3 Elements Defining Startups Success
With apps in the Google and Apple app stores surpassing 1.3 and 1.2 million, respectively, everyone out there is ready to build the next Facebook, Instagram or Uber. However, only a few startups are successful in achieving the growth needed to become a multibillion dollar company.
Technology news these days often features billion dollar valuations and huge growths of startups, but the truth is far from true. When Facebook started off, neither was it such a novel idea, nor was it a first of its kind in the market. Similarly, AltaVista and Yahoo preceded Google; DropBox came into the picture when cloud computing became a cliché.
What separates the success of these companies from the rest of the crowd is how they execute their strategies. In most cases, they have a similar pattern. Read on to find out more.
If market trends are to be analyzed, the one factor that might prove to be a hindrance in the growth of a startup is the high customer acquisition cost (CAC). The customer acquisition costs for an average e-commerce or online company starts from $350 and upwards. Further calculations and we hit $70 billion dollars. Imagine if Instagram or Dropbox had to shell out such huge sums for acquiring their 200 million users! But what is surprising is that the fastest growing web, mobile and tech startups spend next to nothing on marketing and user acquisition.
These high growth startups depict a viral growth graph; with a chain reaction of user connect. This implies that instead of implementing the traditional “marketing funnel”, where the business pays for traffic to convert a small fraction of it into active users, the exact opposite happens here. For every user that signs up, they bring with them more users, who in turn bring in even more users.
It happens just like that – by simply using the product or though an implemented referral system. An example to better understand:
Groupon offered attractive deals with huge savings in the midst of an economic crisis. These deals required a certain number of buyers to be activated, so existing buyers invited friends to join as well. Similarly, when DropBox was launched, they offered free space for every user referred. The incentive was so lucrative that the app acquired a million users in the first 7 months itself. Facebook leveraged the power of email to allow all their users to invite their email contacts to join the social networking site.
Instagram, with its cross-posting feature enabled its users to automatically share their photos with their friends on Twitter and Facebook.
There are times when apps go viral all by themselves, like the Uber app. The customers love the app so much that Uber gets more than 50% of their new customers via referrals.
The metric being followed here is termed the viral co-efficient, which represents the number of new users every existing user can bring. For example, for an app that records a viral co-efficient of 1.5 implies that there are 150 new users for every 100, who in turn bring in 225 users and so on. And if you are able to keep this value over 1, you can steer clear of allocating a marketing budget.
They are great at Retention
Statistically speaking, people use about 7 apps on an everyday basis, which includes text messaging, Facebook or email apps. The statistics also say that of the billion apps being downloaded every year, more than 90% of them get deleted almost immediately or at most within a year.
Products like toothbrushes, TV, emails, credit cards are no longer perceived as products anymore, they have become a part of our lives, our daily routine. In short, these products have become our habits.
These habits are a result of 3 sequences – reminder, routine and rewards – that makes our minds run on autopilot. These three elements function in the following order:
- The reminder is what makes our brain anticipate an action and sets the mind on autopilot mode.
- A routine occurs when the brain is already in autopilot mode and moves into an energy-saving mode by switching-off part of it. As it is, the brain consumes about 30% of the body’s energy and so it is a kind of action from the body being efficient.
- Rewards are an answer from the brain for recognizing a desirable behavior. As the brain goes into repeat mode with a habit, it starts anticipating some rewards. In the world of apps and tech, it is most often recognized as a “like”, “retweet”, or whatever other form it is available in.
Their Value Increases with Usage
Habits are a result of repetition, whereas retention is all about bringing back user to an app. While notifications can be great in bringing back users, but the best products do have the benefits of better strategizing. And their value keeps increasing as their usage increases, effectively creating a “sunk costs trap”. The sunk costs trap makes people stick to things they have invested in, even if their value is on the verge of or has already declined over time.
Some examples from our social media engagement characteristics to better understand this occurrence:
- You build a network of friends on Facebook over time, and keep adding more people to that network, preventing you or others from abandoning Facebook, however boring it might be.
- In the case of DropBox, the more the number of files being added, shared and organized, the lesser the chance of scouring for an alternative.
- There is a similar story with Instagram. You share photos and create an album of uncountable memories. After a while, you just stick with the site because of all the time and energy that you have invested in creating such valuable albums.
They start-off with a small subset of the market
To quote one of the Airbnb founders, it’s better to be loved by few, than to be liked by many. Some of the most favored startups of the decade have dominated a small section of the markets first, before being popularized in the mainstream media.
- Facebook was intended for students form Ivy League universities, not as the mainstream application as it is today
- Snapchat was originally meant for teenagers to share pictures in real time
- Instagram was widely popular with foodies during its initial days
- Paypal was widely popular with eBay customers and used to entirely dominate the market
There is a theory, introduced by Geoffrey Moore, which describes the case of early adopters adding to the popularity of these applications. This theory is termed as “Crossing the Chasm”. As per this theory, new products are bound to fail if they instantly chase mainstream. The reason being the mainstream users prefer security and fear novelty.
For a product to be truly disruptive, it has to dominate the early adopter markets, initially. These early adopter are open to new ideas and are relatively considerate even if the product fails to live up to their expectations. As the product grows among the early adopters, it acts as a much needed validation for the mainstream users, the receptiveness of the product is automatically enhanced.
For fast growing startups to excel in the mainstream category is to dominate their early adopter market, fix their bugs and get their brand established without losing their reputation. This is what a mainstream user needs to see in order to give the new app a try.