I want an oompa loompa now!

Ever since that Summer day a few years back when I was scouring the Web and stumbled across the teachings of Steve BlankEric Reis, and the Lean Startup, I’ve had an ongoing internal struggle with the “Ship Now!” mentality.

Candidly, I think this mentality has the potential to be destructive. I feel this way mainly due to the fact that the underlying message seems to be misinterpreted by most entrepreneurs who claim to enlist as Lean Startup followers.

As a fellow entrepreneur bootstrapping his own startup, I have a message for all my brethren (one which I learned the hard way): It’s not about building something that sucks and will guaranteed fail as fast as physically possible.

Rather, it’s about constructing well thought-out experiments with the bare essentials that will get you to where you’re trying to go by validating your riskiest assumptions with urgency. Hint: Don’t confuse urgency with negligence.

I also think that you can (I’d argue that you should) ignore this “Ship Now!” mentality when building a product that’s set to compete in a heavily saturated market landscape.

Of course, a winning product which solves a real problem with a novel solution that provides end user value in an untapped (or yet to be created) market is extremely rare, but does exist. This would be the exception here. I’m just gonna go out on a tangent and assume that if you did happen to have that type of product you wouldn’t be reading my blog since you’re 1:1,000,000 and therefore probably chillin’ on a yacht in Southern France by now. Cue ‘I’m on a Boat, Bitch’ reference.

No for real though, screw you [Insert dude with perfect product here]! It’s actually hard for us other entrepreneurs out here who didn’t conjure up Instagram or the Snuggie.

And for each one of you lucky shmucks, there are literally a million of us. So on behalf of all of us, I just want to emphasize the aforementioned “screw you”.

Alright, feeling better Average Jose?  Samesies.

Now that we are back to reality though, I do want to stress my point: I think the focus for your startup team needs to be clearly carved out by the CEO from the get-go. And that focus should be on an all-out, synergistic effort between customer development + product development with an eventual goal of constructing a dynamic “feedback-to-ship” loop that is constantly improving with machine-like efficiency.

Sure, like Veruca Salt with her constant (and immediate) needs, your users will want to feel like they are on top of the priority list. So, of course you should change the way that button looks for them immediately, correct?

As in right meow!

***Sidenote: For something like changing a button on your landing page, you’ll probably want to perform some A/B testing rather than simply change it as a result of one user’s suggestion. But that’s a whole different topic re: optimization & metrics that I’m bound to blabber on about later. ***

A lot of entrepreneurs have this (natural) first reaction of wanting to listen and respond to every little detailed nugget of feedback that their early adopters communicate. I know it sounds ridiculous to try and attend to each and every one of your customers’ suggestions, especially at the earliest stages of your company. But, a plethora of otherwise highly intellectual business people get caught in the crosshairs of trying to satisfy all of their customers rather than maintain focus on what matters, and that eventually becomes their downfall.

If you’re a young & gritty entrepreneur, however, reality should eventually settle in. And you will then correctly identify that your best (and only smart bet) is to construct copious experiments which first and foremost validate your riskiest assumptions. Only once you have accomplished that can you then comfortably take to building the requested user interface (UI) and user experience (UX) improvements as time permits.

I say UI & UX improvements because you’ll find that most of what you get in terms of feedback from users will fall into one of those general categories of product design. Of course, you’ll (ideally) get some great inspiration for feature ideas from a small % of ‘power users’, but you can’t expect your users to lay out the groundwork of your product vision, that’s up to your CEO, or Custodian of Vision.

As always, there is an exception to the above statement as well: If all (or a vast majority) of your daily active users are asking for the same feature, you probably should find a way to work that feature into the roadmap sooner than later.

Steve Jobs might disagree.

Then again, you are not Steve Jobs.

Customer Acquisition & Lifetime Value

I was reading an interesting article on PandoDaily that inspired some tangents as I’ve been giving these metrics (Cost Per Acquisition, Customer Lifetime Value, etc.) a ton of thought lately.

Instead of posting a really long comment on the thread (I actually did that already but opted to delete it now that I have this), I thought I’d make use of my new blog and post my response to the article’s author, Jordan Elkind.

After all, that’s the whole point of this, right? Right. (Don’t you love answering your own questions?)

Here’s a link to the original article: “Why you’re not spending enough to acquire customers”

And here’s my response…

Jordan,

This is solid info for entrepreneurs who are not so acquainted with these concepts (and maybe even some who are but lack clarity). Thanks for putting this together and sharing your thoughts.

I do, however, think you’re missing some key analysis that is crucial to decision-making as you attempt to establish the actual CLV (Customer Lifetime Value), optimal CPA (Cost Per Acquisition) in relation to CLV, and what kind of ROI (Return on Investment) to expect from different targeting campaigns based off of these conclusions. I realize essays upon essays and books upon books can (and are) written on the subject, but I thought I’d chime in as I’ve been giving this a lot of thought on my own lately…

1) How do you determine what a “lifetime” is for your specific demographic and product?

This answer doesn’t seem to be determined by one simple equation and from my understanding, varies greatly on the product, market, target customer, etc.

To illustrate, let’s think about a scenario that could definitely take place in today’s market: a vertical ecommerce company selling baby clothing. This baby clothing company recently launched a line of products targeting from 0-3 months, 3-6 months, 6-9, 9-12, 12-15, 15-18, capped out at 18 months. If you’re on your toes, then you might immediately conclude that the CLV should be calculated on an 18 month scale.

Sure that might be the case in a perfect world, but that doesn’t necessarily compute here. Consider the fact that it’s commonplace to have another baby 1-3 years after your 1st child; if you liked the clothing company the first time, you’d probably buy clothes from them again with your next child, right? Likewise, if you’re anything like my mother or sister, you’ll probably be recommending to all your friends that they should also purchase their child’s clothing from this amazing brand (assuming the experience warrants). The brand might even have a referral marketing incentive (which makes their CPA a little harder to calculate, but more on that in point #2). Again, these are simply examples of minute factors that come into play when you delve deeper into any specific business.

Given all of this, how should one go about determining what the realistic lifetime is for this type of customer when you have to calculate in the unknown factors of potential future children, the value that they may bring from word of mouth referrals, and the age of their child when they 1st purchase from you?

This brings me to my next point, which is more about questioning the Initial CPA as being the only metric that should be highlighted in terms of weighing CPA to CLV, and whether these metrics are reliable as the only (or main) data we should be looking at here…

2) By all calculations then, it would make the most sense to spend the entire customer acquisition budget on acquiring customers who are in the 0-3 month range, as you would have an ability to sell them a product every 3 months and the earlier you acquire, the more chances you have to sell them product. A customer that you acquire at 0-3 month stage might be worth 6x more than the customer who has a 15-18 month child. But take into account that you’d have to spend a ton of money on making sure that the customer from 0-3 month is not only converted to a customer, but also retained across that entire period, and you have an entirely different story.

So then I ask, naturally, “What about the CPRCOL?”.

What about the CPRCOL you might say? Yes, I went overboard with the acronym. But you guys, I’m seriously… what about the Cost Per Retaining Customer Over Lifetime?

As stated, you may acquire the customer initially by spending that $40 (the example of CPA provided in the article) and you may justify this by saying that your CLV is $50, so you achieved your goal of 25% ROI.

But, in order to realize the full potential of CLV, you need to retain that specific customer beyond their 1st purchase, not only acquire them initially. Lots and lots of money is spent on retention marketing, specifically on campaigns such as referral credit, discounts, email marketing, funnel/retention analysis, the list goes on. Long story short, there is a huge market out there for retention marketing and it ain’t nuthin’ to scoff at.

In my opinion, the cost to retain that customer over the predetermined lifetime period is therefore arguably as important as the initial CPA and should be calculated into the overall cost that goes into not only acquiring, but keeping the user. So in theory, the ratio that should be optimized is the CPA + CPRCOL :: CLV, not simply the CPA :: CLV.

Of course, this is just touching the surface. When you get into calculations such as Churn, Retention, etc. you’ll be able to generate #s that are much closer to reality than simplified CPA/CLV.

Oddly enough (but not surprisingly), Wikipedia has compiled an interesting resource on the topic that goes into more detail (e.g. calculate retention as 1 – churn): Customer Lifetime Value.

Went a bit long, but hope that added something!

Cheers,

Daniel

On the Silly-ness of Business Plans

Dude I’m starting this company I’m really excited about, but the first thing I gotta do is put together my business plan and I have no idea how to do that. Can you help me out?

Actual Answer: Yeah definitely I’d be glad to help, when works for you?

Answer I want to give: You’re an idiot and probably shouldn’t be starting this business if you can’t put together the biz plan on your own. But if you really want to give it a shot, I will help you out by telling you to do something way more valuable than spending hours on end trying to perfect an absurdly long document that will most likely become obsolete the moment you give it to an investor anyways.

Let me elaborate on my long answer a bit…

  • Business plans don’t cut it for startups that are trying to build a product in an unknown market, for an unknown customer, solving an unknown problem, with unknown solutions.
  • Business plans are ancient documents that are meant for companies who have tons of time on their hands to plan financials using data and estimates that hold little weight in a constantly shifting startup environment.
  • Naturally,  standardized business plan templates cannot take into account the most important factors in deciding whether or not your new startup will fail or succeed, as those are simply unknown before you’ve identified product/market fit (which takes a lot of time and effort).
  • When you tell an Angel Investor or Venture Capitalist that you’re spending time on writing your business plan or that you’d like for them to take a look at your business plan, their first reaction is going to be that this person has no clue what they’re doing and they will 100% of the time not invest, guaranteed.

Why is this the case you might ask?

Well, in simplest terms, there’s more important crap to focus on at the infancy of your startup idea. You could (and should) be spending time on Customer Development. I’m sure I will talk a lot more about Customer Dev in the future, but for now here’s a solid resource from Steve Blank who is an authority on the  “Customer Development Manifesto”.

I do understand the desire to organize your thoughts, however. So if you are someone who needs to get things down on paper and you feel like you need to put together a document that will help you plan your next steps, there are much better solutions available as opposed to the standard business plan…

Two products that I have found nail this are (1) Lean Canvas and (2) Lean Startup Validation Board.

These are extremely well-designed tools created by seasoned entrepreneurs who have been all over the startup map and back. They took the time to build these products so that future dreamers who decide to ride the wild rollercoaster of entrepreneurship could avoid costly mistakes.

What’s the single most important difference between these products and the business plan that has become the norm?

These documents help you define a holistic yet concise approach to your startup’s business model by emphasizing the riskiest assumptions which are most crucial to validate. Nothing more, nothing less.

Say thanks by using their free products instead of the business plan template that you spent $19 on!

And so it begins…

Say hello to my little…blog.

I’ll be posting randomblings (random ramblings) on various startup and entrepreneurship related topics that I find interesting and worthy of my time.

Some of the stuff you can expect to find here on any given visit:

  • Topics that you personally don’t find worthy of your time (too bad)
  • Shit that makes sense (don’t expect too much of this one)
  • Shit that doesn’t make sense by any logical way of thinking
  • Stupid shit that somehow makes sense when you’re a little drunk or stoned (don’t hate the player, hate the game…bro)
  • Poor use of the English language (I try, but sometimes I’m just dumb…sorry not sorry in advance)
  • Me disagreeing with you (this is the only thing I can 100% guarantee)

Anyways, hope ya’ll find this interesting.

Cheers!