THE STARTUP CHAT

Steli Efti:

Hey everybody, this is Steli Efti

Hiten Shah:

And this is Hiten Shah.

Steli Efti:

In today’s episode we wanna talk about situations, as a startup or as a founder,  where growth hacks can’t save you. Here’s why I wanted to talk to you about  this. I was in a phone call recently with a founder and basically he wanted  advice on a number of experiments, and growth hacks that he was planning to run,  in order to improve his conversion numbers from free trials to paid customers. He sent  me a little like overview presentation of his company and in one of the slides  he had a bunch of KPI’s, and just taking a glance at that slide made  me give him advice that I realized I’ve given to many people before, and I  felt like a lot of people need to hear this, so I wanted to discuss  this with you. I’m gonna give you a little bit of context on this company  and this founder, and then the numbers I looked at, and what I told him,  and then I am dying to hear what you have to say about this.

Hiten Shah:

Perfect.

Steli Efti:

So, here’s the deal. This is a company that’s been around for a few years.  They are cash-flow positive, they have built a software tool that’s basically open source, and  they’re making most of their money … I mean, all of their money really by  doing really large skill implementations at enterprise companies for that software. Kind of like, customizations  and all kind of stuff for these big companies that want to use their software.  Then for the past two years, two to three years, they wanted to start a  self service part of the business where people … You know, typical SaaS, where people  could just come sign up for a free trial, play around with the product and  then just put in their credit card, and use it. The hope was that, that  business would be a significant part of the business or eventually be much bigger than  the enterprise stuff that they do because it seems like the enterprise stuff they do  is nice, but they can only service one or two of these big customers a  year, and it takes all of the attention, all of the energy to do. They’ve  been trying this SaaS thing for like two years or so, and here’s the slide that I look at right. I look at the slide where he shows me their  numbers and it’s basically close to 40,000 units that come to their website. Out of  those, around 2000 per month create a free trial and out of the 2000 people that create a free trial a month, less than ten upgrade to a paid account,  and out of those who become paying accounts, they have a 5% customer return rate  every month. This is a product that costs the customer … I don’t know, some  obscurely small amount of money, like $25 to $50 a month or something. So, those  were the numbers and then he showed me a very long list. Like, he was  planning the next six months to put in a lot of effort and lot of  energy, and make a really big push to improve his conversion numbers. He had ideas  like, “Let’s start sending drip emails for free trial users. Let’s have a really good  onboarding experience.” So like, kind of one of these onboarding step-by-step guides that he wanted  to build and just a bunch of like … 20 different ideas from things he  wanted to do to take these over 2000 trials that would come in and convert  them at a much better rate than the less than 10. When I looked at  those conversion numbers, I basically told him that my advice was to do none of  these fucking hacks, none of these conversion optimization things ’cause he doesn’t have a conversion  rate that’s good enough to even try to optimize it, and that when something that  looks as bad out of 2000, six pay, and out of the six that pay,  5% of them return every month. Although it’s a product that costs very little money.  My hunch is that, he doesn’t know his audience yet, he doesn’t know his customer  yet. He’s not focused and targeted on that customer base. The traffic he’s getting is  probably all over the place and trying to optimize … Even if he did all  these things and he doubled his conversion rate from six people upgraded to 12, it’s still horrible and it won’t really work, and doubling is really tough to do usually.  So, he’s at one of these points where I’ve seen many entrepreneurs being this, where  they do something that’s not working and their solution is to put in all these  extra energy and effort to do AP testing, growth hacks, and this, and that, and  the other, but what they really should do, in my opinion, is step back and  look at it. If the numbers are so bad, it typically points that something more  fundamental is wrong. Maybe the product market fit is not there, maybe you don’t understand  your customer or your audience, your marketing is totally off. Like, something really fundamental is really is going wrong and you can’t fix it by writing more Drip emails or  something like that. There’s a long discussion that came after that, but I want to  pause here to just get your reaction on this.

Hiten Shah:

Yeah, I agree with you. To me it starts with math, where it’s like, Okay,  10 people pay, 2000 signed up. There’s 1990 people that didn’t end up getting the  value that they signed up for most likely and so they didn’t convert or they  signed up, and never actually did anything meaningful with the product. Now, because of the  context you shared, I think there’s a big implication and a reason why he might  be having this. You basically said that his product’s been open source and then they  added a self service sort of model.

Steli Efti:

Yup.

Hiten Shah:

Right?

Steli Efti:

Yup.

Hiten Shah:

Well, so the implication is … Whatever the brand is, everyone … Not everyone, but  the brand is known for the open source product. Open source is essentially free.

Steli Efti:

Yup.

Hiten Shah:

You don’t have to pay for the cut of it. You obviously have to pay  for engineers implementing it and all that stuff, but you’re not paying the company anything.  So, the brand is known for something different than what the self service is intended  to do, which is, make people try it and then buy it. Right?

Steli Efti:

Right.

Hiten Shah:

This actually points to the fact that they’ve got a great brand if they have  that much traffic, I would say. Right? Maybe they’re doing some stuff that is generating  a lot of traffic that’s irrelevant, that’s a different story and just pushing people to  sign up. Maybe, they got some growth hacks, if you want to call it that.  They got that 5% sign up rate, which actually isn’t like the best either.

Steli Efti:

Yeah.

Hiten Shah:

So, there is lot there … I just wanted to make sure everyone has the  context ’cause when you can be contextual like this, it’s actually pretty easy to identify  the real problems. So, I agree with you. A lot of people when it comes to growth hacks would say “Oh you need to make sure you have a great  product” and stuff like that. I think this is even … I would say it  a different way kind of related to what you’re saying, which is like, there’s a  value miss match, somewhere. Right? The company probably doesn’t know what people are signing up  for and then what to deliver to them in order for them to buy. So  this is a, talk to customers, talk to potential customers. Understand what the mindset is  when they’re signing up, is the first thing I would do ’cause there’s so many,  literally 99% of them, that are not signing up. I mean paying, you know?

Steli Efti:

Yeah, so I couldn’t agree more with you. I think that when I briefly looked  at what their traffic sources were, it was all SEO, it was basically keyword phrases  like, “Open source, XYZ.” I don’t want to give away what they did because if  you type in open source in the category of software, you’ll find them kind of  in the top results. I was just wondering, the type of people that type in  … Let’s say somebody typed into, just take my category, open source CRM, right? The  question is, what kind of people would type in open source CRM? Maybe there’s a  lot of developers that just want to play around with it, maybe it’s students. It’s  not clear. What is the audience that is coming through the search terms and is  the audience really who they built their tool for. When people sign up for trial,  is it because they want to play around with the developers. Do they just want  to get a sense for how the tool looks like before they download the source  code or is it because they’re legitimate companies and teams that would want to use  the software that they’re selling, or the service software that they are offering? So, they  have like very little control over the kind of traffic that would get in. The  open source part of their brand, I think, plays a major role in all of  this. We can even talk about like the … They’re doing both this like enterprise  business, as well as wanting to grow and scale up the SaaS part. This is  in and of itself an interesting situation that I’ve been encountering more and more, where  start ups want to do kind of both things. They want to work with big enterprise clients, while they also want to grow like the self serve part of the  business. They encounter some of the challenges and implications in this, but maybe that is  for a separate episode. I think the core thing that stood out to me, that  sometimes … When the basic numbers look that bad, a lot of times the reaction  I found was after that is like, “Oh yeah, it’s really bad because our onboarding  is really bad. Yeah, we don’t try to do anything to try to convert people  from free trial to paid. We don’t send Drip emails, we don’t call them. If  we only put a little bit more effort this number would be significantly better.” Not  to say that can’t be true, but if the number is so bad organically, that’s  typically a bad sign. Something is not at a healthy place. Right? I bring up  the example often times with , when we launched … I often tell people that  if your product sucks and people still want to buy it, that’s a really good  sign that you might have product market fit, versus trying to think that you have  to have the perfect product for people to buy, because that’s never going to be  the case. That’s kind of the source of excuse for founders to be like, “Yeah,  we’re not doing well, but we’re missing all these critical features”. That’s very rarely true  if you have something unique that has a product market. When we launched didn’t have  reporting. Right? It seems kind of critical for us here to have reporting functionality and  we didn’t. The productivity gains that were kind of one the main value propositions, were  big enough that people would buy and we would grow every single month. Of course  our customers would start eventually complaining that they really wanted a reporting, but they loved  so many things about the product that they bought despite our shortcomings, and then they  would beg us every day to please fix these. That is a very strong sign  that you have something special and you have something that has product market fit, versus  saying, “We launched, nobody’s buying our CRM, but of course we need better reporting. We  don’t have a mobile app and we don’t have real Drip email campaigns to convert people, and we don’t have this, and we don’t have that.” When you start, you’re  not gonna have most shit. There’s going to be a million things you’re not doing,  or you’re not doing well and a lot of founders take these as excuses for  why they’re getting such poor results. That just makes them go down a path with  the build more and more things, and they work on all these optimizations, and improvements.  “Oh, we need a better website. Oh, we need a Blog. Oh, we need drip  emails. Oh, we need better this, better that.” Then like a year or two, or  three into it, still they don’t have anything because they never truly looked at the  fundamental thing that was the issue, Maybe it’s positioning, maybe it’s not getting … In  this case, I think, it’s not understanding who their customer should be on the self  service side. I find that’s a critical mistake that so many founders figure out one  way or another, that I talked to.

Hiten Shah:

Yeah. I’m a little speechless because we started off talking about this as a growth  hacking and growth hacks. To me it’s absurd because this is not about growth hacking  or growth hacks, it’s really just about, “Are you setting your business up for success?”  What I mean by that is, there’s no growth hack that is going to save  you when you don’t actually understand your customers and why they’re signing up for your  product, and why they might even buy. It feels like people who just go after  the growth hacks and want to like implement all these optimizations, are totally missing the  point. The point is that you’re building a product that people love and that product  needs to have its own value in itself, outside of any growth hacks, and if  you don’t understand the customer, you’re not going to be able to create that product.  To me, I think what people have forgotten because there’s so much talk about these  big conversion optimization and growth hacking, and all of the things, which are actually all  fine and dandy, but what they have forgotten is that even those principles, those tactics,  they’re rooted in learning. They’re rooted in the customer or the user, or the visitor  to a website, and what you know about them, and how to make their experience  better. That’s what this stuff was meant for. Instead, people are just looking at these  blog posts about these tactics, and just all trying to blindly apply them to their  businesses because they think that’s what is going to solve their sort of a business  problem. When really, a business problem is solved by improving part of the business, not  by growth hacking it. So, I don’t know. I’m kind of speechless that we’re still  running into this problem continuously ’cause … I get why. I get that there’s a  lot of founders out there that aren’t business people. There’s a lot of founders out  there that have learned from the internet. The internet has been full of growth hacks  in terms of creating online businesses, at least for the last … However long. But  man, this is just a fundamental business problem. Like, if you had coffee shop, and  a lot of that people came in, let’s say 2000 of them a month, and  only ten people bought. You wouldn’t have a coffee shop any longer. Right?

Steli Efti:

Yeah.

Hiten Shah:

So, this is like … Let’s take analogy of the real world and then we  sound absurd in software like, “Oh yeah. Yeah, it’s cool.”

Steli Efti:

Yeah.

Hiten Shah:

Not many people are coming in, only ten people are buying. We’re going to like,  manipulate them in order to buy.

Steli Efti:

Oh no, you don’t know what we’re going to do.

Hiten Shah:

So, we’re going to make them pay to come in.

Steli Efti:

You know what is our problem? That our toilets are not really as nice and  upgraded and you know what else? We should have more fliers and we should have  a loyalty … You know what we need for our coffee shop? A loyalty program,  because we need to get people back into the store.

Hiten Shah:

Yeah, the coffee shop across the street has a loyalty program. That’s why they’re always  packed, right?

Steli Efti:

Exactly.

Hiten Shah:

And people are buying. No, it’s actually your coffee. Your coffee sucks dude.

Steli Efti:

Yeah.

Hiten Shah:

Yeah. I’m leaving you with that analogy ’cause I think when we start putting it  into that framing, you get away from the growth hacks and you realize that the  real problem is your business, your core business, your product. Right? More than anything else.  Before you grow, you need to figure that out and I know … I thought  this was common wisdom at this point, that you’ve got to have a product that  people care about and that people love before you try to grow it, but I  think that people are just trying to solve these problems in the sort of, “I’m  just going to tactically try to think of all these hacks or implement these hacks  other people have tried,” and then it’s worked for them. The reason these things worked  for them is because their product doesn’t suck.

Steli Efti:

Yeah, and I think that it’s so easy to look at other companies, and feel  like they have built this huge monster in terms of, their product is really feature  rich, they have really a beautiful optimized website, they have all these different marketing properties.  They do all of this advanced stuff in terms of converting people, from customized messaging,  Drip emails, all that stuff. You look at all that and when you start, you  don’t have any of this shit in version one, hopefully in your MVP. Then when  your numbers are bad I think that a lot of people take the easier route  to just go, “Well of course our current version never sounded good because our website  really sucks and we don’t send Drip emails,” but that’s not really the reason. Drip  emails and all this stuff should help improve something that’s already kind of working. It’s  not going to make something work that isn’t working at all right now. If people  … To make this more extreme. If you had to even make this more extreme.  If you had like 10,000 people sign up for a trial, and zero upgrade to  pay, Drip emails are not gonna save you. Like, it’s not working. Now, if you  have a good conversion and you are not sending Drip emails, and you write a  really good Drip email campaign, it will give it a lift, it will increase it  incrementally, but it will not fundamentally fix your issues. Having a better website, like again,  to bring up as a good example for all the things we did wrong and  we still succeeded with it because we had product market fit. We launched a website  that took us like three hours to put together, just a single landing page, and  for four years we hadn’t changed the fucking website. Right, and it was not a great website, but it was just working well enough because our value proposition, and understanding  of your customer was good enough. So, I feel like a lot of founders just-

So, yeah, I bring up as an example often, but when we launched, it took  us two, three hours to put together a single landing page for to launch. For  3 1/2 years, we didn’t change the website at all. It was not that great  of a website, but the reason why it still worked, and converted really well for  us, is that we understood our customer, and we had a really great product, and  product market fit. So really, I think what I want to round up the episode with … I love your real life example. I think this is such a great  thing, framework, that I’ll use now in many situations, where it’s when you have a  difficult problem as a tech company, or a company to be like, “If I ran  a coffee shop or a pizzeria”-

Hiten Shah:

Yeah, what would happen-

Steli Efti:

And three out of … How would I look at this? That’s pretty brilliant. But  I think my last parting words here is that often times, I think it’s easy  to look at parts of your product or business that are not that great yet,  and think that’s the reason why you see zero success or why things don’t work  at all. But, that is really rarely the case. A perfect website will improve things  incrementally. Better drip emails will improve things incrementally. Whatever kind of growth hacks to get  more traffic should improve things incrementally. But, the fundamentals need to be there for you  to scale something. When the fundamentals aren’t there, when … Most people that come decide not to buy your coffee or the people that buy your coffee never want to  return to buy another coffee, there’s something fundamentally wrong with your product and you understanding  who you’re serving and what your customers need. And no nicer toilet, or no better  like, lighting of the storefront … None of that stuff will really fundamentally fix things.  So, I think that that’s my main message to people. And it doesn’t really matter  if you’re in the early stages, later stages. We all have situations with something fundamentally  doesn’t work. And we try to fix it by working with incremental things, and tactics  versus taking a few steps back and ask ourselves, “Why isn’t this working? Like, what’s  fundamentally going on here? What’s wrong?” And trying to fix that. And the route to fix these things always, always, always, as we’ve said so many times on this podcast,  is your customers. You don’t understand your customers well enough. You’ve lost touch with your  customers. You don’t have the right insight when it comes to serving your customers. That’s  always the place to go back to really understand what to do next in your  business.

Hiten Shah:

Completely agree.

Steli Efti:

Also, from us for this episode. We’ll hear you soon.

Hiten Shah:

Later.