Multiple Winners? A Great Market!
I spent time reading an interview of a tech CEO today. He discussed his market and why he’s excited about his company’s growth prospects. Each of the largest players in his industry has no more than 4% market share, yet a few of them do over $100 billion in annual revenue each. It’s a massive market. Large businesses can be built serving a small fraction of it. It’s certainly not a winner-take-all market: there will be multiple winners. This CEO thinks his company can grow rapidly for many years to come without owning a significant percentage of the market.
Market size is something early founders should consider. The size of the market (along with other factors) can have a big impact on the company’s ability to achieve sustained rapid growth. Big or rapidly growing markets are great for building high-growth companies. Small or declining markets usually make sustainable high growth much more difficult.
Customer Acquisition and Retention
Acquiring paying customers is a challenge for most companies and especially for early-stage companies. The brand isn’t well known, and resources don’t allow them do marketing the way they want. Customers that early companies do acquire are precious.
A few weeks ago, I chatted with two smart founders who have an interesting software product. Their platform helps consumers resolve a particular issue efficiently. The issue is something most people will experience only once in their lifetime, if ever. The downside to not resolving the issue is high, so the software creates value for consumers. Once the issue is resolved for a customer, though, they become an ex-customer and no longer contribute to revenue. This creates a challenge: the founders must constantly attract new customers. Their high marketing spend reflects this. This company will likely be successful, but it will be harder to scale than, say, a company that attracts and retains customers who pay monthly for many years.
Acquisition and retention of customers are important issues for founders to think about. Not all business models support ongoing customer payments for years, and that’s okay. Whatever business model a founder chooses, though, they should have a strategy to acquire customers in a cost-effective way and, if possible with that model, retain them.
I was getting an investor’s perspective, and he said something that resonated with me. He’s a big fan of taking risks and trying things. Planting seeds, he calls it. He never knows whether the seeds he plants will germinate or, if they do, what they’ll become. One may grow into something massive. He’s lived this way, and it’s worked out well.
I agree, to a point. It’s important to try new things. If you don’t, the chances of having an outsize outcome are minimal. As Wayne Gretzky said, “You miss 100% of the shots you don't take.” On the other hand, I think trying to do many things at once isn’t ideal for most of us. You can spread yourself so thin that the thing that could be a winner doesn’t work because it isn’t getting enough attention.
My approach? Try new things in hopes that one will grow to be something big—and give each one the sun, soil, and space it needs to germinate and thrive.
Distribution Is Changing the Banking Landscape
I’ve shared a few of my views on Apple’s potential to be a consumer bank and how consumer lending is heating up. Yesterday I had the opportunity to chat with someone who’s worked at one of the largest US banks for over twenty years. Our conversation was social, but I couldn’t resist sharing my views and getting his take on where banking is headed. Our chat was enlightening. I learned a great deal about the inner workings of the bank, how the largest banks view Atlanta as a strategic city and are expanding rapidly, and how this has led to a hyper competitive Atlanta market for bankers, with salaries rapidly increasing.
One of the biggest takeaways was that what matters to consumers in a banking relationship is changing fast. Historically, large banks won because of their branch networks. The more branches, the better. Consumers knew that wherever they were, they could find a branch and get whatever help they needed. The branches were banking’s version of distribution. The branches were a core part of how the products and services the bank offered reached their customers. Establishing a network of brick-and-mortar branches was costly and time consuming, so the largest players had moats giving them defensible competitive advantages.
Now, consumers are rapidly shifting from in-person banking interactions to digital banking interactions. You don’t need to go to the bank to deposit a check or get a loan. You can do many tasks electronically via a mobile app or website. Because of this shift, consumers evaluate banks differently. Consumers care less about a network of branches because they don’t need to visit branches. They care more about digital tools. They want the best and easiest-to-use technology.
This banker was telling me that digital distribution is changing the banking world. The large banks that previously had the best distribution because of their branches are seeing their moats erode quickly. The companies that offer the best digital experiences are winning.
How companies get their solutions in customers’ hands matters a lot. Said another way, distribution matters a lot. The digitization of distribution will drastically change banking. Apple, Square, and other companies will compete for banking relationships like never before.
SMB Operating Systems
I had an interesting conversation today with a founder who’s taking the hassle out of tasks most of us hate doing. His business is experiencing tremendous growth this year. As we talked about it, I realized he’s built a great workflow management business. He’s solving for a consumer pain point and helping the small businesses that do certain tasks for consumers run their businesses more efficiently.
After connecting small businesses with consumers, the founder realized that the business owners needed help executing the work efficiently. They’re routinely sent too few or too many jobs. Or the jobs would arrive late. As he listened to his clients’ challenges, his company built feature after feature until one day the small businesses ran everything through his company’s system. These businesses are now able to do almost double the number of jobs in a day because this system helps them execute more efficiently. The software is helping them grow their businesses.
I’m a big fan of workflow management businesses, especially those that empower small to medium-sized businesses (SMBs). I think we’ll continue to see more tools that empower SMBs to grow their businesses. I can’t wait to watch the journey of this founder and his company. I think they’re on to something huge!
I have a good friend looking to start a B corporation who asked for my thoughts. I’d heard of them but didn’t know much. He explained that he wants to create a company that’s profitable but also socially responsible. He wants it to make purpose and profits priorities—not put profits over everything else. I spent some time learning more about B corporations. I don’t think they’re applicable to all situations, and there are a fair number of hurdles, but I like what they’re created to do.
A few months ago, I shared my thoughts on skilled workers making purpose a priority in their employment decisions. I think this trend will continue to accelerate, and companies that put profits and purpose on an equal plane will win in the long run.
People and companies are beginning to be driven by more than financial gain. This is a great trend, and I can’t wait to see how it evolves.
Great Products Market and Sell Themselves
I recently went shopping and encountered a surprising sales style. The salesperson was knowledgeable, but he didn’t seem to care if I bought the product I was interested in. He wasn’t pushy or even trying to close the deal. He merely suggested I test out the product. I did, and I was impressed. A few days later, I bought it. Afterward, I asked the salesperson why he was indifferent to my purchasing decision. He said the product is so great that it sells itself and that if I didn’t buy it, someone else would—he sees a constant flow of people who are ready to buy.
This company has done a great job of understanding the pains of their customer and creating a product that solves them magnificently. Potential customers test the product, immediately see the value it creates, and are ready to pay for that value. The salesperson is there to answer questions, but the product itself is doing all the selling.
Lots of early founders want to focus on sales and marketing after they launch their product. They believe that’s the key to growth. Both functions are important to any business. But in the early days, founders should be laser focused on their product as the key to growth. An amazingly good sales and marketing strategy is to make a product so wonderful that people easily understand the value it creates for them. Happy customers spread the word to others. When those folks try it, they’ll love it and buy it, and they’ll spread the word.
If you’re an early founder concerned about sales and market, ask yourself: Is your product good enough to market and sell itself?
Big Boys Going after Consumer Lending
Earlier this week, I shared my thoughts on consumer lending heating up. It’s a large and growing market that’s big enough for multiple winners and hasn’t kept up with changing consumer behavior. The market opportunity could move the needle for any company, even a juggernaut like Apple.
Today it was reported that Apple is partnering with Affirm to offer a buy-now-pay-later option for Apple devices purchase in Canada. This is yet another big announcement in the consumer lending space within a short time. Apple and Square are making big bets on it. (Affirm was already in the space.)
I figured consumer lending would be strategically important and change quickly, and it appears to be changing even faster than I thought. Change is generally good—I’m a fan of it. Especially when it helps solve pain points for consumers in a better way. I can’t wait to see how this space is revolutionized by these new entrants.
Land Grab Turned into a Land Mine
Speaking with a founder today reminded me of my days as a founder. He and his team have a great product and they’re focused on producing as many of them as possible to get them in the hands of customers. It’s early days for them, and naturally they don’t know everything. They’re still trying to find product–market fit.
I remember a time I had a bright idea at CCAW: let’s add a ton of new distribution centers all at once. We literally flipped a switch one day and added over a dozen massive warehouses to our distribution footprint. What could go wrong? Um . . . huge problems kept orders from being in customers’ hands when they expected them. Working through the various reasons this happened was painful and stressful for our team.
I later realized that we had trained our valuable energy on the wrong thing: growing our distribution footprint and revenue. We didn’t have product–market fit yet, so we should have been listening to our existing customers, not executing a land grab to get new ones. We missed out on valuable customer insight during a critical phase of our startup journey. The company still scaled and was successful, but I believe that missed insight was the difference between eight figures in revenue (which we achieved) and nine (which we did not).
Focusing on the right thing at the right time is critical for early-stage companies—there’s only so much bandwidth to go around. If I could do it all over again, I’d work on understanding my customer’s problems before adding operational complexity to acquire more customers.
Customer Retention Matters
Customer acquisition was always top of mind at my startup. I’m not marketing-minded and I wasn’t smart enough to hire someone strong in this area, so we struggled. Eventually I figured out a decent strategy. When we acquired customers, we did so in a profitable manner. Over time, I realized that retention (which in our business model meant having customers who bought repeatedly) was key to our growth.
We spent tons of time, energy, and money trying to find new customers. Once we had them, it was easier to convince them to stay (purchase again) than it was to find new customers. If I had to continually replace old customers with new ones, fast growth would be extremely difficult. When I figured this out, we started to focus on the things that mattered most to our customers AND the type of customers most likely to be loyal. This, with other adjustments, allowed us to grow quickly to over $10 million in annual revenue.
Getting customers is important, but founders should also think about how to keep them. If your customers stick around, you’re on to something!