October 14, 2020

What? You haven't started a business this year?

When the pandemic of 2020 began, we thought Spark would be in idle mode. Who would want to launch something new in the middle of a global crisis?

Lots of people, apparently. We've never been busier.

The reason has less to do with the pandemic and more to do with how business is changing. Starting a business has never been cheaper and easier, thanks to platforms like Shopify, Substack, and AWS. But finding customers for a new or repositioned business has arguably become more difficult: incumbents with established brand equity, online audiences, and better customer data have a huge strategic and cost advantage over newbies.

The work we do at Spark—finding first customers and developing customer acquisition models that can be scaled—is more valued than it used to be. With “supply side” impediments like ecommerce infrastructure and hosting removed, business becomes a land-grab for customers. And when you’re building a brand, it’s not enough to find customers: you need to find true fans who will evangelize your product.

In this issue, we will do a quick survey of how growth strategy is changing and then explore a framework for thinking about customer acquisition strategy.

Here's to you, Mr. Robinson

One of the most thought-provoking things we’ve read recently is a (long) post by Ben Robinson. It’s called “Strategy in the Post-Fixed Costs Economy” and it’s a cogent discussion of why it’s hard to scale businesses in the digital age.

Here’s the tl:dr version:
1. All the stuff that you need to start a business these days—servers, software, and so on—used to require millions of dollars of investment. Now, it can mostly be rented. In other words, there’s a lot less fixed cost than there used to be.
2. The effect of all this cheap and easy access is the removal of the old barriers to entry. So now anyone can pop up a storefront (Shopify, Etsy) or deliver online education (Mighty Networks) or put out a record and so on.
3. That means a lot of businesses are looking for customers. Like, tons of businesses.
4. Where things get expensive: customer acquisition. Because guess who holds the keys to the customer castle? Yep: Facebook, Google, Amazon, Spotify, and all their buddies. And they charge a lot for access.

So how do you scale a business in this environment? According to Ben:
-Find an underserved or overserved market.
-Build a brand.
-Capture useful data about customers.
-Get your customers to spread the word about your product.
Let’s go!

What? You Haven't Started a Business This Year?

Is Ben Robinson right? Is it really that easy to start a business?

Shopify’s second-quarter revenue growth was 97% over last year, driven by a 70%+ increase in the number of stores between March 31 and June 30. Is that just the pandemic talking? Sure, but the point is that it must be pretty easy to start a Shopify site—everyone is doing it.

It’s not just ecommerce. Publishing via Substack is hot. Etsy is on fire. Cloud computing is on a roll. And it’s all adding up, pandemic notwithstanding: new business formations in the US are up in 2020.

Of course, Ben is also right about marketing being the biggest line item for most young companies: According to one study, startups spend 50% of the capital they raise on marketing, especially on Facebook and Google.

How to Create a Pathway to Scale

If you are a well-established brand with a large online audience, congratulations. Today’s ad platforms are made for you. Their algorithms vacuum up data about your fans and use it to find people with similar profiles.

Ben Robinson, whoever he is, agrees with us on this point: “Basically, the bigger a company gets, the cheaper its relative cost of customer acquisition becomes because it pays a lower cost per lead thanks to a higher ad score (the algorithm that advertising platforms like Facebook and Google use to calculate the likelihood of a customer clicking on an ad).”

But if you are launching something new, or trying to find new customers without much of an online presence, you have your work cut out for you. How do you get big enough to start taking advantage of algorithm-driven magic like ad scores and lookalike audiences? This is the scaling problem for new businesses.

Many intra/entrepreneurs are convinced they know exactly who their first customers are. If they are right, they are heroes; if they are wrong, they end up spending all of their ad budget targeting the wrong audience with the wrong value proposition and messaging.

The solution: validating your new thing and its positioning with audiences—ideally before you even launch. Like this:
1. Test for True Love. Testing value propositions for your new product with discrete audiences helps you zero in on the people with the highest response rates—the ones who love you most. The rest can wait till you’re bigger.
2. Build a Fan Base—Fast. Higher response rates from your true loves mean lower costs on ad platforms like Facebook, even when your brand is not well-known. You get more out of your advertising dollar and build an audience faster.
3. Use the Force. As your audience develops, you can start to leverage the algorithms on ad platforms to find more people who resemble your fans in tastes and behavior.
4. Make Nice. Because you tested your new venture with different audiences (we define ours based on brand affinities, values, and behavior), you know a lot about what your fans care about and you can build a brand they love and will share with others.  
Anyone know Ben? We would love to meet him. And we would always love to chat with you about launching something new.

Help Wanted

We’re looking for a couple of people to join Spark No. 9. If you know someone who is clever with respect to customer experience or interested in analyzing data to identify a fit between brand positioning and audience, send them along please! Job descriptions are right here.

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