Traction Playbook for Startups (and Companies)
We need a new marketing mindset, of making marketing activities a driver of demand creation and customer acquisition. And manage and measure marketing outcomes by how they influence measurable customer behavior.
The above sketch shows the 5 Forces that influence customers in their engagement with a company. Influences act on a customer as a company takes actions to connect, engage, and convert the target customer into a customer.
A company attempts to acquire customers by attracting (left of the image) them, triggering their interest, motivating them to evaluate their offering.
After a company has acquired a customer, its goal is to induce consumer loyalty (center of the image), making them a long term (sticky) consumer.
Consumer commitment to a product (bottom of the image) is a test of a customer’s willingness to pay the price and a product’s revenue potential. This idea becomes graphic if a company evokes interest in consumers for their product through a ‘free’ trial. A company can convert free customers to paying customers and discover pricing based on customers’ ‘commitment’ to the product. Commitment is a manifestation of the customer experience of the value proposition. A committed consumer is prepared to pay for use.
A consumer is always under the influence by actions of competition (top of the image). Each innovation of competition creates interest in consumers to evaluate and consider their alternative offerings. This pull towards competition can only be neutralized by company actions that evoke engagement and stickiness, increasing the cost — cognitive, effort, and time investment — needed to switch.
The last influence (right of the image) is of monetizing the relationship with the consumers. Companies create innovations to increase the revenue potential, wallet share of consumers.
I am suggesting a way of thinking about customer acquisition based on my experience of starting and managing businesses. And learning along the journey. I am proposing a model of marketing that defines marketing as demand creation and customer acquisition.
Why is this necessary?
This requires redefining the boundaries of a business recognizing that companies have to develop capabilities to start engaging with potential customers at the beginning of the customer funnel, believe that customers are annuities, and marketing is an activity that can be measured and managed (no longer spray and pray).
1. The customer funnel is a customer journey that takes place before a sale occurs. It is not adequately reflected in the profit and loss statement for analysis.
2. In the old school marketing world, a company mass broadcasts a marketing message to a universe of potential users and wait for their response. The potential customers are ‘external’ to the company.
Digitalization has changed this paradigm. Today consumers are embedded in a digital network and are no longer ‘external’ to a company. They influence the purchase process. The diagram contrasts the mass marketing communication to customers outside a company boundary (above diagram) with customers digitally integrated with the company (image below).
3. Customers are annuities that are measured in their Lifetime Value and not ‘A’ sale. Business performance (growth) requires an understanding of manage customer acquisition, retention, and churn.
4. Every customer can connect to other customers through social media networks. And influence the purchase behavior of other customers; they add value to purchase behavior and user experience by influencing demand creation and customer acquisition. In the pre-internet and pre-Google world, a customer was dependent upon information provided by suppliers to make choices. Customers today often have better and more information than suppliers through networks.
4. Disruption (Late (Prof) Clayton Christensen) occurs when legacy mindset (of incumbents in the industry) is unable to understand the cost structure of innovators and hesitate to change. Similarly, a hesitation to realize the changing role of customers embedded in digital networks, capable of adding or detracting value, may also be a cause of disruption of incumbents by startups. It is normal practice for Startups to use traction measures of their customers right from the start of the funnel when they first test whether the problem they are solving is needed (problem-solution fit). Managing a customer funnel, activities that today ‘lie outside’ the company, is to become normal managerial practice. Marketing adds value to a business beyond the boundaries of a company before a sale is realized.
Porter’s Five Forces of Competitive Analysis was developed in 1979. The model focused on the value chain, what a company does within the business, and is inward-looking. Its emphasis is on management and control of the value chain to compete.
I propose a framework to manage different ‘influences’ that envelope a customer as they choose and use a product/service, and decide to be loyal.
Legacy accounting
A Profit and Loss statement is a starting point for managing business performance. The customer funnel metrics are missing from the P&L. The cost line-entry - ‘Sales, Marketing, and Fulfillment’ expenses — are indirectly connected with customer acquisition. Accounting has to evolve to manage the digital business.
Startup ingenuity
Startups have converted customer acquisition costs (marketing) into a variable cost.
In the early years, entrepreneurs focus on making the go-to-market strategy effective and efficient. And measure outcomes of expenditure (it is an investment, capital allocation, for the startup) on each step of the customer journey. This is the basis of an entrepreneur’s confidence in creating a business and convincing early-stage investors of the value of the startup.
Startup cost structures also evolve with time. Most prudent entrepreneurs do not allow any overheads to manifest in the business for the first few years. They ensure that they do not allocate capital that does not ‘directly’ add value to the customer.
Media goliaths own the start of the customer funnel
Apple, Amazon, Google, Facebook, and Microsoft (LinkedIn) capture a very large share (nearly 70%) of all the mobile and digital advertising spend.
Together with startups, these companies own the start of the marketing funnel for nearly all products and services. Customers invariably search for what they need on these platforms.
This makes it imperative for traditional businesses to develop a digital capability to engage with customers when they are choosing and evaluating what to buy/use. Otherwise, they will be at the mercy of the media goliath algorithms which can direct customers to those who pay them (maximize their shareholder value — behavioral economics at work).
Extreme Customer Centricity
The model I am proposing is of continuous engagement with customers using technology platforms (I believe that engagement is far > loyalty). A company is accessible to customers whenever a customer wants. They can express their opinions, share ideas, give suggestions, evoking a feeling of a relationship. This is extreme customer-centricity. Not a Bot dialogue with sentiment analysis. But of a profound kind that B2B SAAS companies attempt to create.
Such ‘open’ relationships require managerial courage to make customer feedback public based on a self-belief that a company's responsiveness will reinforce customer-brand trust.
Drivers of customer acquisition and demand creation
The following diagram is a visualization of how Customer Acquisition and Retention Engine operates.
Engagement with customers visualized as a set of interlocking drivers. (The item numbers below relate to numbers in the drivers).
- A company takes actions to acquire customers.
- Engagement with users enables a deeper understanding of consumer motivations.
- Deliberate actions are undertaken to enrich/deepen customer engagement,
- Keeping a watchful eye on customers lost (becoming disengaged) and making customer relationship sticky and increasing exit barriers.
- Customer monetization, sales revenue, is a consequence.
Each driver is elaborated with suggested metrics.
Customer acquisition — customer attention and cognitive commitment
A company acquires users by ‘influencing’ potential customers. The magical currency in a digital world is attention.
A company has to evoke adequate interest in a customer for them to focus and spend cognitive energy to evaluate (give up all diversions). The following visual depicts trends, opportunities, and the challenge in an era of multiple platforms and media.
The option to engage customers is not based on budgets.
The options have to be discovered through trial and error by conducting experiments with customers. This takes a little while requires patience.
The actions to attract and engage with potential customers labeled as ‘pull’ (draw customers to a brand) and ‘push’ (taking products to the customers). To do this, companies use technology and content on digital media and social platforms.
This effort’s efficacy and efficiency (influence) is measured using outcome measures like — the cost of acquiring customers (CAC) and customer numbers — and analyzed by connecting outcomes to the factors within the company’s control — platforms, content, and influencing strategies/tactics used. Metrics are a reflection of strategy. They help answer, is the strategy working?
User Engagement and retention acquisition
A customer and a user is not the same thing in most business models today. A customer is defined as the person/group that is paying you. A user is a person using the product. In subscription products, oftentimes there are multiple users associated with a single customer. Or people are users before they are a customer.
Once acquired, customers become users. A customer engagement platform is a means of engaging with their customers at every touchpoint they have with the business. The platform has content and tracks users as they transform from potential users to prospects to customers and eventually to advocates. A company’s goal is to influence users to spend more time on the platform (become engaged). This happens when users discover what they are looking for and contribute through their creativity/actions to the platform, believing that they will get what brought them to the platform.
The measure of engagement, the outcome of actions taken to influence customers to engage — are daily and monthly active user ratios, frequency by which users achieve what they want (match rate), and user contributions.
Exit barriers of attention and engagement — ease of diversion through options and simplicity of use
In the digital space, businesses compete based on the networks of their users. Customers in a digital world can easily migrate from one brand to another. A platform is always vulnerable to influence from competing platforms. Users are easily distracted. Preventing user churn requires keeping track of functionalities, features, and value proposition of competitors and their competing platforms, doing things to embed the user experience, making potential exit costs high. The only lock a business has on a customer is its value, the customer experience, and how important the engagement is in meeting user needs.
If a customer has invested time, effort, (getting used to new interfaces and new learning), and money then that is an effective barrier-to-exit. Customer engagement based on their creative contributions (designs, products, articles, etc.) to the platform creates engagement or exit barriers are an automatic consequence of the creative activity.
Just as entry barriers in most industries are low because start-up costs are low, using digital capabilities, a new business today can grow faster than ever before. The engagement measures are — churn (customers that drop), the other products, services, and platforms customers use, and the tangible, psychological, and cognitive costs of switching.
Customer commitment — willingness to pay
The most important metric in creating growth is usage/engagement. This is a leading indicator of revenue potential. High usage allows testing, creating experiments for propensity to pay, and price discovery.
Customer commitment to engage with other customers and the company is their willingness to pay to be members of the customer community. The definitive test of the value proposition of a community is to charge users for their experience of the platform product/service price. The value of a product/service derived by a user/customer is the difference between total customer benefit less the customer cost.
This is reflected in the pricing proposition of Spotify.
It is to be identified whether customer engagement experience results in — extra price, not wanting to engage in the cognitive effort of evaluating alternatives, revenue per user, and trends of income.
Monetization
Monetization, at the core, consists of the following:
The end result of all engagement is user economics based on gross margin and trends of prices, costs, and user growth. Gross margin increase can be based on new revenue opportunities, options for recurring revenue, user control of costs, improved ROI of marketing, and ability to launch new products.
The 5 Forces Model of Marketing
The Customer Acquisition and Retention Engine is summarized in the diagram below. I title this as the 5 Forces Model of Marketing.
This model, with suggested metrics, is a playbook for understanding, influencing, and managing user/customer behavior. And create business defenses (moats) based on customer stickiness.
Annexure
Metrics used in the model.
Acquisition-Related Metrics
Competitor-Related Metrics
Engagement-related Metrics
Value capture
Unit economics
