The one equation that will save and grow your startup
Guy Kawaski - “Distribution. Distribution. Distribution!”
Peter Thiel - “Startups do not get distribution. They tend to overlook it. It is the single topic whose importance people understand least.”
Ron Conway - “Silicon valley is all about growth. Growth is the lifeblood of Silicon Valley”
Distribution is one of the greatest challenges for every startup. Great products die because the team failed at finding a scalable and cost-effective acquisition strategy. Every startup can avoid this pitfall by understanding how users make decisions.
While this may be hard to believe at first thought, consumers have beat you to the punch. Users have already solved their problems in two ways: the use of substitution products and pricing solutions out of the market. Consider a few examples:
- Before BaseCamp, people used Excel and other overly complicated web tools.
- Before Twilio, custom developed communication features.
- Before Wordpress, people used TypePad, Blogger, and custom built pages.
Users are hacks by nature. Users will try and solve their problem until the benefit is no longer greater than the cost. An equilibrium is established at this point. Following the model of rational expectations*, a startup attempts to disrupt the clearing point in the market with the use of a new product. The market is on balance and your job is to screw it up.
A user’s decision making process is framed in the following If statement :
var newOption = newBenefit - newCost - changeCost
var currentOption = currentBenefit - currentCost
If ( newOption > currentOption) {
return newOption};
else { return currentOption};
The above If statement frames the decision to switch to a new product down to the margin, where user decisions are typically made. A decision to switch is made between two or more options. As passionate entrepreneurs, we often present our solution in a frameless vacuum with no other options. Bad move. The goal of a startup is to influence the decision paradigm and maximize newOption when compared to currentOption.
Studies of consumer choice point to the importance of framing. In the book Yes!, potential customers were shown a display of three products and 30 products. Potential customers were 10X more likely to buy then when presented with only three options. Customers lose focus when presented with more than seven options (the maximum number of items our short-term memory can hold). What is understood as the universe of options greatly influences the purchase. Dr. Rober B. Cialdini writes, ”It is often the case that potential customers do not know precisely what they want until they are surveyed of what is front of them.”
The job of a startup is to convince the market one of two things:
- Comparison Choice: “My solution sucks. Your solution is better!”
- Discovery Choice: “I never knew I had this problem.”
By influencing newOption, you influence a user’s decision to switch or not. For example, newBenefit will rise with product pivots, new features, and messaging optimization. changeCost will fall with the optimization of the acquisition funnel and reducing switching costs to your product. newCost is the initial price of your service.
Startups fail because of bad positioning in the market that fails to demonstrate marginal benefit. In other words, you are not demonstrating enough value for consumers to bother to switch. To change this, focus on what you can change in your product and how your product is framed in the market.
Your potential users are already “satisfied”. Tell them why they shouldn’t be.
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*I used a rational expectations model to simplify the equation. There are additional factors I would add if time and space allotted, including social proof, time, touch-points, etc. I understand the limitations of this assumption.
