you are to deactivate your account.
Referred to as the "sunk cost trap", Facebook and other high retainers utilise the concept that the more someone invests in something (be it time, money, or energy), the less willing they are to abandon it. Startups can use this to their advantage to hook customers on their product, and should if they intend to master customer retention.
Viral Marketing: Capitalising on the User
Customer Acquisition Cost (CAC) is a number associated with the amount of funds needed to convince a single customer to begin using a product. It is easily calculated by dividing the number spent on marketing by the quantity of new customers.
For startups, a high CAC is deadly. Some online retailers spend as much as £230 / $300 for a single new customer, which would be the same as if Dropbox and Instagram paid £46.2 billion / $60 billion to gather their 200 million person user base.
What these extreme spenders are missing is the viral marketing strategies that have made high growth start-ups successful. Convention marketing has the advertiser drive traffic from a large population to their product, whereas viral marketing users a small but existing user base to bring in new customers from the population at large.
Viral marketing relies on product use or a referral system to naturally generate interest. Here are just a few prominent examples:
Facebook was among the first to implement an email invite system, allowing users to ask their entire address book to join them on the social site.
Groupon offered huge savings during an economic crisis, but these were only accessible if the existing users collected enough friends to unlock the deal.
Instagram implemented cross posting features so that users could share their Instagram content to other networks.
Uber, Airbnb, and Dropbox all offered such attractive referral systems that their user bases grew exponentially, and continue to expand.
The viral coefficient is the key metric for determining this type of marketing success. Any number over 1.0 represents user bringing in new customers beyond themselves. For example, a coefficient of 1.5 means 100 users will refer 150 other users. Businesses maintaining a viral coefficient over 1.0 do not need a substantial marketing budget and can subsist entirely on viral marketing. This should be the goal of all startups.
Marketing Audience: Starting Small Scale
Brian Chesky, co-founder of Airbnb told the audience at Y Combinator this:
“It’s better to have 100 people who love you than to find a million who just sort of like you. Build your business one person at a time... If they love you, they will market the product for you and tell everyone else. Go to your users. Do one scalable thing, one person at a time. It’s actually that simple.”
All successful startups exhibit the ability to determine the exact kinds of people to whom they should market the beginning of their products. As we’ve discussed over at Appster in the past, creating a minimum viable product (MVP) is essential to building a successful product. To do so, a company must understand two basic principles: first, Everett Rogers' theory of disruptive technologies, and second, Geoffery Moore's theory from Crossing the Chasm.
The former states that different types of people adopt revolutionary technologies at different rates and degrees, while the latter asserts that startups must dominate the early adopter market before they attempt to "cross the chasm" and gather a mainstream audience.
Recently, I spoke extensively on the topic of differentiating between market sectors.
“Customers in the mainstream care about two things, i.e., established brands and security. They generally don’t buy new things unless other people are clearly already using (and recommending) them.
Early adopters, on the other hand, don’t care if your company/brand is unheard of, yet-to-be-proven, or straddled with the risks associated with pushing a new product. They’re actually drawn to your venture by these very kinds of novel and radical qualities that characterise it”.
Looking at startups from the past two decades will show you that all started by marketing to a niche audience, before trying to capture the mainstream. Instagram marketed to hipsters. Facebook dominated the educational system. Paypal focused on eBay implementation. Snapchat zeroed in on teenagers.
All of these companies chose the correct time to cross the chasm, rather than trying to reach everyone at once. To be disruptive, every company has to dominate on the small scale before they can achieve large scale use. The validation of early adopters is key to transitioning into the general population that is more receptive when they know they aren't the guinea pigs.
Start with your early market. Manage your product, squash bugs, establish a brand, and then try to reach further.
You may want to contact us for professional advice on maintaining a high growth startup.