A blog by Edward Kim

One of the key lessons I’ve taken away when listening to other startup founders who are early on is to judge the model more than the idea.  Someone who understands how to structure an effective product model will eventually land on the right idea given enough time/resources.  But someone with a great idea that has no understanding of how to put together a good product model is in for a rough ride.

I’ve put together a user acquisition/retention checklist for your site’s product model (not business model,  I’ll follow up with a business model checklist some other time).

1. Price
2. Immediacy of return
3. Degree of user behavior change
4. Chicken/Egg problem
5. Value of product

Price is pretty self explanatory.  If your product is free, more people will use it.  If your product costs a lot of money, less people will use it.

With immediacy of return, there are studies that have shown people would rather receive $10 today than $20 in 3 months.  The longer the latency between action and return, the less sticky your product will be.

Even if your product is free and provides an immediate return on action, if it takes the user too much effort to complete the action, most won’t start, and even fewer will become dedicated.

It takes two to tango.  Your product should not be a tango.  If you have no way around building a product that has a chicken/egg problem, make sure that there is at least some degree of value provided to the user without the engagement of someone else.

Value of product is the hardest to define and of course its completely subjective.  The only way to measure this is to build a prototype and test it out or do extensive surveying.  Simply put, you need to fulfill a need or create one.  The best end user products seem to tap into our vanity.  (I wrote a post a few months back on assessing the value of your offering. http://bit.ly/bVZDJL)

So I just gave you a checklist, now lets apply it.  I’m going to use Foursquare as an example.

Foursquare is a free product and although there is a chicken/egg problem to get the complete experience, they were very smart in piggybacking off of Twitter to broadcast your location.  This takes advantage of a user’s vanity which, as mentioned, is a proven motivator in driving user acquisition/retention on the web.  We already had real-time life-casting and mind-casting.  Foursquare provided us with real-time (immediate) place-casting.
The degree of user behavior change is very minimal.  It takes less than 15 seconds to complete the action (check-in) for the product model to work.

There are plenty of things I left off the list such as having built-in virality, but that doesn’t relate to all products and in some cases its more a feature than a part of the model.  There are probably a few things I also just didn’t think of so feel free to add to the list.

Update: Someone brought up a great value, saving users money.  So the obvious product model to analyze here is Groupon.  It’s free to receive the daily emails which clearly state the deal in the subject so there is almost no behavior change.  If you see a great deal, you can immediately buy it and with Groupon you’re almost guaranteed there will be enough people to trigger the deal.  It’s a symmetrical model meaning your users are paying customers so its also a great business model.

Keeping a regular blog is work!  I’ve got a bunch of notes for different posts but can’t seem to sit down and write one.  I feel like I’m overdue so I cheated a bit.  These are some excerpts from an email string between myself and @vivsharma.  We were discussing new ideas in hot spaces.

I think the important thing when working on an idea that is in a space gaining a lot of momentum is to be clear about what are the elements driving the momentum.  It’s so easy to get caught up in the whole which tells you very little, that you forget to look at the pieces which is often where the value is.

What I mean is, if you take the case of Youtube, it was:

1. video cameras becoming smaller/cheaper

2. rising use of webcams

3. easy to use video editing software

4. lower cost and wide use of broadband

5. more openness to sharing on the web

6. rise of social networks creating behaviors and lowering the learning curve

7. all the other things i didn’t think of

I would say that even though there were many video sites at the time, Youtube really maximized 5/6 better than everyone else, especially when you compare to offerings like google video.

When you look at any meme and a rush of startups to build around it, it’s important to further break down the elements driving the momentum.  Then you’ll see what is a commodity and where the true value proposition lies.  It will also help prepare for where the space is heading.  http://cdixon.org/2009/09/10/non-linearity-of-technology-adoption/

When a founder says: “My idea is a pretty straightforward one and surprised it hasn’t been done yet”

I’m sure the idea has been attempted several times, just not successfully.  But that goes back to the whole thing about all the elements aligning for it to take off.

One comment about saying your idea is straightforward, even if it is, I think the context isn’t depending on scope of your ambitions.  If your scope is small, then thinking of it as just an app is cool, but if you’re thinking bigger, then I think the context is quite complicated.  Especially when an idea looks simple at face value, it’s the person who understands the value most deeply who wins.  Back to the Youtube example, if you built your site around creating/uploading videos, you ended up losing because at the end of the day, that wasn’t your core value.  The stat is something like 5% of users create 95% of the videos.  So if you built your UI around 5% of your potential userbase, you didn’t understand the real need/behavior etc.  The same thing can be said of searching for videos.  The behavior wasn’t to just search, it was go be led, to be given recommendations, to see ratings, etc.  The guys who didn’t build around these core values lost.  At the end of the day though, they all had the same straightforward idea.   Create a video site where people can upload their own videos and other people can watch them.  Unfortunately, some of these things you can’t know beforehand, you have to build a prototype and put it out there to see how people interact.

 

There are a handful of great blog posts I’ve read over the years that I refer back to every now and then.  “The Penny Gap” by @joshk is one of those posts.  What it comes down to is having a distorted sense of value and what customers are willing to pay for.

Another great post is “Designing for Social Traction“.  This is a must read slideshare for anyone who is working on a startup.  The presentation isn’t really relevant to this post, but I wanted to share this slide.

Most founders I meet pitch me on their actual value.  They say, this is what I’m doing, this is the incremental value add over existing competitors and that is why people will use it.  The problem with this way of thinking is that in most cases, the incremental value add is not large enough because you’re biggest competition is not other sites, it’s your potential user’s existing behavior.  You need to provide enough value to override their existing habits.  Ask yourself, how many sites have you been to just once?  Now ask yourself, how many times have you been to a site more than once?  There is clearly a disproportionate ratio there.  And in cases where you went to a site only once, the incremental value add was not enough for you to start using the service.  So why don’t founders apply these experiences more strictly in building their own startups?

Now when you start talking about charging customers, founders seem to have an even more distorted sense of value.  The post by @joshk talks about one aspect of this, but there is also the issue of what I call ‘Actual Value vs. Perceived Value’.  Actual Value is what a user gets for his $10.  Perceived Value is what he believes he is getting for his $10 and its often relative to what they currently pay for something and how they value their existing behavior.  Users will never pay if the actual value and perceived value are the same.  Founders tend to think that they can get away with this.  On the internet if you are charging me $5 for something I believe is worth $5, my inclination is not to pay.  And simply put, if your model is predicated on providing an equal value, then you have to ask yourself, is my business model forward thinking enough that it will survive against my competitors?

One of the best examples of this is NetFlix.  Early on they charged $20/month which seems like a lot, especially around 2000 when everything was free.  But what was the user’s perceived value?

1. Having to get off your ass vs. waiting 2 days.
2. Cost of driving to the store and back vs. free shipping.
3. Cost of each movie rental vs. unlimited movies.
4. NO LATE FEES!

For a typical user who signs up, they probably overestimate how many movies they will watch per month so lets say 5 DVDs which would have cost 5 x $4 per rental.  Lets throw in $5 for gas over a month.  And now the late fees, which everyone freaking hated.  Lets put that at $10/movie.  So a very quick estimate puts the perceived value at $75.  Today NetFlix costs $9 plus you can stream online.

Great business models have a high enough actual value that it overcomes existing behavior and an even higher perceived value that users are willing to pay for.  Be your harshest critic and don’t cut yourself any slack because no one else is going to.  After a few weeks since Simple.PR went live, we’ve stopped all marketing efforts and are investing all our time into the product.  Simply put, we were not providing enough actual value.

One last thing, this is a great post by @andrew_chen for anyone wondering about different strategies for going about testing your product’s value proposition?

 

I had a great lunch with Vivek Sharma (@vivsharma) yesterday where we pretty much spent a few hours ripping each other’s business models apart.  He definitely did a much better job than I did.  We also discussed a number of different issues. 

Vivek has a very broad scope of experiences being an engineer and then shifting to the business/sales side.  He has also been through the startup process before so has the perspective that only failing at a venture can provide. 

At one point during lunch, he brought up the saying, “During the gold rush, it wasn’t the people digging for gold that made money, it was the guys selling the shovels.”  So then we started discussing, who is selling the shovels in today’s gold rush? 

The answer?

It’s everyone selling “Create a successful startup for Dummies”.  It’s all the tech blogs trumping newly minted 20 year olds.  Its all the meetup events, tech conferences, pay to pitch, etc.  They’re not building anything, but they want you to because at the end of the day, that’s how they get paid.  The guys who sold the shovels needed to sell the dream.  That’s how they sold more shovels. 

What we really need right now are people who sell the truth.  The problem there is that no one would buy.  No one would buy a shovel if you were told that the success rate was 1 in 10,000 and even then most people didn’t strike it rich.   They picked up a few small nuggets that might cover their costs to that point and buy them a beer.  There are plenty of people who struck it rich in the gold rush, but in many cases it was the guys who got there early enough, found gold and bought the actual land. 

The thing about entrepreneurs is that we are optimistic by nature, perhaps a bit irrationally exuberant. We need a startup course that spells out the fact that WE WILL FAIL.  Tell us all the hardships we will have to endure, how much sacrifice we will need to make, that our idea as it exists is complete shit.  We need people who tells us we have an overvalued sense of self (and here’s why).  Most people will value our product at 1/10th of what we value it to be.  We need to lay it all out, and if after that, we’re are still willing to go ahead, then we’re on the right track. 

To be clear, I think there is a great value to all the people selling shovels.  I’ve been amazed at all the tech oriented meetup events in NY and the community they foster.  I’ve learned a lot from watching some awesome webinars.  I read TechCrunch a few times a week and having access to that kind of information and what everyone else is doing enables me to build a better product myself.  It’s just that we’re so focused on the idea of succeeding that there isn’t enough reminding us how hard it is to get there.