Episode 112 | Startup Metrics for Pirates
[00:00] Mike: This is Startups for the Rest of Us: Episode 112.
[00:11] Mike: Welcome to Startups for the Rest of Us, the podcast that helps developers, designers and entrepreneurs be awesome at launching software products, whether you’ve built your first product or you’re just thinking about it. I’m Mike.
[00:19] Rob: And I’m Rob.
[00:20] Mike: And we’re here to share our experiences to help you avoid the same mistakes we’ve made. How you doing this week, Rob?
[00:24] Rob: I’m doing good. We had a new addition to the Startups for the Rest of Us Drinking Game and it was submitted by Will Samuels and he said, “Drink whenever Mike says essentially. Toast a glass of eggnog and prepare to do some drinking in this episode.”
[00:38] Mike: Yeah, I’ve noticed I do that a lot.
[00:40] Rob: What’s going on? Did you get anything cool for Christmas?
[00:42] Mike: I got a Kindle Paperwhite.
[00:43] Rob: Very nice. How’s the screen? I’ve heard they’re nice, easy to read.
[00:47] Mike: It is very nice. I was actually reading it last night in bed. It was nice. It was not like the iPad where…and part of the reason I want it was because it was not an iPad because the iPad has got that LCD screen and the light is basically shining through it right in to your eye versus everything I’ve read about the Kindle and the Kindle Paperwhite was that it’s more or less backlit where the light shines down on the letters then reflects off of them as oppose to shining directly from the back. And it was a very nice experience. It’s very easy on the eyes. You can read it in little light and you can adjust the lighting levels. It’s just very nice pleasant reading experience. I feel like it’s a lot better to read in bed than an iPad.
[01:25] Rob: That’s what I’ve heard. Makes it easier to go to sleep and doesn’t mess with your realm. The Kindle Paperwhite is the next what is it like the fourth generation Kindle with the same price as the old one but you can read it in the dark without having an external light on it like the old Kindles.
[01:38] Mike: They still sell the ones that are not backlit and those are sold about 60 or $70. This one was about 110 or 120. It’s kind of in between the…like the baseline Kindle and then you have the Paperwhite then you’ve got the Kindle Fire and the LCD screen and everything else.
[01:53] Rob: Cool. I have to admit I have Kindle NV because I had an iPad one. It weighs I don’t know a pound and a half or something and you know, if you get in bed, it actually is just hard to hold up. You need two hands. I really have thought about getting a Kindle as well because they’re so light.
[02:07] Mike: Yeah and that’s part of why I wanted it. So far it’s working out. Probably give some sort of an update in three or four months after. I’ve actually use it for more than what, two days. [Laughter]
[02:16] Rob: Sure, sure. Well, hey, I’ve had more credit card failures than usual. HitTail normally it charges X people per night for…for their monthly membership and there’s just been a substantial rise in credit card failures and you know what I think is going on I have no way to prove this but I think that either people’s cards are maxed out or the velocity of charges has flagged just a few more of them with the…you know, like the risk department of the credit card has flagged them and kind of shut them down until they can get it cleared. You know, again can’t validate that but it’s the only reason I can think of that, you know, that the charges wouldn’t be working all of a sudden because it’s not like it’s at the beginning of the new month, often times, you know, I’ll see things that…that expired from one month to the next but it’s the middle of December and I would expect that maybe at the start of next year. But…
[03:01] Mike: It could be. I recently got a new American Express card and it’s not like my old one was expiring. I just got a brand new one in the mail. I have no idea why. I think it had to do with…they’ve got some like new chips that they’re putting in to the cards so I don’t know how many of those cards or American Express versus something else but that might be what the issue is where people are switching cards and then because of that their old cards are being denied because they’re no longer valid.
[03:01] Rob: Got it. Yeah, good to know. How about you? Have you been doing any work on AuditShark?
[03:33] Mike: Yeah, I’ve had a bunch of articles written recently. I think I had mentioned last week that I was going to get that started. I tried…tried out a few different things. I’ve got about ten different articles on various topics written at this point. Most of the qualities had been pretty good. There has been one that was…it was off topic. We asked for false positives or false negatives. It’s basically a definition of it and we forgot to specifically state that it related to compliance so they gave it to us based on e-mail false positives and false negative. So, it was more about spam filtering than about compliance and we try to go on back and forth with them but it was just going to be a nightmare. So, we’re just ordering a brand new one. And it was only I think 8 or $9 to have it written. So, it’s more cost-effective to have them rewrite it than it is to try and go back and forth with the original author.
[04:19] Rob: We’ve seen this happened from time to time with the articles that people order through HitTail and we’ve actually had to tweakour U.I. and add an extra required feel that forces our HitTail customers to add more detail to article request because they’ll just say, “Write an article about this keyword.”And often times, you know, I might say going to the Notre Dame but what they mean is going to Notre Dame the college in Indiana. You know, there are these things where people just get it totally wrong. There’s the same city names in like Canada and in the US, in England and they’ll say, you know, blank city name real estate. And so without an extra layer of specification of what you really want the article to be about, you’ll often get the incorrect subject matter. So, I can totally see what happened. You really can’t…can’t fault them because when I have false positives, I would…in technology, I would also think of e-mail false positives.
[05:13] Mike: We caught it before, well it wasn’t before I got to the person, apparently the writer had picked it up and we gotten in touch with the intermedia area. I’ll call them and say, “Hey, we just want to clarify and add some notes on here and it looks like we’re not going to be able to.” And they said, “Oh, yeah, once a writer picks it up, there’s nothing we can do. You can’t send them additional instructions or change anything, nothing.” I’m like, “You can’t even just forward this information to them,” and apparently not. So, whatever, what you do.
[05:39] Rob: Sure, I did want to cover some iTunes reviews we’ve gotten recently. I want thank Kyle MB [Phonetic] who said, “Real value and no fluff. I’ve listened to you guys for about 12 months. Rob and Mike share real life practical information that provides value.” And Scott Bartell said, “Great podcast. Awesome thought provoking content, offering some great advice that is typically actionable and applicable to my startup.” So, I encourage you, if you haven’t go in to iTunes even if you don’t write a full review like that, you can just click the 5-star rating and you don’t have to do anything else and we really appreciate it. It helps us rank well in iTunes, helps us grow our audience and we obviously, you know, appreciate you taking the time to do that.
[06:16] Mike: You know, I…I reviewed a very interesting book over the past couple of weeks for O’Reilly. They got in touched and asked if I’d be interested in taking a look at this book. It’s called Lean Analytics for Startups and it’s all about looking at data trying to figure out what it is that you should be doing, talking to people and trying to figure out what it is that they actually mean versus what they are telling you and being able to read between the lines and then some of it I’ll say softer skills because you’re interpreting what people are telling you versus a lot of it is very hard core math about these are some numbers that you should be looking at and this is exactly how you should track them and how you should follow them. And it doesn’t give you technology specific things in terms of what…of how you should track them, just these are the data points that you need and these are the actions that people need to undertake in order for you to track that information.
[07:05] Rob: Nice. Did you take away anything that you think you’ll be putting in to place with your businesses?
[07:10] Mike: I did. I took a bunch of notes and I have to say it was part of the review process I had to send them back, filled out questionnaire they had and it’s probably two or three pages worth of questions that they had but then in addition to that, I sent them probably 8 or 10 pages worth of supplemental notes and stuff on different things that were in the book, things that I thought either they need to be elaborated on or just didn’t make much sense in the contexts of where they stood in the book. But there’s a lot of really good information in there. So, yeah, I definitely took some notes and made sure that I’ll be integrating some of that. But the one interesting thing that I found was that it almost seemed like no matter what the stage of your business, the book was going to be applicable to you or at least certain parts of it. When you start your business, there are certain things that are going to be applicable to you and then as you progress in to your business and you start building it up, there are other parts of the books that are applicable to you. So, depending on what stage you’re in, it’s going to have something for you which just depends on, you know, where you’re at with your business.
[08:07] Rob: That sounds good, hope to check it out when it comes out. I just listened to episode 219 of TechZing and it’s called Confessions of an Overcommitter and Justin and Jason talked about overcommitting to doing too many projects and just their process…some projects they’ve had to abandon over the past couple of years. It’s really quite interesting. I recommend, you know, even the folks don’t typically…even if you don’t typically make it through the 90-minute TechZing Podcast every week, it’s an exceptional episode that I wanted to call out because I resonate a lot and I feel like the entrepreneurial ADD that a lot of people have will, you know, resonate with this episode. So, check it out if you have time over the holiday break.
[08:45] Mike: Speaking of those guys, are you taking funding from Jason? [Laughter]
[08:48] Rob: [Laughter] No, I’m not. Did you hear that episode?
[08:51] Mike: Yeah, he…he’s talked about it several times. He’s like —
[08:53] Rob: Yeah.
[08:53] Mike: “Oh, I’d love to just dump money in to whatever Rob’s way.” [Laughter]
[08:56] Rob: Yeah. No, I don’t think I’m going to take funding. Obviously, I told him, “You know, you’ll be first on the list if I decide to.” But there’s more…it’s more trouble than it’s worth to take a little bit of funding just with the structuring that needs to take place and all that. I don’t really need the funding. At this point, I have enough in the bank to fund this as fast as I can and I guess if I wanted to get, you know, Drip specifically, if I wanted to grow quicker, I would consider funding obviously if it was the right choice but I just don’t think. Without raising several hundred grand, it’s kind of not worth the effort to do so.
[09:25] Mike: Cool. So, I think in today’s episode we’re going to be talking about startup metrics for pirates. There’s an acronym that’s Dave McClure came up with. And Dave McClure if you’re not familiar with who is, he’s an entrepreneur and a prominent angel investor who’s based in San Francisco and he founded and runs a business incubator named 500 Startups. And he does public speaking engagements and works with a lot of different startups. And the acronym that he came up with is called Startup Metrics for Pirates because it’s AARRR kind of a play on aarrr for pirates.
[09:58] Rob: Yeah, folks who haven’t heard of Dave McClure, he’s more than just an angel investor. He founded a technology consulting company in ’94 and then he works as a consultant for Microsoft, Intel and other companies. He was a Director of Marketing at PayPal for some key years 2001 to 2004 then he launched and he ran marketing for Simply Hired which a lot of you probably heard of and he was also heavily involved in Mint.com. I think he chose to hire Noah Kagan to run the marketing. So, I think he was the marketing guy there before Noah. So, he definitely has experience, you know, with this kind of stuff and then as Mike said he started his seed accelerator in 2010 and he’s been doing…he’s been an outspoken and he, you know, large personality angel investor. So people…people either love him or hate him in general.
[10:40] Mike: So, the acronym that he came up with is there’s two As and three Rs. And the first A is acquisition. Second A is activation. The first R is retention. The second R is referral and the third R is revenue. And we’re going to talk through these five different things. There’s two different things that Dave points out about this and the first one is that these are explicitly for marketing. These things that you do apply specifically to the marketing not necessarily to the product itself because there are different things that you are going to do with the product versus the marketing behind it. The second thing is that these are not exactly sequential and one of the things that he would do is he would put an emphasis on activation and retention before acquisition referral because you want to make sure that people are actually using your product and you are retaining them as users before you go out and try to do a lot of acquisition and referral to try and scale things up. And there are certain things that are more important but it’s definitely important too that you make an attempt to go through these different stages in your startup and try to apply them to the marketing plans that you put in place.
[11:41] Rob: I see. So, when he says they’re not sequential and again, let’s run to the five. It’s acquisition, activation, retention, referral and revenue. So, they’re not sequential in terms of what your business should focus on and optimize but for the most part they would be sequential for a single customer coming through your business because first, you would acquire them through, you know, general means we’ve talked about different marketing approaches. Then hopefully, you get them to activate and then try to retain them and then he’s saying get them to refer others and then look at the revenue model.
[12:11] Mike: Right.
[12:11] Rob: It seems like for an individual customer, it’s probably going to be sequential but for your business in terms of what you should focus on, it’s…you may start with number three and four like you said.
[12:21] Mike: Right and again, because these are associated with marketing not necessarily the product, you have to remember that because number five comes in as revenue, that essentially ends the marketing pipeline because you’ve already marketed to them enough such that by the time they get to the revenue phase you are asking them for money or you have monetize them in some way, shape or form through either ads or lead gen or something else.
[12:47] Mike: So, the first one is acquisition and acquisition is essentially when users come to your website and they can come to your website for a number of different channels. They can come in through any SEO you’ve done, PR campaigns, social networks, direct telemarketing, TV, ads, et cetera. And this is essentially where you start measuring from and this is 100% all of the people who come to your website, all the people that you get in touch with, that’s where you start counting from and that is you’re hundred percent that you should start counting from.
[13:17] Rob: Right, so this is the top of the funnel, right? This is all of your marketing approaches, all the high level stuff and certainly, acquisition is probably talked about more than a lot of his other points than the other five points because the acquisition, the marketing approaches tend to be just the things where you can have little tips and tricks that work and can drive…it just sounds so cool to say, “Oh, I’m…I can drive 10,000 people to my website doing this.” So, 20,000 people by getting on Digg or Hacker News or some other, you know, social news thing.
[13:49] Mike: Right and that’s one of those things that if you look at that and you look at those raw numbers, “Oh, I got a million people to my website,” that’s great, you know, how many of them activate? How many come back? How many are going to follow through and do any of your calls to action? And getting a million people to your website is great but if you’re not doing these other things to essentially follow up with them, then it really doesn’t matter.
[14:13] Rob: He’s just saying it’s almost like visitor acquisition. It’s not actually acquiring the customer. It’s just getting someone to come to your website and step two then is activation.
[14:23] Mike: Correct. So, activation is when users enjoy their first visit. If they have some sort of a happy user experience, if they hit your home page or a landing page or they stay for more than a couple of seconds because a lot of people will come to your website and just at a glance, they’d said, “No, this isn’t what I want,” they hit the back button or if they start clicking around your website a little bit, if they view two or three pages or four, those are the people that you want to start tracking. Again, you’re moving from that, you know, hundred percent people who are in the acquisition stage down to maybe you’ll get 25% of them or 50% of them in to the activation stage. And as you start measuring these obviously that funnel is going to whittled people down but you want to get as many people down to the revenue stages you possibly can. But again, this is just your marketing funnel.
[15:10] Rob: Yeah, I think the way I would think about activation in terms of maybe a SaaS app or you know, WordPress plug-in or some type of software product, I would think that activation will either be someone who signs up for trial or better yet is someone who signs up to hear more about the knowledge that you’re spreading basically through a like an e-mail follow up sequence something…the similar thing that I’m trying to do with Drip that we do with HitTail and I do with all my products. I think that getting a certain percentage of people to engage give you permission to contact them again is likely a good indication of activation. Do you…can you think of other aside from them entering an e-mail in a box but it seems like it’s a trial or them giving an e-mail is activation? Do you see other options for that?
[15:54] Mike: Well, that’s not really what Dave is talking about when he’s talking about activation. In terms of just marketing because what you’re talking about with users activating a subscription or signing up for a newsletter or something like that that is more about users coming back. That’s about retention. What he’s talking about with the second page which is activation is that they actually enjoy coming to your site and they stay there. If they view a couple of pages, maybe they look at the newsletter sign up screen. That’s essentially still looking at them in terms of being in the activation stage in your marketing. If they sign up for it, then they’ve entered in the stage three which is the retention but if they sign up for a trial, they’ve…they’ve skipped all the way to the end and you know, you’re trying to get them in to that stage five which is revenue. I —
[16:39] Rob: But the trial is not revenue, right? A trial is more…I could see a trial being retention like you’re saying step three but a trial is not revenue yet because of whole chunk of those people will never give you a penny.
[16:49] Mike: Right but in terms of the retention that Dave is talking about, he’s talking about mind share more or less and it’s getting people to come to your site and to think about you in the future and in terms of retention, users come back to your site. It doesn’t matter if they’ve signed up for anything, if they come back to read your website again because if you…if you look at the number of people who just come to your website once and then leave and never come back, then it’s an awful number to look at. I mean people don’t want to see that number but it’s really, really high. If they come back to your website for anything whether it’s because they signed up for something or if they start viewing other pages on your website because there’s a blog or additional content that they want to read, that’s what he’s talking about in terms of retention. It’s not about retaining you as a potential customer for product, it’s about retaining some sort of a mind share for you to want to come back.
[17:41] Rob: I hear what you’re saying and I think that could be done using let’s say you have a free trial of a SaaS app or you have a free version of a WordPress plug-in that is what’s going to bring them back to your site, right? Or if they sign up for a 5-day e-mail course is that…that’s what I’m thinking of in terms of the step three, retention. Would you agree with that stuff or not?
[18:03] Mike: No, I do, I do.
[18:03] Rob: Okay.
[18:04] Mike: It’s just that I guess morph in what you were talking about in terms of activation because —
[18:07] Rob: Got it, okay.
[18:08] Mike: …you had said activation they sign up for a trial, I’m like well that’s true —
[18:10] Rob: Jumping and be gone. [Laughter]
[18:11] Mike: Yes, it’s jumping all the way to step five. It’s not what —
[18:14] Rob: I see.
[18:14] Mike: …the same thing.
[18:15] Rob: So, activation and which is step two is pre…you think it’s pre them giving you anything. It’s pre…it’s just them having a good experience on your site rather than them actually giving you an e-mail or taking any kind of action.
[18:28] Mike: Correct.
[18:28] Rob: Got it.
[18:29] Mike: And then step three as you said they sign up for a mailing list or they sign up for a newsletter. They start reading the blog. They come back to it and you know, they start actively looking for a little bit more information.
[18:42] Rob: You know, imagine, Mike, someone might be listening to us and thinking how can I improve step two, the activation stage because I think we talked a lot about acquisition and retention but how do you make someone have a better first visit, have a better happy user experience?
[18:56] Mike: Well, you have to kind of walk them through what you expect them to do or what you expect them to understand from your website. You want to strip it down. You want to make sure that there this little information there as possible that is distracting and that’s one of those things where you look at a landing page and a lot of landing pages these days, they only have one or two links on them. They look like the rest to your site but almost nothing is clickable and they may rip out some of the navigation. They may rip out a lot of the additional images that are on the page and all of that’s in an effort to…to minimize what the user has to pay attention to.
[19:33] So, if there’s only two buttons on the screen and obviously, those are your only two options to click on anything. If you have arrived there from either a Twitter campaign or from Google AdWords or something like that, if it’s a true landing page and those are you’re only two options, you really make it simple for the person. Either they use the back button and they leave entirely or they move forward on one of those two options. They don’t really get around to the rest of your site and you can help drive them to do exactly what it is that you want them to do such as signing up for a mailing list or watching a quick video or signing up for the newsletter and things like that.
[20:08] Rob: Yeah, I think there’s a couple of really common mistakes made at this point like with landing pages. The first one I see over and over is giving way too much information. You should give the minimum, minimum amount of information and you should and need to be able to communicate your products, value proposition through that specific audience and realize that the value proposition may be different for different audiences you’re marketing to but you should send each of those through different landing page then but you should be able to communicate your value prop to that audience in one sentence or even shorter than that like six words and in complete sentence. And if you can’t do that, then your product is…is too complicated and you need to figure out what the…the single most valuable value prop…someone is going to be coming through that click to find, you know, that’s what you’re trying to do. You can’t have ten value props on the page thinking that you’re going to capture everyone because you’re basically going to capture no one, right?
[21:01] The second error that I see is doing the opposite of what you said which is putting a lot of links, giving people, you know, all the paths through your website and I think that the natural inclination is to think “Oh, you know, if they don’t want to give me their e-mail, then I don’t want to chase them off. I don’t want to lose those people.” And the fact is that if they don’t want to give you their e-mail, then they aren’t a good prospect. They aren’t interested enough in your product to type in their e-mail and to trust your, you know, your website hasn’t build enough trust to convince them that you’re not going to spam them and that you’re actually going to provide them with something valuable. If they’re not going to do that, then either number one, your offer is bad and you need to fix it or number two, they’re just not a good fit for you and you’re wasting your time marketing to them anyways.
[21:44] Mike: So, stage three in this process is retention and like you said getting people to sign up for a newsletter or e-mail list, walking them through to a tutorial or things like that making sure that you have plans at enough mind share such that they will come back to your website. Those are the things that you’re really looking for when it comes to retention.
[22:01] Rob: Yeah and retention can happen in a number of ways. You know, if you think five or ten years ago, retention was just someone came to your website and then remember to come back to your website and that’s a really poor way to play it these days. There’s much better tools for it. You know, before social media and blogging and all the e-mail lists and all that stuff, that was what most people did. And if you actually go in to your Analytics and you look at the number of the percentage of people who purchase that are first time visitors versus returning visitors, it’s typically anywhere between two and ten times more returning visitors purchase from you. And I look at this in my Business of Software talk a couple of years ago and I actually…I talked to Hiten Shah about it for Crazy Egg. I think Patrick McKenzie, I had numbers from him. I had numbers from Dave Rodenbaugh, from a number of my apps and they…across the board it was a minimum of 200% improvement from returning visitors and like I said I think with Crazy Egg it was like 14 times more people purchase who are returning visitors.
[23:00] And so you can always rely on people remembering but that’s a really, really pathway to do it. You want to improve you’re odds of having them comeback by doing things we talk about a lot on the podcast and you know, offering a 5-day e-mail course or some type of rewards that they sign up for your e-mail list so you can ping every once in a while. It is maybe having Facebook and Twitter and having them follow you but there’s just such a weak ties these days that they…it’s not something I really go after. I always go after the…the higher commitment approach like an e-mail or a trial. I mean when someone is actually trying your app, then you’re having more of an excuse to get in touch with them and they answer their questions to the e-mail and I think those are probably the top ways these days that I’d recommend looking at retention. And this is actually I mean as a little plug like that’s why I’m building Drip. So get drip.com. It helps with this stuff. It helps you retain more and be able to contact them more and work them, you know, turn them in to trial users and or customers.
[23:54] Mike: Right and all that’s more focus on actively trying to retain them versus passively just hoping that they will come back to your website or that you’ve provided enough information on your website to begin with that they come back on their own. Something else that I think we haven’t really mentioned yet about retention that I think would fall in to this is if you’re using Google or AdRoll or any of these other services that will market to them after they have left your website and essentially follow them around with advertisements when they visit other websites.
[24:24] Rob: That’s exactly right. Retargeting or remarketing —
[24:26] Mike: Yup.
[24:26] Rob: …yes, it’s called. Yup and you can do it both on other websites they visit or even now Facebook has remarketing. So, if someone visits your website, you can remarket to them on Facebook and that definitely works well.
[24:39] Mike: The next two, number four and five are referral and revenue. And I think that this can be interchange a little bit. It depends on the type of company that you’re putting together the type of product that you’re marketing as to whether or not referral comes before revenue or vice versa. But with referral, users like your products enough to refer other people and you can get them to help refer other people either through e-mail campaigns or things that you do on your website, contest, having widgets on your website that they can either download on to their desktop or on to their website. There’s a number of different ways that you can allow people to refer other people to your product or service.
[25:17] Rob: There’s a whole world that goes on this viral marketing type of stuff where if you’ve ever heard the term viral coefficient, you’re shooting for as high viral coefficient as possible and that means that every new user you get refers X other users. There’s a certain number when you write one viral coefficient it means that every new user refers one other user as a certain number that you hit that I think like Sean Ellis talks about which is when you’ve really hit product market fit and your viral marketing is doing well because imagine, let’s say every new users you got referred three other users. That’s an incredible viral growth. So all you got to do it just stuff as many new visitors in to the top of the funnel and then business is going to multiply. That is only achievable, again, from what I’ve read because I’ve never built a viral business like but it’s only achievable if the virality is baked in to your business. It’s not something where you have them sign up for a trial of a SaaS app and then there’s a screen that says, “E-mail your friends,” or “Refer your friends to, you know, to…to get a discount or something.” It’s just your viral coefficient will never get above one or very unlikely to get above one if it’s not baked in to product in terms of something like LinkedIn or Facebook or Twitter where you’re actually actively encourage and the product actually gets better the more people you refer, right?
[26:32] In order to use the product well, you need to refer a bunch of people and so there…there’s a difference here and it’s something to keep in mind forcing virality on the product is not necessarily a bad thing but you can’t expect it to dramatically grow a SaaS app or a WordPress plug-in or just a standard software business like it would a social network or you know, even e-Bay that kind of thing because it…they’re different piece. And so, while virality can work in all the cases, it’s something to keep in mind as you’re building your business to know what kind of business you actually run and how you can use referrals and thus the virality…there’s a several companies that offer this now but if you are a software type of company or you’re selling something even if you’re selling information, there are services like ambassador. They’re at getambassador.com and I think Referly is another one but they basically help engineer with this so you don’t have to build all the engines to do this. It’s kind of like having an affiliate program, someone who handles your affiliate stuff. But they offer more abilities. They offer the…they e-mail your friend forms, the widgets and that kind of stuff. And I do actually use that with HitTail. That’s a good way to think about doing it instead of building it yourself.
[27:41] Mike: And the third R in Dave McClure’s list is revenue. And in this stage, users conduct some sort of monetization behavior and whether that is they’re clicking on ads or they’re filling out information that you’re going to follow up on with them for example lead generation. If they’re signing up for a subscription or doing anything that is essentially going to generate money for you, that’s the revenue stage.
[28:04] Rob: Like Mike said earlier the revenue stage can come before the referral stage but in the typical Silicon Valley startup and the stuff that Dave McClure is talking about, that referral stage they try to put it before any type of revenue because that’s how you get that viral coefficient as high as possible whereas building smaller businesses where, you know, you are mode dependent on the revenue in order to grow since you’re bootstrapping, I would tend to put the revenue before the referral. You also need someone to be using it and be happy with it and willing to pay for it in my opinion before they’re going to refer someone to “more boring” business like these businesses that we do talked about on this podcast.
[28:43] Mike: One of Dave’s points about the referral is that your customer satisfaction for them has to be greater than 8 for to work anyway. If they’re not particularly satisfied with the experience that they’ve had with your website or with your product, that just not going to work at least an 8 out of 10. Well, that kind of makes sense. I mean if people aren’t happy with it, they’re not going to refer others and if you’re depending on that referral piece of it to help drive your growth, it just not going to work.
[29:07] Rob: Yeah, I think in terms of the step, the revenue step, this is harder than it sounds. I actually run in to quite a few entrepreneurs who do build that application or build that software product and they do get visitors to the website, meaning they get past the acquisition stage and they do get some kind of activation because people at least mill around on their website and they do get them to sign up for a trial. So some type of retention but then they either have a free plan and the person never converts to revenue or the trial expires and no one is converting to revenue. So, getting to this fifth stage with at least one or two percent of your overall website visitors is harder than it sounds and it’s something that requires that you’re solving a problem have, problem solution fit and that you’re marketing to the right people so that you have product market fit.
[29:53] And once you hit this and you can push a lot of the folks who are in step one all the way down through the funnel and actually get some revenue from at least a small portion of them, that is when it’s time to scale the business and that’s where it actually does makes sense to sometimes to raise funding. I think a lot of folks take for granted and I think I did in early days as well take for granted that getting to revenue is just the natural next step. It’s like going to high school and then going to college and then, you know, taking the next step and that in that whole path, but it’s not. It’s actually a lot harder. The first three steps, acquisition, activation and retentions aren’t actually that hard. Getting someone to sign up for a freemium plan or getting them to sign up for a trial is really not that big of a deal. Getting someone to refer someone or getting someone to pay you money is a lot harder and turning that in to a repeatable process is even harder. But once you do, you basically meant taking money. I mean that’s where you just put money in one…you put a dollar in one side and you crank the handle and then $3 comes out the other side a month or two later.
[30:52] Mike: One of the other interesting things that I think Dave does with this is that he assigns an estimated value to people who are in each stage of this funnel. So, at the acquisition stage, you have a lot more people but their estimated value for each one is, you know, maybe 5 cents versus somebody who is down at the retention area because they’ve come back to your website a couple of times. They might be worth an estimated value of about a dollar and then if you get down to the part where they are entering the revenue stage, they may be worth $50. And again, these numbers can be wildly different based on what your revenue model is, how much your product cost, what’s your expected lifetime value is, those kinds of things. But from Dave’s point of view, the interesting things is trying to estimate the value of each of those people because then you can essentially extrapolate how much money you should be investing in to each of those phases.
[31:45] Rob: That’s a really good point. I actually wish I had brought that up. I have all of my funnels spelled out just like you’ve said. I have…I know the exact dollar amount and sometimes it’s the cents amount for all those change of the funnel and I know how much I can pay to acquire a trial, how much I can pay to acquire an e-mail address in to our 5-day e-mail sequence. I know how much we can pay to get someone on the 7-day long tail SEO crash course on HitTail. I know how much we can pay for in general for website visitors although that one tends to vary, right, because the source really matters a lot. But if you don’t know those numbers, then you have a couple of issues. First thing is you’ll never be able to do paid acquisition and while that’s not the end of the world, paid acquisition is such a large…it’s a large market that you could be reaching in to that you won’t be able to grow very fast, you know, without knowing these numbers. You can do things like content marketing and put out infographics and blog post and do a lot of, you know, viral videos and be on Twitter and Facebook and do all that and that’s okay. You can drive traffic fairly inexpensively but you still have to monetize your time and infographics, they are fairly expensive to get designed and they will often take a lot of your time to manage and to figure out the numbers.
[32:56] So, in my opinion, you have to monetize those as well. The entrepreneurs I know who are doing content marketing they won’t say an infographic is free. They will look and say, “All right, I’m paying a designer X hundred dollars and I’m spending X hours of my time that are valued at a hundred or $200 a piece and I add that up and unless this infographic or this blog post or this, you know, story that I’m trying to get placed on…on a guest post somewhere, unless that drives X number of trials or X number of e-mails, then I have a negative ROI even though I didn’t actually I’ll put that money I will put it in time.” And so I truly believe in…in basically monetizing and quantifying all elements even if you’re not cash out of your pocket, it’s really important that you know your numbers. That in my opinion is a way that you’re going to be able to monitor things and go after the things that work and double and triple down on and actually grow your business the fastest.
[33:49] Mike: So, just to recap that, the first stage is acquisition which is users come in to your website from various channels. The second one is activation and that’s where people enjoy their first visit. They have some sort of a happy user experience. The third one is retention, users come back to your site and visit it multiple times. The fourth one is referral and again, the fifth one is revenue which can be interchange with the referral but referral is people like your products enough to refer others. The fifth one is revenue in which users conduct some sort of monetization behavior.
[34:20] Rob: If you have a question for us, you can call it in to our voicemail number at 888-801-9690 or e-mail us at firstname.lastname@example.org. Our theme music is an excerpt from “We’re Outta Control” by MoOt, used under Creative Commons. Subscribe to us in iTunes by searching for startups or via RSS at startupsfortherestofus.com where you’ll also find a full transcript of each episode. Thanks for listening. See you next time.