The rise of subscription 💵; How much value VCs really add; When to ❌ poor fit customers...
|Oct 18, 2019|| 7|
It’s the spookiest month of the year, and we’re going beyond the spider web decorations by sharing some of the scariest, costliest startup failures in history that will make the hair on the back of your neck stand up. Our favorite part is the “goodbye” messages failed companies sent to their customers—basically the startup version of an obituary.
On the bright side, very few of these businesses were SaaS!
🌠 When we think of subscription revenue, we think tech, but subscriptions aren’t just limited to software and IoT. Other sectors like manufacturing and business services have entered the chatroom, and play a part in the subscription economy’s 350% growth over the past 7.5 years. That’s 5x faster than both the S&P and US Retail sales over the same period (see Zuora’s graph below). Along with these new players, the biggest contributing factor to the meteoric growth is the introduction of usage based billing, which enables customers to pay only for what they need. Sectors that have adopted the pricing strategy are seeing lower churn rates (like SaaS), while those that haven’t are struggling (like Publishing).
📞 Every VC hopes to be a value-added investor, and provide advice, connections, and services to help their investments thrive. But how much do they really affect a company’s trajectory? Creandum Partner Carl Fritjofsson surveyed 98 VCs and 121 founders to see how each group perceived a VC’s impact on their investments, and found there is a bit of a disagreement—on a scale of 1-10, VCs scored their impact as a 7, while founders scored it as a 5.3. Important areas of impact like contact frequency (see below) were also heavily debated. What both sides could agree on: personal relationships and chemistry are the most important factors in choosing a partnership.
🚀 Part of the problem is that it’s hard to measure a VC’s impact on a company—there’s no time machine to see what the growth and ultimate outcome would have looked like without their involvement. During Ashley Mayer’s 11 years in Silicon Valley, she learned that team members in rapidly growing startups face this difficulty in attribution as well. Facebook COO Sheryl Sandberg famously said, “If you’re offered a seat on a rocket ship, don’t ask what seat! Just get on,” but when employees hop off that ship and onto the next gig, they may wonder if their work had a meaningful influence. You’re best off staying level headed, and not letting the “what if” bother you, or the superstardom go to your head.
🎅Some frustrating customers feel like they just aren’t worth the hassle. A popular strategy has been to let these clients go, and free up resources to expend on better fits. Now it seems companies are trying to retain all customers, even if they are a thorn in the company’s side. This trend has some people worrying that the pendulum has swung too far the other way. To make the tough decision whether to drop a customer, companies can map out customers based on profitability, strategic importance, and churn risk. Those who are slow to pay and abuse your support team’s time should also be put on the naughty list. If you are going to cut ties, make sure to do a face to face call, or something with more personal touch to avoid negative word of mouth.
🍬 Conducting bad customer research increases the likelihood of adding poor fit customers, and there is one commonly used approach you should avoid: the Piñata approach. This is when product researchers quietly ignore their insights in favor of gut feelings, and blindly swing at what they hope will work. Yes, sometimes they’ll luckily hit the right strategy and grab some metaphorical candy, but for the most part, this is a fruitless effort. Companies really should be taking more of a Sherlock Holmes approach, with great curiosity that takes signals from the macro, meso, and micro level into account.
Nir Eyal’s Hooked, takes a look at the psychological side of product experience, and how to create product forming habits. His model is a 4 step process (see below) that relies on the dopamine surge a user experiences when receiving a reward, and can literally be addicting. Not every product has the potential to create a Facebook type of user dependency, but even marginally increasing the habit-forming nature of your product can improve LTV, pricing flexibility, and growth through network effects.