February 16, 2012

Great startups fail if they can’t reach their audience

There was a recent thread on HackerNews comparing the traffic driven by HN vs r/programming to a blog post written by an entrepreneur working on an iPhone app. I made the following observation:

I know this is just a fun article, but to get more serious for a minute; the missing thing here (what most people seem to forget when they’re attracting traffic) is that neither of these audiences are part of his target market. He mentions his call to action is attracting votes, and maybe that’s all he really cares about, but it’s worth remembering that the target customer of this app is neither reading HN nor r/programming.

I don’t have a good alternative for how to reach “iPhone-owning NYC cab riders who care enough to review drivers”; I’m just trying to make a general observation about these kinds of traffic-from-A-vs-B tests. Of course, I’ve assumed his objective is app sales, not attracting hacker/VC attention. Nothing wrong with the latter!

I’m not trying to pick on Alastair Coote; he made an awesome app as a proof-of-concept, and my assumption about his goals were incorrect (he was targeting the right audience to attract votes).

His post just touched a raw nerve my obnoxious evil-marketing-suit alter ego has with a lot of the ideas floating around the startup community. Startups with great ideas, even great executions, fail epically when they’re unable to reach their target customers in a cost-efficient way.

GroupOn is a perfect example of the hilarious absurdity of a company that has a couple terrible things going for it:

  1. They pay more to acquire customers than their customers spend over their lifetime as customers.
  2. There is no second point.

Now, what about all those brilliant venture capitalists who invested in GroupOn? They made a killing at the IPO and stuck the dumb hold-for-value public with a worthless company. Psst… the stock market is for suckers.

But I digress.

The idea comparing acquisition costs (AC) vs lifetime value (LTV) is not new, but lots of people jump over the part where you actually identify your market and decide if you can reach them at all.

The problem with consumer web apps and mobile apps is that “everybody” is a really shitty audience to sell to. You need things like puff pieces in newspapers and million-dollar adword budgets. Narrowing the definition of the  audience has a direct relationship with reducing the cost to reach them.

For Alastair, “everybody” goes down to “New Yorkers” then to “iPhone owning New Yorkers”. That’s not super helpful, but already you can start to have all sorts of geolocation-specific ideas like advertising through foursquare when someone checks into a bar after midnight. Those people only represent maybe 10% of the potential customers, but worse, the group probably includes 100 times more people than those who would even consider using the app. Reaching those people is a waste of money.

The real question is still how to reach “iPhone owning New Yorkers who ride cabs and want to participate in a cab reviewing system”. So here’s what your thought process should be in evaluating a startup idea:

  1. who wants to buy this thing?
  2. can I reach these people to tell them about this thing?
  3. can I do it cost-effectively?
  4. is that group big enough to make enough revenue to cover the fixed costs?

Then you leave the realm of the underpants gnomes to reach great success.