It seems like the tech investment market hasn’t been this excited about anything since 1999. The ICO, or “Initial Coin Offering,” is on the lips of every investor, and floats to the top of every startup discussion around fundraising and new business models.
Depending on who you ask, it’s a revolutionary shift in the investment paradigm that will help tech companies and investors alike become wildly rich, or it’s a scary bubble-creating, fraud enabling monster the likes of which hasn’t been seen since the dot-com bubble.
So what’s going on? What’s an ICO? What do you need to know about them? Why should I be wary or excited? This post will jump into the circumstances that created the phenomenon of ICOs, and try to dispel or confirm some of the most important common beliefs about them.
First, a bit of history:
First There Was Blockchain
In the distant technological past, around 2009, an idea emerged from a mysterious coder with the pseudonym of Satoshi Nakamoto. In a now-legendary whitepaper, he produced a theoretical model for a new kind of digital currency: what he called Bitcoin.
Without getting too deep into the technology, the key to Nakamoto’s innovation was the idea of a distributed digital currency that relied on a network of computers to process and authenticate transactions for its users. This network would create many copies of a “blockchain ledger,” and would copy transactions written to the ledger based on consensus with the network.
The ledger would contain many “coins,” or unique pieces of code that could be “traded” from one user to another only with the use of a private key. Over time, the system itself was designed to create more coins as a reward for those who processed transactions- a process called “mining.”
In this system, transactions would be theoretically tamper-proof. The system would keep what amounts to a never-ending record of everything it does, impossible for one person to alter alone.
Though Bitcoin’s exact origins and Nakamoto himself are mysterious, what is true today is that millions of people around the world have traded bitcoins, and used them for a variety of purposes, including making payments, transferring money abroad, and in some cases, illegal activities such as extortion, money laundering, and black market sales. There is such ongoing demand for bitcoins, that they have been valued by some exchanges at up to $5000 dollars recently.
The popularity of Bitcoin has spawned many follow-ups, including and especially Ethereum, which has presented a number of technical advancements to solve limitations in the original Bitcoin technology, particularly Bitcoin’s lack of speed and extensibility.
Today, the Ethereum blockchain functions as a platform upon which applications that need a distributed blockchain can be built. The Ethereum coin called “ether,” can be “spent” as a way of leveraging the network on which it runs to accomplish new tasks in a secure way.
Blockchain and ICOs
While Bitcoin popularized shared ledgers, new platforms like Ethereum promise to put that technology to much broader use, such as in authenticating contracts, securing communications, and enabling new forms of crowdfunding. Proponents see Ethereum and similar technologies as a way to decentralize many functions of the web, and eventually the whole economy.
TechCrunch has a good introductory article on some of those ideas. I suggest you read that as well.
An ICO is one of those new uses of a shared ledger. As simply as possible, it is the process of offering a new set of coins for purchase, either for cash, or more commonly, in exchange for cryptocurrencies that the seller of the coin can then exchange for cash, or something else. The coins being sold by the company raising the IO should be tied to some external financial instrument or physical asset, such as a loan, a share of common stock, a security, or in some cases, “credit” towards the use of the products a company offers.
You may recognize this kind of transaction as essentially similar to the sale of a security or a debt. The main difference is that the sale is accomplished using a blockchain ledger, and the “coin” sits in place of a typical security instrument, such as a bond, or a note.
Thus, an ICO could be used to facilitate many existing business activities. It could be used to enable a group of lenders to pool their money, or it could be used by a startup to sell equity in itself. An ICO can also be used by an existing company to offer a way of buying its services (the same way mobile gaming companies sell tokens, gems or other items to their players to make in-game purchases).
The advantages of employing blockchain technology in these circumstances are the same as ever: increased security, transparency, and auditability. In short, ICOs can potentially offer a better or fairer way of doing things people mostly already do.
So Why is this So Crazy Popular?
Because it’s so easy to setup, and easy to use. The wild popularity of ICOs in the past 6 months or so is largely driven by the general investor hype around cryptocurrencies. As the prevalence of shared ledgers grows, it becomes ever easier to leverage them for novel purposes like an ICO.
And that cutting-edgness can make the ICO market a bit frothy and potentially bubble prone. People who have invested in cryptocurrencies, and more importantly those who missed the huge easy gains that early Bitcoin and Ethereum investors made, now are seeking more opportunities to make returns of a similar scope. At least a part of this is mania and greed, as evidenced by the wacky valuations and amounts raised in some ICOs.
On the other hand, ICOs carry undeniably attractive advantages. They can be bought into from anywhere, by anyone, and are instantaneous- a powerful antidote to the slow and restricted nature of traditional investments and bank transactions for end-consumers. In a sense, an ICO lets individuals do what big investment banks have been able to do for decades: to be the first movers in new and exciting markets.
What an ICO is Not
Of course, that freedom and opportunity comes with its own cost.
Currently ICOs are mostly considered to be unregulated, and have thus been characterized as dangerous, risky for investors, and legally questionable by experts. Certainly those ICOs which mimic the characteristics of a classical IPO have been among the most concerning activity in the ICO market, and were the primary motivator for both the Chinese and US governments to intervene in the market recently.
An ICO can allow a company to bypass institutional investors who might normally help to diversify risk for consumers, or ensure that an investment is legally structured in a way that protects investors. In an ICO however, no central mediator such as a stock exchange or investment bank exists, and thus, in some cases, due diligence on behalf of investors is poor or non-existent.
Whatever the legal or ethical dangers, ICOs have quickly ballooned in value to what is estimated to be billions of U.S. dollars in the past year. Companies have used ICOs to raise eye-popping amounts of money, sometimes with little reliable information about where that money is going, and often with little legal protections in place for buyers.
ICOs have also been the tools of purely criminal enterprises, with a fraudster reportedly caught attempting to move $350 million of ICO investments offshore from India, after a fake ICO for a company calling itself OneCoin.
Massive speculation in cryptocurrencies has fueled plenty of fraud and abuse from bad actors looking to make easy money. And the distributed nature of a shared ledger makes it correspondingly difficult for investors to organize in response to problems. Collective shareholder action becomes difficult when many shareholders remain anonymous.
As to whether we are in a crypto bubble, as many commentators fear, it is inherently difficult to recognize a bubble when you are in it. But according to the economic historian Michael Lewis (author of The Big Short), a defining feature of the investor mania that leads to bubbles is “ an exponential increase in the volume and complexity of fraud.” And fraud today in crypto-currencies is both voluminous and increasingly complex.
Original Art by Mirek Sultz Copyright 2017, StartupYard
Are ICOs Legal?
At least right now, they’re not illegal in most places. But the question of their legality is part of an evolving situation. They have recently been banned in China, as the government grew concerned over the disruption they were causing in the country’s traditional financial markets. In addition, the SEC (Securities and Exchange Commission of the US), has also issued new guidance suggesting that ICOs that are similar to a classical IPO must register with the SEC, and adhere to existing regulations.
The ESMA (the European SEC), has yet to issue coherent regulatory guidance for European investors and companies. European regulators are typically slower to act than either the US or China.
In addition to this, while an ICO might not be illegal, it may in some cases be technically illegal to participate in it. For example, investors who are American citizens, and the companies they buy coins from, may be at risk of violating US laws including FATCA and FBAR – laws that require many financial transactions to be reported to the US Government when they involve American citizens.
In most countries, ignorance of such laws is not a defense for breaking them.
Are ICO’s Safe?
They can be. An ICO is not inherently safe as an investment. One unique risk in blockchain transactions, as opposed to traditional commerce, is that nothing is reversible. “No backsies,” meaning that you can’t appeal to anyone to recall a transaction once you make it.
And a coin alone does not guarantee shareholder rights or ownership of something. However, if the proper legal framework is used to tie coins to real assets or give their holders certain rights, then an ICO investment or a coin purchase is not fundamentally different from the purchase of any other type of security or medium of exchange.
So while an ICO is not by definition “safe,” it is not necessarily any more dangerous than any other type of transaction. And in some ways, it can be considered more secure against certain threats.
Ok, but Should I Buy Into an ICO?
According to our in-house blockchain expert, Decissio founder Dite Gashi, you should not consider investing in any debt or equity ICO unless it meets some essential criteria (many of it the same as for any traditional investment).
Here are the highlights of Decissio’s checklist:
- The ICO’s Focus – The focus should be on the business, and not on providing investor returns, particular fast investor returns. If it looks like a pyramid scheme, assume it is.
- Meeting Technical Due Diligence – either you or someone you trust has examined the technical specifications of the offering, and are satisfied that it is sound from a technical point of view.
- Complete Company Documentation – Just as with any investment, the company launching an ICO should be on a sound legal footing, and should be represented by qualified board-members, free of legal trouble, compliant with regulations, and have its finances in proper order. If documentation that establishes this is not provided, then the investment may not be as safe as you think.
- An Exit Plan – A company raising money through an equity or debt ICO should have a clear idea of how and when investors can be paid back, what triggers a liquidity event, what events or milestones call for a reorganization of the company, and so forth. This should all be provided in writing and vetted by your own legal counsel.
- Legal Framework – Purchase of a coin in a debt or equity swap absolutely must have legal documentation tying the coin to a real asset, or to the right to collect payment on a debt. Sufficient collateral for such a transaction should be in place, and all standard legal documentation must be provided. The blockchain technology does not replace any of this, or make any of it less necessary.
To be clear: we are not offering financial advice. But our opinion is that an investor should make a habit of looking for the same kinds of things in any investment they make. The way that an investment is offered doesn’t change the fundamentals of wise investing.
As the renowned VC Fred Wilson says: “Don’t be greedy.”
Should I Raise an ICO as a Startup?
In answer to this, we would pose a different question: what are the specific advantages of doing an ICO?
- It’s Faster: ICO might be easier to manage in the long term. Because it’s handled using a shared ledger, there’s no need to deal with many investors all trying to give you money at the same time- no problems with exchange rates, transfer fees, bank delays, and other annoyances.
- It’s more Scalable: Unlike a typical early-stage investment, an ICO can in theory be easily extended or replicated in the future without any changes to existing agreements. Traditional equity investing involves complex time-intensive processes to transfer shares, convert notes, gather signatures, and the rest.
- It’s Auditable: A nice thing about an ICO is that it can all be audited. Investors can feel more secure because a company cannot easily lie about how much money it has raised, or at what value. It’s all in the ledger.
- It’s Flexible: an ICO can be used by a small group of investors, just as it can a large one. This means that you can theoretically offer early investors the advantages of using a shared ledger, without sacrificing the personal touch that is so important with early stage investments. Startups rarely just need money: they usually need investors who can help them. It’s still possible to do that with an ICO.
ICOs are a Threat to Traditional Investors
It should be obvious by now that blockchain technology and ICOs are perceived as a threat by many traditional investors. And with good reason. Traditional startup investors may offer more than just money, but money is certainly a huge part of what they offer. ICOs can be a way to get around large institutional investors and deal with people on a peer-to-peer basis, meaning that traditional investors will have to compete harder for investments, and offer more to companies they invest in.
Early stage investors like StartupYard also face challenges from this technology. As it becomes easier to get capital from anywhere, startups are perhaps less likely to think of an accelerator as a starting point for their business. They may find that raising money in an ICO is easier – maybe even too easy.
Investors down the line may also find that investing through traditional institutions doesn’t give them the access to deal flow that they want, and they could be attracted to ICOs as a way of getting “closer to the action,” and giving money directly to exciting startups.
Tech Business Angels and VCs may also find that startups are not as keen to cooperate with them because of the alternatives available. That may be good for some startups, and very bad for others. Small companies that raise money too quickly often make big, costly mistakes, rather than little, cheap ones. Institutional investors don’t make you immune to that problem either, but they can enforce much needed discipline on founders who are playing with lots of funds for the first time.
What can we do about it?
As the famous line from newspaperman Horace Greeley says: “Go West, young man, go West.” In other words: we must adapt to our times. The reality is that this technology is gaining popularity because it promises something that people want: a new level of transparency and immediacy, for investors and for startups, that the old investment world can’t match.
While we have to continue to advocate for the processes that have made us successful at what we do (which have less to do with money) we also have to recognize that the modes of technology change whether we want them to or not. Our model must adapt, which is one of the reasons that StartupYard has made itself available to smaller investors through private equity placements over the past two years. We see that small investors want more access to early stage investments, so we must provide it in a way that makes sense for us, and for them.
Still, and it bears repeating: startups don’t really need money as much as they need help. Really effective startup investors provide enough money, in order to offer the level of help a startup really needs. A day may soon come when StartupYard will adopt blockchain technology in our own fundraising efforts. But when the winds of change blow, you shouldn’t be blown away by them. At the end of the day: the tech business has to be about more than money.
Originally published on our blog way back in 2014, this post has been one of our most enduringly popular. According to Google Analytics, the average reader has spent over 20 minutes studying it. It is also our most popular piece on Medium. Since that time, we’ve shared this post with scores of startups, and used the methodology detailed here over and over again. This post is updated to reflect all that we’ve learned in the past 3+ years.
What is Positioning?
“Positioning” has often been described as “the organized system for finding a window in the mind.” That’s how Al Ries and Jack Trout described it in their book: Positioning, a Battle for Your Mind, a groundbreaking work from 1981.
Al Ries is often credited with coming up with the term “positioning,” and he describes it as a way of using a customer’s own experience of the world (including with other brands and products) as a way of communicating with that customer. Rather than communicate in a vacuum, companies that use effective positioning target customers who are already familiar with competing products and brands, and use that familiarity to differentiate themselves.
In the book, Ries highlights perhaps the most famous example of brand positioning in the 20th century: that of Avis, which in 1962 premiered the tagline: “At No. 2, We Try Harder.” Avis was at the time the market runner up in rental cars, and the company used that fact to imply that they were more accountable than their competitors, because they had to be.
Positioning is Everywhere
When we stop to think about positioning as a promotional tool, we begin to see that it is everywhere.
Brands use their competitors as foils for their own messaging constantly. Remember those “I’m a PC, I’m a Mac” adverts.
Brands for the the past half century have often focused less on defining what their products are, and chosen rather to define what they are not. Another striking example comes from 7-up, which in the 1970’s sought to gain market share by telling customers that their clear soda was “the un-cola,” explicitly defining themselves as essentially “Not Coke.”
Whereas in the past, consumers may have seen their range of choice as: “drink Coke or don’t drink Coke,” 7-up presented a different scenario: “drink 7-up when you don’t want Coke.”
In presenting consumers with a new choice: either drink Coke or drink 7-up, the brand found a window into consumers’ minds. It suggested that there were many people who would prefer an alternative to Coke that was not available.
By framing 7-up as an alternative to a popular drink, the brand convinced retailers and consumers alike to buy 7-up along with Coke, in order to fill the demand implied by the advert. In 7-up’s ideal scenario, customers would not stop buying Coke, but would buy 7-up in addition to Coke.
The product itself also emphasized its differences from traditional sodas. It was not caffeinated, it was sour, and it mixed well with the more popular alcoholic drinks of the time, including gin and vodka, which were gaining market share in the 1970s. “7 and 7″ was a popular drink choice by 1970, a mix of Seagram’s 7 Crown Gin, and 7-up.
The brand thus further differentiated itself from Coke, which had traditionally focused its brand on taste and tradition, using the tagline “It’s the Real Thing.” Whereas Coke was a conservative choice, enjoyed by families and older generations, 7-up was a young brand- enjoyed at night in bars and in cocktails, rather than on sunny afternoons at baseball stadiums or at restaurants.
Thanks to these ads, 7-up rose in the 1970s to 3rd place among sodas, only losing its market share with the rise of diet sodas in the 1980s and 90s, and the decline in popularity of mixed drinks in favor of bottled drinks and beer.
What a Product Positioning Statement Looks Like
Here we’ll focus on a sub-discipline of positioning as a whole: Product Positioning. It’s the same general philosophy, but with its own specific methodology.
When a startup team joins StartupYard, one of the first things we ask them to do is to sit down and write our a “positioning statement.” The format is deceptively simple, and it looks like this:
Product Positioning Statement:
(Our Product) is for (target customers):
Who (have the following problem):
Our product is a (describe the product or solution):
That provides (cite the breakthrough capability):
Unlike (reference competition):
Our product/solution (describe the key point of competitive differentiation):
Why A Positioning Statement Is Important
The positioning statement contains the core elements not only of a product, but also of its marketing and sales strategy. And while most of our teams have worked primarily on ways of describing their ideas, a positioning statement does more than this: it also justifies the notion of that idea becoming a business.
It’s important for a startup to have the concepts of saleability and market differentiation baked into the essence of the product. Writing a positioning statement, like writing a SWOT analysis, can reveal basic strengths and weaknesses in a product while it is still in the “idea” phase.
A Starting Point
Even more importantly, a positioning statement can serve as the basis for validation of a product. If you can’t describe what your company does in this compact format, it’s possible that you aren’t sure yet what your company actually does. You may be sure of what you are doing on a technical level, but what that means in business terms might not yet be clear.
The positioning statement is a conversation starter, particularly with early mentors and core team members, to facilitate early discussions about core strategy, and how the team sees itself in the bigger picture, what market it is really addressing, and what its real competition is in that market.
And a positioning statement, well-executed, can be transformed virtually complete into the core marketing message for a product, once it is developed. Take this copy from Nest’s webpage:
“Our mission is to keep people comfortable in their homes while helping them save energy, and with the next-generation Nest Learning Thermostat, we’re able to spread that comfort and savings to even more homes — and to help higher-efficiency systems perform the way they were meant to.”
Here are all the elements of a positioning statement. If the Nest founders filled in our form, it would look something like this:
Our Product is
For: Upper-middle class and wealthy people
Who: Own homes and spend a lot of money on energy costs and heating/cooling systems
Our product is a: Smart Thermostat and related products
That provides: Savings and increased comfort by improving efficiency of existing systems.
Unlike: manufacturer provided systems
Our product/solution: Learns and intelligently adapts to the inhabitants to increase comfort at all times, while saving money
A Positioning Statement Tells the Truth
The above “translation” of the Nest positioning statement doesn’t say exactly what their marketing copy says of course. They don’t mention wealthy clientele for one thing. But at $130 for a smoke detector, and $250 for a thermostat, that is surely the market they are targeting.
Their products are priced high enough to be clearly exclusive, but low enough not to seem extravagant or make a money-wise customer feel foolish for purchasing. And anyway, that messaging is not only found in the price, but in mention of “homeowners,” and of “higher-efficiency systems.” These subtle cues indicate to customers that the product is made for people who value performance, and are willing to pay to get it.
Features ≠ Differentiation
Notice too that none of the positioning statement deals with the exact features of the product. It’s all about the outcomes the product promises.
This is key: their competitive differentiation is not on a feature-by-feature basis, but holistic. They frame their competition as not only out of date, but barely worth mentioning at all. They indicate that their competitors (the providers of the systems), are not even in the same business as they are, and that therefore competing products are not even worth comparing in a more granular way.
These are all elements of Nest’s marketing that are informed by the market segment they have chosen to address, from the quality of the products, to the design, to the sales language and the pricing. And so the marketing message that says: “this product is for you,” when speaking to its target client, is backed up by a product that is built with that person in mind. The mission is clear: this is not a product for anyone, but for someone very specific, so that when the customer comes across the product and thinks about buying it, he or she can immediately see that it is made for them.
Who, Not What
There’s a reason the positioning statement starts with “who.” Over the years, we’ve consistently observed that the first thing most startup founders do is try to talk about the product before talking about the customer.
But here’s why that’s a mistake, and why the positioning statement doesn’t do that: understanding the target market is the first hurdle in actually validating a new product. Features are a distant second consideration to clearly articulating who the customer is, and what their problem is.
A laundry list of features doesn’t really address the problem of “who” the product is for, but only “what” it is for. And that “what” that a feature describes doesn’t necessarily give any indication of what problem is being solved. Startups that are dealing with complex technologies can easily skip over the core user benefits of the technology, in favor of describing the technology itself.
Common is the startup that pitches “a revolutionary new method of transforming leavened wheat products into crispy squares by employing concentrated on-demand heat conduction derived from electrical coil technology,” instead of pitching: “toast whenever you need it,” or even “a less boring version of bread.”
People Buy Outcomes, Not Features
Customers ultimately buy solutions to their problems, not technical specifications. And those problems are not always the same as the ones that the feature list actually addresses.
Consider this, when thinking about buying a car, what are the first things you’re likely to check?
Probably it isn’t technical specifications. Most people will answer one of two ways: they will check either prices, or reviews.
That indicates that the customer is very aware of what their problem is. They need a car, and they need it at a certain price, or at a certain minimum level of comfort and safety, or both. Car companies rarely list their prices up front on their websites precisely because they know that this is what customers are looking for, and so they are able to ask for customer information in exchange for information on their pricing.
Cars rely heavily on marketing to differentiate themselves, but the marketing is typically not focused on what the cars actually do. And that’s because cars all pretty much do the same things. So the problem being solved for the customer is not “I need a car,” but “I need a car that fits my personality/lifestyle/class/status and/or specific needs.”
Look carefully at a car commercial, and you’ll be assaulted with subtle and unsubtle cues about price, lifestyle, class, education, and culture, but not much about fuel injection, or anti-lock brakes, or all-wheel drive. These things may get a mention, but the whole object is to present the car as being a great value, in consideration of all that it offers for the price being asked.
The goal of a typical car commercial is to convince a customer that they are buying the status and the culture that is associated with the car; that their decision is not motivated by price, even when it usually is.
That is how powerful positioning is. By showing a very clear understanding of who their customers are, car companies can turn a price-motivated decision into a statement about who the customer is, and about their place in society as a whole.
Try this: go and ask someone why they bought the phone they own, or the car they drive, or the computer they use. Whatever it is, ask them why they chose it.
The majority of people you speak to will probably not say: “it’s the best I can afford.” Instead they were answer the question in terms of what the phone or car or computer represents to them; what it says about them and their values.
For example, if the person has a cheap phone, they’ll say something like: “I just use the one that came with the plan. I don’t need anything fancy.”
That’s often code for: “I’m too cheap to buy a nicer one.”
On the flip side, ask a latest model, hi-tech phone owner why they bought their tech toy, and they’ll say it’s because they value the design, the features, or the amazing convenience of using it. They won’t say: “I bought this because I want to signal that I am wealthy and can afford luxuries.”
This dedication to explaining our motivations in personal terms doesn’t extend only from a marketing strategy for high end consumer products – it derives from the way those products are made as well. The design and build of a product must subtly betray its role in social signaling for the owner. Cheap cars are “humble,” while super-expensive cars are “subtle.” It is the cars in between that are most ostentatious.
When you see a fancy paint job on a cheap little economy car, you cringe because it is a confused communication of values by the owner. It’s pig dressed as a lady.
Consumer products can also be designed to signal their utilitarian nature, in order to make customers more comfortable with their purchase. For every €20 bottle of wine, there is a €5 bottle of wine that looks somehow less pretentious, and more sensible.
The Position and the Pitch
The main difference between a positioning statement and a full blown pitch is that the positioning statement says in plain words, what is really true about who your product is for, and what you believe its market fit to be.
This will help you to stay away from visions of (and talk about) your product changing the world, even if it doesn’t really have the capacity or the capability to be a real world changing idea. Not all products have to be for everyone, and many of the best products aren’t.
It will also keep you honest and focused; force you to make clear the needs of the market you are targeting, and force you to live in their shoes instead of your own.
The 17th century French poet Boileau famously said: Ce que l’on conçoit bien s’énonce clairement, Et les mots pour le dire arrivent aisément. Or: “An idea well conceived presents itself clearly, and words to express it come readily.”
Or to put it bluntly: An idea isn’t any good unless it can be explained to someone else. If there were one piece of advice I could drill into the head of every brilliant startup founder I’ve met in my career, it would probably be just that.
But since we have some time, I’m going to go deeper. Here is:
How to Never Fail at A StartupYard Interview
StartupYard will begin interviews for Batch 8 next week, and in the meantime, we thought we would share with them (and you), 4 key strategies that any startup can use in an interview with us, or any investor, that will help them never to fail.
Now, this advice is not going to win you an investment 100% of the time.
Investments are complicated, and they involve the needs and priorities of multiple parties. A perfect meeting might not produce an investment for a million valid reasons. But I can guarantee that if you follow this advice well, you will not fail to give your best possible impression to an investor.
Follow this advice, and you will not fail for stupid reasons.
1. Answer Questions As They are Asked
Simple and yet incredibly difficult for many people. Answer a question as it is asked, not as you would like it to be asked.
Did someone ask you a question to which you can say Yes or No? Then say Yes, or No. Then explain your answer. If you’ve never interviewed someone, I can let you in on a secret: it is very obvious when someone does not want to answer your question.
It is also very annoying.
And this produces the world’s most frustrating non-answers to simple questions. The below example is not fiction:
- Are you making any revenue?
- Well, we only launched about 6 months ago, and we have been focusing on making partnerships with relevant partners who are going to help us scale to our target market, and define the right sales strategy while getting early feedback from customers.
- But are you making any revenue now?
- Currently we are in beta and we are talking with a few clients who are ready to become paying customers once the features they need are fully implemented.
- Are. You. Making. Any. Revenue?
- Thank you.
We don’t ask trick questions. What would be the point? And yet this behavior is widespread among startup founders. It is a learned behavior that must be slowly and painfully unlearned.
We want to know about what we’re asking about. So don’t try to give us the “right” answer. Just give us the real answer. What do you think is worse, us hearing that you aren’t making any revenue, or us leaving the meeting thinking you’re not even capable of answering simple questions?
And the real answer can contain the same information. Just in a slightly different format:
- Are you making any revenue?
- No. But we have a few customers who want to pay us as soon as we have the right features implemented. We only launched 6 months ago, and we’ve been focusing on partnerships.
- Ok, who are these customers, and what features do they want?
Now we’re getting somewhere. And it was so easy! Now we can move to more important questions. This is a real conversation.
If the purpose of an interview is to exchange information and to assess a relationship, we would much rather spend our time doing that, than trying to decode cryptic phrases and hints.
So answer the question.
2. Win the Argument: Lose the Interview
It might be in school where people learn that an impressive, intelligent answer to a question is necessarily the longest and the most complicated one. It might also be in school where we learn that the one who speaks last has won the argument. We probably learn that from watching our teachers. But are these really good lessons?
Among the worst qualities we observe in some founders is the need to triumph, rather than to persuade. But winning an argument is different from convincing someone you may be right, or that you at least know what you’re talking about. Winning is not the goal here.
Trust your interviewers to see you as a human being, and they will like you for it. Treat them as human beings, and they will love you. But make the interview into some sort of contest for control of the subject matter and the upper ground, and they will end up wanting to get rid of you.
So communicate. Don’t argue.
What’s the best answer to a question you don’t know how to answer? Try: “I don’t know.”
You might be surprised how much investors will respect a founder who is not afraid to admit they don’t know everything. In a room full of smart people, there are always going to be things you don’t know that others do.
When answering a question, watch the interviewers, and if they seem ready to speak or unsure what you’re saying, ask them: “is this answering your question?”
So much of what we do at StartupYard involves unlearning and deconstructing the behaviors and impulses that stop founders from being great communicators and effective leaders. Most of that boils down to their motivations in any given situation. What do you want to accomplish here? Do you want to win, or do you want to be understood?
So start with this simple goal in mind: you want the investors to know you. You want to get to know them. If in the course of an interview, you can achieve this basic understanding, on a human level, then you will have succeeded.
3. Look Like You Belong Here: Because You Do
My father wore a suit and tie to work for 30 years. When I got a bit older and started working, I told him I’d never wear a suit and tie to work.
What he said sort of took me by surprise. He said: “we dress according to social customs, not just to show respect for others, but also to show self-respect. We dress to show that we feel we belong.”
I still don’t wear a suit to work, because I work with startups, and nobody does. But still, I notice when a person is poorly or inappropriately dressed for any given situation.
And that can swing both ways: a guy in an immaculate 3-piece suit who wants to talk about his startup is as out of place as the guy in the bathrobe with sleep in his eyes. Neither belong in that situation. Failure to dress like you belong can show that you don’t respect the social customs of your surroundings, but also that you don’t see yourself as belonging to them.
So think just a bit about how you look. Do you look like a startup founder? If you’re not sure, you may need to think more about this. Not too much. But a little.
4. Plan Ahead: Most Questions are Obvious
Here are three things any startup investor should ask you about:
- What is the problem you’re solving?
- What is the solution?
- Who are your customers?
If you can’t answer these three questions clearly, and succinctly, then perhaps you don’t know the answers well enough yet.
And when you sit down to answer these questions, try and imagine an investor hearing this for the first time. What is that person likely to ask you?
- The problem we are solving is that X can’t Y when Z
- Why does X want to Y when Z?
- They just do…
Oops. Do you know why your problem is actually a problem? It might surprise you how frequently founders aren’t all that sure that the problem they’re solving is even a real problem at all.
Because “answering the question,” as in literally stating the problem, is not really answering the question. The object of the question is to get a useful answer: Why is it a problem? When is it a problem? How is it a problem? What is the result of the problem?
So be ready for a follow up. It will come.
Remember, a good investor, especially at an early stage, should be evaluating your ability to think clearly, as much as the idea you are describing to them. They can hate the idea, but be impressed with the clarity of your thinking. That happens to me all the time.
We have invested in companies whose ideas we didn’t fully agree with, because they showed they could think well and be receptive. That’s more valuable than an idea you love, and a founder who can’t answer simple questions about it. In assessing which of those two founders is likely to be a success, the one who can answer questions is the one we pick every time.
You probably know that StartupYard is the oldest and leading Seed Accelerator for technology startups in Central Europe. What you might not know is that StartupYard is also a member of the exclusive GAN: The Global Accelerator Network.
GAN: The Global Accelerator Network
GAN is an invitation-only network of the leading technology accelerators in the world, including TechStars (all campuses), NUMA, StartupBootCamp, and MuckerLab.
GAN is more than just a network: it offers a package of perks and free services to member accelerators and their startups, that vastly reduce the early-stage costs of starting up. In the past, our startups have used GAN perks to do everything from cloud hosting, to email management, and much more. If you can think of it, there is probably a GAN perk that covers it. And all those services, our startups get for free.
What StartupYard Members Get from Gan
$34M in Perks – In the last year, GAN startups received $34M in free or reduced cost services they needed to get off the ground successfully. But more than just free credits, partners like Sendgrid offer credits as well as guidance for any GAN company in setting up and establishing an impact email strategy
$400K invested – GAN Ventures, the investment arm of GAN, provides seed stage funding and has made investments in four GAN alumni companies so far this year.
20+ Corporate Partners – GAN founders have exclusive opportunities to connect with large enterprises for business development opportunities.
Access to global locations – No matter where your startup is based, if you need a place to work or take meetings, the GAN Exchange gives you access to GAN program offices around the world.
Mentorship from the best minds in the industry – Mentors are a key part of a startup founder’s success. GAN startups benefit from more than 13,000 mentors throughout the GAN community.
A community of entrepreneurs – No matter where you or your company are based, you’re surrounded by a community of more than 5,000 startups who have launched their business in a GAN accelerator.
(Update: May 2017) This post originally appeared in 2014. We’ve updated it with what we’ve learned since then.
Startups often join StartupYard right at the beginning of their journey. For B2C companies, having a few hundred or a few thousand MAU (Monthly Active Users), can provide a wealth of insights about what in the product works, what doesn’t, and what the users want from it.
But how does a startup with essentially zero confirmed users make decent User Projections based on little or no evidence?
One of the key mistakes that B2C companies make is to see trends in their user growth that don’t actually hold up. Every B2C startup wants hockey-stick growth, but the less data you actually have, the less precise your projections based on that data will be.
If my user numbers doubled last week from 1 to 2, I can claim that my userbase is doubling on a weekly basis. Then I should reasonably predict that by week 26, I will have nearly 68 Million users!
Depending on your sense of what’s reasonable. Or I could as easily predict that I will have just 26 users. Regardless, I can be very sure that the real number will probably fall somewhere in the middle.
Startups need to be both ambitious, and realistic about their growth projections. This is essential to creating a plan that will actually achieve those results. In this post, we’re going to go through the process of establishing reasonable and falsifiable assumptions, that will help you achieve your user growth goals.
Noah Kagan of Mint.com, discusses this process in his informative blog. He points out that the only workable approach to gaining users is to work backwards from a clearly defined goal, breaking down the channels and methods of user acquisition, their costs and their timescales, into one simple to follow spreadsheet. And while his own projections of how Mint.com would reach 100,000 users in 6 months seem wildly optimistic (including a 25% conversion rate from sponsored adds on Digg.com, with a CTR of 10%), this type of planning actually brought Mint a million users in that same period.
The Assumption Spreadsheet
Before launching, it’s important to relate your marketing goals to your assumptions. If your goal is, say, 30,000 users within the first six months after launch, you’ll have to justify that growth with something more than hope. You’ll have to show how you assume it can be done. Catalogue and quantify your methods of getting this growth, in ways that can be tested quickly and definitively, including the costs of acquisition per user.
Your assumptions for marketing costs might look something like this:
Cost Total: $39,500 User Total: 25,250
Projections are Not a Plan
Your assumption spreadsheet is more than just a plan for user acquisition, or a marketing plan.
This is just a part of a much larger set of assumptions. Other factors include your churn rate, your pricing, your internal growth costs, etc. But everything should relate back to basic assumptions that can be challenged and adjusted before launch.
Ask yourself: what will happen in 30 days, when I find that the CTR for one source is half what I expected? Alternatively, what if my CPC for one source is much lower than I predicted?
Going back to the table and adjusting the assumptions as data comes in, helps you to see where your time is best spent going forward. If CTR is low, maybe the message doesn’t match the medium, and you need to rethink your call to action. If conversion is super high somewhere, maybe you need to increase the spend there at the expense of other channels.
Death to an early stage startup is a failure to react to data. I can’t count the number of times I’ve looked at early marketing data for a startup, and pointed out the above issues, only to be met with blank stares. You must incorporate changes in your data as often as possible, and iterate as often and as quickly as you can, in order to press advantages, and eliminate disadvantages.
“Wait and see” is death to a startup. You must react to every change in the data. Data must guide your planning.
Sometimes you need to seek outside advice. Divorcing your assumptions from objective reality can be hard for anyone. That’s why mentors and advisors exist, so use them.
For example, my spreadsheet above has a few obvious problems. First, I’ve obviously fallen in love with the idea of “native advertising,” or the kinds of ads that fit in with the content of a given site. This makes sense, as I am personally a fan of this type of advertising. But by scrutinizing the spreadsheet, I can see that native advertising is predicted to cost me $40,000 out of a total marketing budget of $56,000, or 71% of my budget. Despite that, only 58% of my users will come from native ads. They will cost me a lot, and will not be as valuable as the users I gain from Google Ads, or even direct email marketing, according to my own assumptions.
Having your plan challenged can reveal your biases and hangups. Often, just sitting down and gaming out the plan for yourself can show you that you’re locked into the wrong thinking.
Have an Answer
It’s not necessarily wrong that I would spend 70% of my marketing budget on native ads, when they will only bring me 58% of my users. After all, users are not points of data in the end: they are people. Different kinds of users will behave in different ways. Maybe the CLV (Customer Lifetime Value), of a user acquired from a particular channel is higher than one from another. I can’t know that. The best I can do is assume, and test assumptions.
These are the kinds of details that investors will pounce upon when they are shown your user projections. You need to have an answer for why you would pursue that avenue of user acquisition over another. The conversation has to be about your assumptions, not about what you don’t know.
Perhaps these users are of a higher value (they buy more expensive products), or perhaps they are likely to stay with your product for longer. Perhaps the market for your product in Google ads won’t give you that same CPC if you spend twice as much on them. The size of the market may not justify a bigger focus on Google ads over native ads.
Don’t Fall in Love with Unknowns
Donald Rumsfeld, U.S. Secretary of Defense under George W. Bush, famously justified poor planning for the American occupation of Iraq in 2003 by saying: “There are known knowns, known unknowns, and unknown unknowns.” As many critics later pointed out, the Bush administration leaned heavily on the idea of “unknown unknowns,” to justify a lack of realistic long-term plans that matched their aims in the conflict. Anything that was inconvenient to think about or defend to the public became an “unknown unknown.”
The result was years of escalating conflict that have continued to plague the region to this day.
You can surely see the parallels between this kind of expensive, poorly planned and overly-optimistic strategy can be a cautionary tale in business as well. Refusal to undertake planning and spell out -and then recognize and react to- expected difficulties can lead you to do things that cannot be undone. You can undo a product change, but you can’t un-spend wasted advertising budget. You can’t un-launch a product that has failed to launch.
How Big is Your Mountain?
“How big is your mountain?” That’s the metaphor our StartupYard’s MD Cedric Maloux uses to describe this process of reconciling ambition with the need for some realism, even in the growth phase of a startup.
Ambitions to reach 1 billion users are great, if your product is the kind of thing 1 billion people can get some value from at the same time. Not many products are like that, which is why most don’t have the chance to grow that big.
But perhaps your mountain isn’t made of a massive user community. Perhaps it’s made of a smaller, quality user base, that pays a reasonable but significant amount to use your product, and gets a disproportionately large value out of it. In either case, your first six months or so should represent the first “summit” of your mountain.
Within that time, with the help of investors who understand and support your journey, you should reach a goal that is both ambitious and achievable, and you should gain valuable understanding of real users, and what it takes to make them happy.
Justify the Impossible : Control the Conversation
While the assumption spreadsheet functions as a roadmap for growth, it also works as a roadmap of your thinking for investors and partners.
Blind ambition, particularly when you’re asking for money, is not an attractive quality. But qualified ambition, in which you set hard goals for yourself, but also show how achieving those goals can be possible, can be very enticing to investors.
To use the mountain analogy: you can ask investors to help get you to the first summit. A goal they can believe in. That moves the conversation about the ultimate goal to a more appropriate time; a time in which you have more data and more momentum.
Imagine two founders who have essentially identical products. Both will meet with investors. One does not prepare these predictions because, as he says, “you just can’t know what will happen.” The other makes predictions, each representing his ambitious plans to achieve benchmarks in user acquisition. One of these two has something real to talk about with the investors. The other doesn’t.
How do you think those two conversations differ? I can tell you from experience: the one who comes with predictions gets enormous value form investor feedback about those predictions. The one without them gets, at best, idle speculation. If you aren’t willing to do the mental heavy lifting of making predictions, investors aren’t going to do it for you.
To define the conversation and lead it, you have to make statements that you can back up. Instead of having investors question your ideas, have them question your predictions. They’ll be speaking in your terms, rather than theirs.
You can now apply for StartupYard Batch #8.
- Artificial Intelligence
Thoughts are very important. Leadership is very important. Thought leadership may be the most important development in thinking, or leadership, since before thought leadership.
In all seriousness, this video is a valuable teaching tool for StartupYard, and we use it to show startup founders that the elements of a convincing presentation are from a separate skill-set than a deep knowledge of what you’re actually doing.
Knowledge is never enough, but nailing the format is also never enough. Always, founders must compromise between what they know, and the things they need to do to gain the trust of others. We call it “being clear,” rather than “being accurate.”
You can now apply for StartupYard Batch #8.
- Artificial Intelligence
We’re pleased to announce that StartupYard will take part in Startup Safary Budapest, April 20th and 21st, 2017.
What is Startup Safary?
Budapest turns into a startup exhibition for 2 days
20/04/2017 17:30 – 18:00 – thehub.hu, 1061 Budapest, Paulay Ede utca 65.
21/04/2017 TBA Mosaik, 1136 Budapest, Pannónia utca 32.
StartupYard helps technically sophisticated developers and makers turn their ideas into real, growing businesses. In recent years, we have helped launch a series of high tech startups including TeskaLabs, Neuron Soundware, Cryptelo, and Rossum.ai. Find out how these startups went from a brilliant idea, to companies serving clients all over the world with cutting edge technologies.
20.04.2017: 13:00 – 16:00 – thehub.hu, 1061 Budapest, Paulay Ede utca 65
21.04.2017: TBA – Mosaik, 1136 Budapest, Pannónia utca 32.
This is your chance to meet the management team of Central Europe’s leading seed accelerator for tech startups, and find out how we can help you turn your experience and knowledge of AI, Machine Learning, IoT, Blockchain, or Cryptology into a globally scaleable business. Come to find out about our program, pitch us an idea, or make a connection.
How do I meet the StartupYard team in Budapest?
There will be a few opportunities. First, we warmly invite you to join our workshops at TheHub and Mosaik, where you can hear about real-life examples of startups that have been through our program, and what they have accomplished as a result.
You can also sign up for our office hours. Because this event is happening under the umbrella of Startup Safary, you should sign up directly on their platform, and you will need to purchase a ticket on their website (tickets are just 8 Euros, and go toward organizing the events).
We will update this post when we have times for our appearances at Mosaic on April 21st.
We look forward to seeing you!
We’re excited to announce that on the 11th and 12 of April, StartupYard visits Sofia, Bulgaria, to meet with Deep Tech startups, entrepreneurs, and others with ideas for businesses built around AI, AR/VR, cryptology, blockchain, IoT, and related technologies.
Our visit will be at Puzl CowOrKing, one of Sofia’s most exciting startup workspaces.
This is the first of 5 visits to Central European capitals this spring, with an eye to attract brand new startups to StartupYard Batch 8.
DEEP TECH FOCUS
The focus of StartupYard Batch 8 will be “Deep Tech.”
Deep Tech means companies working on technologies and products that are unique, difficult to replicate, or are exploring areas of innovation where the barrier to entry remains high, and the problems scientifically complex and difficult, such as Robots, AI, IoT, VR/AR, and Cryptography.
Today, the barrier to entry for globally scalable startups is lower than ever. However, there are still tremendously complex problems left to solve. In years past, our focus on the Data Economy has shown us that there is a growing need for novel approaches to the way people work, communicate, do business, participate in the economy, and understand the world around them.
Deep Tech solutions seek to develop never-before-possible opportunities to profoundly alter the way everyone, not just the tech industry, works, thinks, and sees the future. Deep Tech companies work at the edges of possibility for emerging technologies, and so have the potential to disrupt and change whole industries overnight.
Taking the time to apply costs you only a bit of your time, and is the first step in the StartupYard selection committee and investors getting to know you and your team. There is no risk in applying, so why not start today?
StartupYard “Training Days”
April 11th and 12th in Sofia will be StartupYard’s first visit to one of 5 cities, including Budapest, Bucharest, Vilnius, Krakow, and Sofia. Unlike a typical roadshow, where an accelerator gathers early-stage startups to show off their pitches, StartupYard will instead offer workshops for Deep Tech engineers and idea makers in these different cities, about how to turn a high tech concept into a real business.
From AI to a Real Global Business- April 11th at 16:00, Puzl CowOrKing
Do you have a Deep Tech idea that could potentially become a tech startup? This is your ideal chance to find out what it takes. StartupYard CEO Cedric Maloux will walk attendees through the process of turning AI and other Deep Tech startups into thriving businesses, from proving their concepts with real-live pilot customers, to signing their first paying clients, and gaining venture investment.
Deep Tech Positioning- April 12th, 10:00, Puzl CowOrKing
In this workshop, StartupYard’s head of communication and community Lloyd Waldo (that’s me), will show would-be entrepreneurs how early stage startups in Deep Tech can use practical storytelling skills to convince the earliest stakeholders (including cofounders, investors, customers, and employees), of the power of a new idea, by transforming it from dry description and speculation into a compelling narrative, that puts you in control of the conversation.
This workshop will include hands-on strategies for positioning that will provide entrepreneurs with the toolset necessary to construct a persuasive and powerful story about themselves, and their vision of the future.
Open Hours, April 12th, Puzl CowOrKing
Do you have a Deep Tech idea and a great team that you think is worthy of funding and acceleration at StartupYard? Are you ready to take the next step and run your own Deep Tech company? Now is your chance to meet the StartupYard management team, and tell us something about it.
Out of 7 startups that joined us just a few weeks ago for StartupYard Batch 7, only 2 are currently selling a product to real customers. Those 2 have just a handful of customers each. Most of our startups are very early stage; you have to have something to sell, before you can sell. But it surprises many of them how early it pays to think pricing.
While we expend days and weeks and months of effort discussing features and USP, design and everything else, it’s surprising to me how difficult it really can be to talk to startups about pricing. Talking about pricing is kind of hard. People don’t want to think about it. They panic at the thought of raising prices, and they cower in fear of having prices too low. It can be a rollercoaster.
Of course, pricing is a sensitive subject. As Tom Whitwell writes in his insightful medium piece on pricing psychology, “Prices are a shortcut to our most sensitive emotional responses.” Pricing is a deeply primal part of consumer psychology, and as Whitwell shows, leaves consumers surprisingly, sometimes shockingly, susceptible to manipulation or suggestion.
I suggest you go and read that piece: The First Rule of Pricing, to find out why. I’ll wait.
Hello! Now that you’re back, this piece is going to build on Whitwall’s, to talk about what all that means for early stage startups, and how they should actually approach pricing their products for the first time, or through the first few iterations.
Your Customers Don’t Know What They Want (Or How Much They Would Pay)
As Malcolm Gladwell explored in his best-seller Blink, and associated Ted Talk “On Spaghetti Sauce,” it has been known in retail since the early 1980s that optimum sales results could not be achieved by finding the ideal single product and price point. For decades, product companies had been simplifying their offerings in the hopes of reducing costs while optimizing their sales around best-selling lines of products.
The logic was simple. The attractiveness of products could be graded on a bell curve. An ideal point was where most customers would be willing to buy, whether or not any of them were completely satisfied. Simple product lines also made advertising easier, reducing the need to target advertising to specific audiences, because increasingly, products were targeted at the vast middle of the market.
As he explains, beginning in the early 80s, big food companies, and later other product companies, discovered that this tendency to optimize around single products was hurting their profitability. Instead of selling one popular product that was a mix of the qualities most customers wanted, producers began to develop products that catered to “clusters” of customers who had distinct preferences.
Importantly, research showed that customers were not well equipped to predict what they would enjoy or what they would buy. As Gladwell notes, “For years and years, the standard practice when you wanted to find out what customers would want to buy… was to ask them.”
But customers routinely used experience as a reference point for future behavior. People are bad at imagining a future that isn’t similar to the present. Likewise, they are not good at predicting their future behaviors, because they assume their behaviors will remain consistent.
Experimental field research discovered that “hidden preferences” in consumer behavior were powerful, and almost completely unknown. By testing products with “value added” features, researchers found that price tolerance was much more flexible than previously believed.
For example, about ⅓ of US consumers enjoyed “Extra Chunky” spaghetti sauce. And yet no major brand offered such a product. Customers failed to state, when asked, that they wanted “chunky spaghetti sauce,” but experiments showed that when given the choice, they readily bought it and paid more for it.
The post 80s flourishing of product segmentation was slow to be adopted for the digital economy. Driven by the technical difficulty of offering and maintaining more diverse product offerings at different pricing points, and the difficulty of marketing each individually in the online space, software and online companies often adopted the old model.
But today, tiered pricing has seen a major comeback. Customers are again comfortable with the concept applied to digital products. Thus instead of we have “9.99 for Standard, 14.99 for HD,” or the “Good, Better, Best” pricing model, in which features and functionalities are limited or exclusive to different products.
So what does this mean for your own pricing? First, there is no optimum pricing strategy- at least not in the sense that most startups tend to think. There is no perfect price, but rather a continuum of price and feature combinations, into which most customers fall somewhere. The work of a product company is to identify where pricing and feature expectations align for different categories of customers– what Gladwell calls “clustering.”
If you aren’t consistently testing the limits of your pricing and the feature expectations of your customers, then you will likely leave money on the table. Whitwell uses the example of The Times of London. Beginning in 2014, The Times began asking customers whether they would pay X amount for different combinations of features. They produced a range of prices and feature sets, to test different “flavors,” of plan to sell to their customers.
What they found shocked them. Although a minority of their customers would choose to pay more for certain features, the actual revenue to be gained from offering those features at a different price point far outweighed the lower number of paying users. They found that customers would gladly pay up to 3 times more than they currently did to retain only a portion of the same features they enjoyed at the old price. By throwing in features that customers had not needed at lower price points, The Times had co-opted its ability to upsell those features later.
The Freemium Trap
“Freemium” is generally taken to mean a product which can be used free of charge indefinitely, but which is limited in comparison with a premium version, either in offered features, or capacity (such as storage), or in other ways.
It’s not always a bad idea to have a Freemium model. Particularly, products that provide a long-tail value that is hard to see at the beginning may have to be freemium. Most casual games use freemium these days. Dropbox is also a freemium service, which makes sense, because customers typically don’t have a need to buy up to 1TB of storage in one go- instead, they collect data slowly. Slack is another example: a small team doesn’t always need unlimited message history, storage, and all the bells and whistles on day one.
It’s hard to get someone to pay for something of uncertain value. It’s even harder to get someone to pay for something for which a ready and free replacement already exists.
But on the other hand, many, many startups who use a freemium model shouldn’t. When you provide a product aimed at customers who easily understand the value, and who moreover really need what you offer, then offering them a Freemium experience may simply be giving them a handout. And addicting your customers to the free product can make it even harder to sell the Premium version.
One of our startups, 2016’s Satismeter, experienced exactly this problem. As Co-Founder and CEO Ondrej Sedlacek told me recently:
“Switching from a freemium model to free trial and ditching cheaper plans was a big improvement for us. The truth was that people who needed our product were ready to pay for it.
Freemium ended up being a barrier to selling to some customers, because they would get used to just making do with the free version. When we eliminated our free plan, we saw only a slight reduction in signups, and we increased sales overnight. Plus, free users were ironically the most demanding for support. Paying customers invest their time to understand the product and set up the whole process to get the most value out of it”
Customers who understand your product’s value are inherently better customers in the long run. Attracting people who don’t believe in your product might be necessary at the beginning, but it should be viewed as a means to an end.
Price is about Positioning
In his piece, Whitwell calls attention to this with reference to Apple (itself discussed in another piece: Why You Should Never Ask Customers about Price). When unveiling the iPad, for example, Steve Jobs had basically two options, assuming that he couldn’t actually change the price of the product significantly.
First, he could sell the iPad as an expensive version of the iPhone (something many internet trolls did anyway), or second, he could sell the iPad as a cheaper and better version of a netbook computer. He chose the latter- making a point to talk about the features of a netbook in comparison with those of an iPad, before revealing the iPad’s original price point- at $999.
Voila: the Ipad wasn’t a very expensive phone. It was instead a cheaper and better netbook- one with all the features of an Iphone, and the power of a real computer.
In pricing psychology, this is called “anchoring,” and it’s hard not to notice once you know what it is. Retailers will routinely display their best selling items next to items which are significantly more expensive, and items that are significantly cheaper, in order to give the customer the feeling that she is getting the best deal.
Often products are offered that are far more expensive than is actually justified by features. The logic is plain enough: a few customers might buy the Deluxe Collector Edition, but it’s really just there to make the more popular product look cheap in comparison. That’s how you get a $10,000 Apple Watch, or a fully loaded Mustang Cobra. Buying the next best thing is almost aspirational- the customer is invested in a product category where prices run very high, giving them a sense that they are in the “big game.”
By the same token, restaurants may list the most profitable wine on the menu in second place, just above the cheapest wine, and just below a significant jump in prices. This plays off of a human tendency to “reality check” prices based on other available evidence. $25 for a bottle of wine seems like a lot if the options are $5, $15 and $25, but it seems reasonable if the prices start at $15, and reach over $100.
In sum, pricing can function as a way of positioning a product in the market. Too cheap, and the product may not be taken seriously enough. Too expensive, and it may flash a warning to a potential customer that the product is simply not for them.
Think About Pricing: Cost and Value
There is no formula for pricing. One of the hardest lessons that many startups learn is that the value of a product as they understand it, can be very different from its value to a paying customer.
Thus, cost and value are only loosely correlated. This is why it costs $10 to use the Wifi in an airport. The cost is negligible, but the value to a traveler is worth the price. Most commonly, startups should learn much more about their own customers, in order to understand the value of their products to those customers.
That doesn’t necessarily mean doing what your customers want. But it does mean understanding what your customer’s needs and priorities really are. Anyone who has angrily paid an obscene price for a bottle of water on a train, or for a dongle they simply must have for their Mac, knows that pricing is correlated with need.
Most importantly: think about your pricing more. It rarely fails that, when asked about their pricing, startups lack key insights that would potentially allow them to make the difference between a profit and a loss. Absent a clear picture of the value of their products to customers, startups simply guess at what people will be willing to pay- and more often than not, they guess wrong.
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