Feb 18, 2019
Ask Women in Product: Is my problem with the Product Idea or the Marketing?
Katie McCann answers this week’s question: How do you know if it’s the product idea that’s the problem versus the marketing?
This week’s question: I don’t have a technical background, but I’ve hacked together an MVP that 40+ people I don’t know have paid to access. That is exciting, but I keep getting told it’s not enough traction to raise money off of, and it doesn’t feel like there’s Product/Market Fit because the cost to acquire a new paying customer is still a lot higher than average revenue. What I struggle with is determining if the product itself will likely never generate enough revenue per customer to make sense…or if my also hacked-together marketing efforts are too inexperienced and as such, more expensive. TLDR: How do you know it’s the product idea that’s the problem, versus the marketing? What principles should I use to evaluate this question?
Answer from Katie McCann
Katie McCann is an angel investor and product leader who loves helping startups define their product and growth strategies, find product/market fit, and build products people love.
First of all, congratulations on getting the product to market and getting 40 people to pay for it! This is a fantastic first step. Many ideas never get this far.
Early-stage investors don’t expect you to have a fully-optimized marketing engine going, or even profitable paid marketing. It can take years to get to a profitable acquisition, and marketing is a key use of investor funds during that time. Instead, at this early stage, one of the primary things prospective investors look for is early signs of product/market fit (PMF).
Is it the Product?
Testing For Product/Market Fit
There’s been plenty written about PMF, including this great article from the Ask Women in Product series. Another article from Andreessen-Horowitz quotes Andy Rachleff, who developed the idea of PMF, on how to test for if you’ve achieved it:
“You know you have fit if your product grows exponentially with no marketing. That is only possible if you have huge word of mouth. Word of mouth is only possible if you have delighted your customer.”
If your 40 customers truly love what you’ve provided them, they should be sharing it with other potential customers. In other words, a product that has achieved PMF is its own most important marketing vehicle.
Uncovering Unmet Needs
Reach out to your customers to understand their experience with your product. Your earliest users are often the best source of both positive and negative reactions. Did the product solve a problem for them? Were there big gaps in the offering? Do they feel like they got value for money? Would they have paid more for the value they got out of it? Do they see themselves using the product on an ongoing basis? Would any of their friends have a use for it?
During this customer discovery exercise, you may uncover other unmet needs that had not yet occurred to you. If that’s the case, then it’s worth re-assessing whether you’ve already achieved PMF.
Is the problem with Marketing?
Enabling Word of Mouth
If your customers already love your product, have you built virality into it from the start? I know you’ve “hacked it together”, but is it easy for a user to share your product with friends? Does your product benefit from network effects (in other words, does a user’s experience improve when more of their friends are also using it)? As you continue to iterate on your MVP, consider how you can build organic growth into the product and show investors that paid acquisition isn’t your only source of new customers.
Optimizing your Marketing
If you haven’t had a chance to do so yet, I recommend researching all of the main paid acquisition channels (social media ads, Google search ads, display ads).
Each of these platforms provides research tools that you can use to estimate ad costs for relevant keywords or target users. If you have some budget to spend, it may be worth testing different platforms to see how they compare in terms of cost to acquire a new customer.
You should also test optimizing the ads themselves (different copy/images) to see if your early efforts performed as well as they could have. It may be worth seeking out an advisor who’s a guru in paid acquisition to help guide you and teach best practices.
Getting Ready to Raise Money
Paid acquisition isn’t bad; it’s part of almost every company’s acquisition strategy. The fact that your initial paid marketing campaign wasn’t profitable is okay provided you can demonstrate to investors that it could be profitable. To do that, you need to prove that you understand both your costs as well as the lifetime value of a customer.
Understanding Acquisition Costs
Customer acquisition costs (often abbreviated CAC) are, understandably, a critical metric for investors. While Marketing costs are the most obvious contributor to CAC, there are other factors to consider, such as discounts you may offer or commissions/credits you may provide for referrals.
Another factor worth considering is the trend: is your CAC going down as you add more customers? Is it stable over time? Or are you finding that it costs you more to acquire each succeeding customer?
With an in-depth understanding of what factors drive your CAC, you’ll have a better understanding of how much revenue you’ll need to be a viable business, which leads us to the other side of the coin: Customer Lifetime Value
Estimating Customer Lifetime Value
Aside from understanding your costs, it’s also important to understand the Lifetime Value (LTV) of a customer — in other words, how much revenue a customer will generate over time. By performing this analysis, you will better understand how much you can afford to spend to acquire a customer. There are many articles that do a great job of explaining how to think about LTV, such as How to Calculate Lifetime Value by Neil Patel. I also suggest giving Hubspot’s Interactive Customer Lifetime Value calculator a look.
At this early stage, you’ll need to make some assumptions to forecast your LTV. Some factors to consider about your product that play into the LTV calculation:
- While it sounds like you have a single product right now, are there any plans for additional products (or pricing tiers)?
- Is the product something someone might conceivably purchase on a repeat basis?
- Could (or should) it be a subscription model?
- In terms of virality, how many of your new customers were referred by an existing customer?
Neither the forecast of acquisition costs nor the LTV calculation will be perfect at this stage. What’s important is to show potential investors that you understand the concepts and have made realistic assumptions based on whatever data is available.
Conclusion
The startup graveyard is full of companies that threw millions of dollars at paid acquisition, yet were never able to find a sustainable business model. Your goal should be to get your product and your marketing working together in harmony to create a profitable growth engine. If you demonstrate that you understand how you’ll get there, you’ll have a much easier time building confidence with investors. Good luck!
Thank you to Amulya Chirala for editing this piece.
