A business exists to provide value to its customers. And with a digital business, a critical mass of customers is often needed to realise this value in full, and to justify the heavy costs of initial build. But the desire to reach mass market quickly, whilst keeping acquisition costs low, can sometimes endanger the long-term success of the business. Here’s why.
Acquisition – you need users, but you really need the right users.
There’s a temptation in the world of start-ups to go big or go home, and to do so as quickly as possible. This is sometimes driven by the need for large numbers to deliver platform value in full (for example, if user-to-user interaction or user-generated content is involved) or by investors wanting a swift return. Either way, the impact can be devastating.
Our experience is that designing initially for a smaller number (usually <10,000) of targeted users and delivering a really focused value proposition tends to deliver higher conversion at lower cost. If true value is delivered, then early users are more active and engaged, enabling you to test and evolve the platform in an active environment with meaningful feedback.
Designing and building a digital business for a targeted segment has further advantages in terms of operational efficiencies. For example, it’s easier to adjust and adapt an offering when the users are similar to each other. In larger and more diverse populations there are no one-size-fits-all solutions, and resources can be spread too thinly. It is important not to design for the 1% but the dangers of a lack of focus generally outweigh the danger of over-specialisation early on in digital projects.
A targeted group is also likely to have a similar set of primary use cases to be supported operationally by the business. This makes it easier to optimise or automate processes in order to make – for example – the onboarding process as fluid as possible.
The impact of automating operational processes in this way can be highly disruptive. Look, for example, at the impact of neobanks. They realised that their target specific audience was comfortable with an account set up process that did not rely on human interaction. This enabled the likes of Monzo, Revolut and Starling to utilise automated processes to onboard new clients which reduced operational costs significantly.
As a result of their more user-focused onboarding process, customer expectations of what it’s like to open a new bank account have been completely transformed across most customer groups, leaving the industry-leading brands playing catch up.
Don’t think acquisition, think advocacy
When it comes to customer acquisition and measuring the cost, not all customers are equal. Whether you’re building a product for a single segment or, if necessary, for several segments, it pays to research the individuals, brands or organisations that carry influence. Targeting these early, even in the design and testing stages of your business and product development, can pay dividends as it gives you a chance to build strong relationships with key influencers.
You may, for example, consider going against the grain with your signup and onboarding process – lengthening it, by making it more specific and requiring more user engagement. So, instead of a swift ‘sign up with your google account’ approach, you could design a signup flow that lets you build a relationship, that exposes these influential users to the value you bring, that gives you data you can use to improve and personalise the service they receive from you.
You may see a lower conversion rate overall, but you should see an increase in the conversion of loyal customers who go on to play a key role in advocacy and related user acquisition. When it comes to converting customers, what matters is converting the valuable active customers.
Another way to use your early adopters as advocates is through a more-structured referral process, which can even be hard-baked into your launch. A great example of this is Initiative Q, or Quahl as it’s now known, a project describing itself as “tomorrow’s payment network”.
Quahl managed something that is definitely no mean feat, signing up millions of users through a viral incentive program – with users getting rewarded for referrals with a “future currency” called Q, which it was claimed could be worth tens of thousands of dollars. This is an extreme example but it is worth thinking about how you might incentivise referrals within the segments you really want to engage. Quahl proved another important point, that advocacy and the resulting acquisition relies on trustworthiness. This was central in their messaging and in their digital solutions.
Avoid the leaky bucket
Many start-ups or digital businesses focused on scaling quickly can put too much focus on acquisition, and can end up suffering from what might be called “leaky bucket syndrome”. This is hugely frustrating to your whole team and doesn’t go down too well with investors.
There are several ways to crack the tricky nut of retention. You could adopt the approach of Amazon or Bloomberg and just make it really hard for your customers to leave – sending them instead on a lengthy journey of ever-more compelling incentives to stay.
Whether or not this is a path you choose, an absolute must-do to avoid a leaky bucket is to build a customer database from the start and set-up your product analytics at the same time. Don’t worry too much about capabilities like attribution models if you don’t have time or resources to work this out – just get your product funnel configured then spend your launch optimising that, especially drop-offs in key areas such as account registration and checkout.
From there, you can look to your data to understand who your most valuable customers are; focusing your retention efforts on those and accepting a level of attrition from those that generate the least income/advocacy/value. This is a trickier challenge that involves organising your data in a way that enables you to interrogate and put it to good use – for example powering effective loyalty and reward programmes, personalising experiences, delivering operational efficiencies and generally drive high levels of customer experience. The right infrastructure can directly lead to both better conversion and the ability to find the “holes in the leaky bucket”.
Aim to grow, but accept it may take time
When it comes to starting and growing digital businesses, it’s easy to think the challenges and pain points are unique, but that’s simply not the case. The automotive industry, for example, really kicked off with Ford’s first production line, which made identical black cars for a single market. There was no space for complexity. This suited the early mass market for cars as the general automobile owner desired “a car” not a “specific car” – the focus was increasing efficiency for the broadest general audience and not any niche audience..
That set the standard until Toyota came along with its lean management process and matured the entire process to cope with high levels of customisation. The basic production process was the same but the wrap around processes for customer ordering and supply chain management revolutionised the industry, meaning that most cars coming off production lines these days are made to meet a specific set of customer requirements.
This is an example of the product maturation process that all products face. Time and competition drives products to change to better suit their markets. At the same time, they become more efficient and more widely utilised, which drives diversification in use.
Digital is no different. There is an inherent understanding in the industry that digital products are agile, unique and customisable, but anyone in the business knows that most products are not unique. They appear to be from time to time, since digital products deal with unique data, but the presentation and the structures around them are just the same as an assembly line i.e. a unique sequence of processes creating emerging value from a base resource.
For digital businesses, especially in more traditional sectors, there are some things you can do to drive this change (like creating a data infrastructure that enables fast learning and enables evolution based on real customer behaviour) but there’s also a need to accept that other market forces need to come into play.
This is when the principles of lean management again come into play. Founders and teams in this situation must find ways to keep platform and operational running costs to a known minimum so that, when the opportunity for maturity growth arises, there is still enough in the tank to scale and dominate.
