Startup: An Insider's Guide to Launching and Running a Business (15 page)

You must know the contours and details of this cycle inside and out. Know it, observe it, tweak it, own it. Why not put this book down right now and figure out how your different customers move through this pattern in your business? This is one of the most important exercises you will ever do to ensure the success of your business.

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Learn to Love Statistics

I love statistics. They make me happy. Why? Because they give me confidence. For instance, statistics gave me confidence when I was running my first online business. Confidence was a very big deal for us because we had started where everyone starts: from zilch. When we first launched the product, we had a membership base of my partner Sterling, myself, and an account that I had made for my cat. That is a grand total of three users, one of whom was not likely to ever log in. We obviously needed to build up our list of users if we were ever going to have a real business. At that time, the big search engine was AltaVista. Banner advertisements were still “pretty neat,” and had user click-through rates of over 20 percent in some cases.

OK, so I started by saying how I love stats. Here’s why: we were using a service called goto.com, which was one of the pioneers in selling keyword-based click-through traffic. It was a pay-per-click model, where we would bid on a keyword phrase and pay 10 cents for every person that clicked through to our site. This is not big news now, since Google AdWords is a cornerstone of many business ventures online these days. For us, it was very important to get these bids right. 10 cents per click sounds tiny, but it adds up. We quickly got to where we were spending tens of thousands of dollars a month for traffic, and we had to get it right—if we were not capturing value, we could have gone broke in a few weeks The stats that came through this experience were beautiful to see. The aggregate behavior of thousands of visitors to our site ended up being very predictable. We could not say if any one visitor would spend money to become a member, but in aggregate, we would see that if we spent $1,000 in traffic from goto.com we would get $2,000 in sales. If we spent $10,000 dollars, we would get $20,000 in sales. This then got us into page testing to tweak up our stats.

Look for opportunities in your own business to measure return on investment (ROI) or business performance, tweak what you are doing, measure, and repeat.

Here are a couple of examples:

• For web sites, use Google Analytics, Omniture, and testing platforms like Google’s Website Optimizer to create experiments where you both change aspects of your site and measure for performance. Test both major and minor tweaks—you would be surprised at how even minor and seemingly irrelevant changes can positively (or negatively) affect performance. The presence of a web radio player on one site at the top of the screen increased performance by 6 percent even though customers did not click on it.
  
• For service businesses, provision separate phone numbers for certain ad campaigns to measure dollars spent vs. business earned.
  

Never stop this process. A quote that I am famous for in my circles is

A day without testing is value forever lost.

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The Marketing Mix

Every viable business has a magic formula for efficiently connecting with the right group of customers, in the right way, at a cost per customer that is sustainable. The basket of various marketing tools and methods that you use is called your marketing mix. More often than not, the difference between the companies that fail, the companies that barely make ends meet, and those that flourish, rests on finding this magic formula and executing it effectively.

Identify the best ways of reaching your audience very early on in your business. Make a list and continually adjust the ways in which you use these tools. Always be on the lookout for new ways to reach out and get your message into the right places. I remember back in the 1990s when Amazon.com was putting stickers on bananas at the grocery store. That was really out there, but here I am mentioning it to you over a decade later, so it must have been memorable.

Repeating the point: Always keep your eyes and ears open for new opportunities to reach your audience. The key to marketing is being able to discern openings in the market. This means finding and exploiting new products and services that fit in places where there are no competitors, and it means being the first to devise and press strategies for connecting your product with the people who are not
yet
your customers.

Pay particular attention to those mechanisms that you can track the performance of. Be careful not to spend too much money on mechanisms with which you cannot actually track sales. Early on, Sterling and I spent a substantial amount of money to market one of our brands with CitySearch.com. The company had an impressive office and a nice-looking sales pitch. We ended up signing a contract. We came to regret it, as there was not one sale or sales lead attributable to that investment. It hurt, because on our limited budget we did not have much money to spend on marketing, and here a big chunk went out for a year-long contract on something that was of no measurable value to the bottom line. The reason that we spent this money was that we were new to the market and we did not yet have a playbook to reach our customer. I remember feeling like it was a Hail Mary move, but we did not believe we had other options. That was neither smart nor accurate. We learned, moved on, built a playbook, and were able to grow from no customers to counting many of the
Fortune
500 as our customers within 18 months.

There have been times in my businesses when the marketing mix was more of a single channel from which every drop of water dripped. Our relationship with goto.com was an insidious process to experience: we had a new product and needed to reach people. We were not yet getting organic traffic to our site, so we paid for traffic. There were a number of options for spending advertising dollars on the Web, but the one that was most effective was the goto.com product. What happened was a natural course of events—we pulled money from ineffective campaigns like banner ads and trade magazines and put it where we were getting good results. In the short term this was great, because we leveraged our marketing budget to get the biggest possible return. This ended up feeling like a deal with the devil because we became dependent on the traffic from that source—too dependent to be comfortable. What would happen if goto.com increased its rates? What would happen if it went out of business altogether? What would happen if it dropped us for some policy violation we weren’t aware of? What if? What if? The fact is that we would have been in a tough place if something had happened to that customer stream. It did not become a terminal problem for us because we diversified our marketing and gained solid ground on the search engines, which provided a great deal of customers at a cost of $0.00. (Read zero dollars and zero cents. Free.) With multiple sources of traffic and customers, we were well diversified and had found a way to minimize at least one area of risk in our business.

In subsequent years, I have seen the same process occur again and again. The most popular mechanisms for reaching customers—eBay, Amazon.com, Google, Google AdWords, the local newspaper, trade magazines, television,
Craigslist—all of these marketing mechanisms will
try
to work well enough so that you drop all your other options and become dependent on them. This can feel easy, inevitable, and even
natural
: but it is inadvisable to succumb to the temptation to allow any one marketing source to overwhelmingly drive your value chain.

Following only optimal returns on your marketing spend can lead you to the situation you see in
Figure 3-4
. When you allow your business to be dependent on one marketing channel, you put yourself in a hostage situation (which is bad). What to do?

Figure 3-4.
Progression from a variety of marketing sources to one winner, because it performed better than the others.

• Allow yourself to spend money on the best of the other marketing options that you are aware of that have a positive or near-break-even ROI. The options near break-even may be tweaked and made to be profitable.
  
• Any healthy Darwinian system has a weeding-out process, and a process of
  replenishment
  . Seek to replace the options that die off as quickly as possible, and initiate new marketing tests. There are always alternatives, and you must find them.
  

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Product Pricing

Think people will buy more if you charge less? Maybe, but not always.

Case Study: Meridian World Data and Pricing

When we were building our social networking business, we needed to be able to figure out how far apart our members were from each other. When someone signed up in Singapore, they probably would be less interested in people who lived in Greenland or Australia (although you can never tell). We absolutely needed to be able to determine how far apart people lived, and what city and country they were in. The end result was that we built our own database of city and country names with latitude and longitude for each. This database had over 2.5 million entries in it before we were done and was a critical part of our business. Because we were not able to find this kind of product for sale anywhere for any price, it made a lot of sense to spin it off as a standalone business. This is an example of a choice—where you focus on one thing or chase supplemental opportunities. The decision for us was “chase on!” in this case, and we started another business in parallel by posting a simple web site called GeoData that offered a World Cities Database on CD, priced at $425.

No sales at all.

I was sure that people needed our product, but it was not selling. As a test, we bumped the price up to $1,200, and sales started coming in. Amazing! Emboldened, we created even more versions of the product at $1,200, $2,000, $3,000, and higher. The result? More and more sales. As the business grew we would eventually come to sell the product for up to $50,000. This is the same product that we could not get anybody to buy for $425.

There are four lessons that I take away from this:

• It turned out that people could not trust a product that was too cheap. They had a psychological need to spend more if they were going to trust it.
  
• Businesspeople spend money, and they don’t want to put their reputation on the line with their bosses in order to save a few dollars of
  company
  money.
  
• It is good to offer graded versions in your pricing structure. People don’t want the cheapest, and they want to feel that they did not pay for the highest either—the one with all the bells and whistles. They can settle in and feel comfortable with the one-notch-down-from-the-most-expensive product. There is substantial research to back this point up.
  
• The price we set was completely arbitrary. We charged what we thought we could get at first, but found by raising prices we got more sales (the first lesson mentioned previously). The fact is that by setting the
  anchor point
  ourselves, we were able to build a price structure that was very appealing to our customers. In a vacuum of experience (have you ever bought a data disk of cities with latitude and longitude before?), we could charge whatever we wanted within reason, so long as we were consistent. Human beings have difficulty evaluating a product or service and putting a hard-and-fast price on it, especially without points of reference such as competitors or prior experience with similar purchases.
  

Even parity products can vary widely in their pricing if you can convince the customer that they are not buying a parity product, but something special. Look at Louis Vuitton and Tiffany. A Vuitton handbag is a bag. It is made of stuff and holds stuff inside. There are many, many, many products on the market that do exactly the same thing. You can drive down to JCPenny and buy a bag that probably does a better job of holding stuff than any Vuitton bag and costs 1 percent of the price.
But
, my wife, for instance, would much prefer the Vuitton bag because Louis Vuitton has communicated a product message that she wants to be a part of, and the brand has name recognition.

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Oprah Is Not Your Marketing Plan

Ever see a company become a big hit because it got very lucky and found itself on TV, with a tremendous amount of attention and free advertising? It is a sin of many young tech entrepreneurs that think they are going to have such a good product that people will automatically start talking about it and buzz will materialize automatically. Or worse yet, they hypothesize: “Maybe Oprah will like it!” Appearing on
Oprah
is an example of what I call the
lightning-strike
marketing model. You can get a lot of energy from a bolt of lightning, but you never know where or when it is going to strike. I don’t want to be a downer, but I am here to tell you that the odds of lightning striking, and you getting a huge infusion of free marketing attention that will carry you to the promised land, are not good.