Re-applying Lean Lessons Learned

We‘ve been working on a new product line, Thread Tradition, for the last several weeks. It’s still in private beta, although if you ask President, Jack Reyer (jack@threadtradition.com) nicely, I’m sure he’ll pass along an early invite. Attending an Eric Ries Lean Startup talk during the week, it reminded me of some lean tactics we’d applied in the early months at Blank Label (and still are!).

Test as Many Forms of Traffic as Possible

Something I touched on in my last post, one of the biggest mistakes we’ve made is not testing different forms of traffic early enough, especially paid search. If you can’t be profitable on a channel where people are actively looking for you, e.g. for us “custom dress shirts” you have a problem. If they’re looking for you, and you can’t convince them to convert, what chance do you have on converting a browser or passer-by?

Three Yes’s to Product Development

We take three things into consideration when building and iterating product. i) Analytics. Why is there a high bounce rate on this page? Why is everyone buying the gingham shirt? ii) Customers. “Hey guys this page sucks, I have no idea what’s going on here.” ” You guys need to get more gingham, didn’t you know everyone’s buying gingham now”. iii) Product vision. What message are we trying to convey on this page. Are we selling to hipsters or business executives.

Talking to Customers Is  The Best form of Learning

TALK to CUSTOMERS! Talking I define here as a back and forth conversation. The best vehicles of talking are on the phone and on instant messenger. Don’t think you’re doing enough by throwing up a feedback tab on the right and answering a handful of people who bother to drop an email. We use Snap Engage for IM, just an awesome product. I’ve personally called hundreds of customers who’ve ordered to ask them about their experience. Some get annoyed because they want to keep the relationship online but the overall net is undoubtedly positive.

Start Thinking about CAC and LTV from Day One

Because our main sources of traffic for Blank Label for year one were press and word-of-mouth, we didn’t really think too much about CAC, we said PR is free so our CAC is zero! Awesome! Not awesome, because PR is hard to scale. And we definitely didn’t think about LTV. It wasn’t until only several weeks ago we started to seriously look at customers’ behavior over time rather than just at the single transaction level. Through talking to customers we get a better sense of how many dress shirts they purchase a year, and from that we can make better judgements of LTV and from that CAC. Wow we can actually spend $X to acquire a customer! That makes a lot more channels look profitable.

What lean lessons are you applying to your startup everyday?

Our Journey in Building a Customer Acquisition Model

This is mostly an anecdotal account of how Blank Label got to 60k in monthly uniques and what I hope can learn from it. When I talk to most non-technical founders, we share the pains of not being a builder. It’s painful because no investors will take us seriously without a prototype, most engineers won’t talk to us because they know we initially bring very little to the table, and we just feel stuck and helpless. We think, once we can get the site we want built, we’re golden. It’s time for my idea to shine, then everyone will see how right I was from the start. Not exactly.

1. Before Marketing Comes Economics

You first need to understand the fundamental unit economics of your business. If you’re running any kind of commerce site (travel, jewelry, custom dress shirts), what’s the average order value, how much are people spending per visit. And how much of that do you actually keep as profit.

Then you make up a number (because it’s very hard to actually get the number right without the actual data) which is how many times you think that customer will shop with you again. Is it 3 times, 5 times, 10 times? All depends on your business. Good advisors can help here. This will help you ultimately determine 1 of the 2 most important numbers in your business. Most people call it the Life-time Value (LTV), essentially it’s how much a customer is worth to you.

The other-side of the equation is the Customer-Acquisition Cost (CAC), how much you want to pay for a customer. The CAC number is the marketing spend divided by the number of customers; e.g. if you spent $5,000 this month and had 100 customers on your site, the CAC is $50. If you’re a logically minded person, you’ve already figured out  that everything funnels back to

LTV > CAC

If you’re paying more to get the customer to buy something than the customer is going to give back to you in profit, you don’t a business.

2. How To Get Free Traffic

For us the first year of Blank Label, traffic was mainly driven by PR and word-of-mouth. Our Lead Evangelist Danny Wong was very determined in using PR as a pillar of traffic. We were featured in New York Times, MSNBC, BusinessWeek, Inc, Forbes, just to name a few. When starting out, PR is a great place to get traffic, mainly because its free and can often surprise you at how big it can be.

Invest time into it and you’ll see it as a funnel just like site usage. You’ll start tracking how many pitches you send out, how many replies you get, what pitches get more replies, whether in-person meetings with journalists are worth your time, that closing stories actually is very rare but if you pump that funnel with good leads, you will get write-ups.

3. Paid Traffic is Better than Free Traffic

We always thought as we grow our PR relationships, we’d get more PR traffic, times that by some viral word-of-mouth co-efficient and we’d be golden. Not quite the case. Here’s the best PR tip that no one has ever told us. Everyone wants to write about you when you’re starting out, when you’re “launching” but then you become old news. You’re most interesting when you’re the shinny new thing.

One of our advisors, David Hauser, told me pretty early that we should really be thinking about how to spend some of the money we were making from the free traffic on the paid traffic. Admittedly I wish I took this advice when he told me rather than four months later. The earlier you can budget paid traffic, the better. Ultimately if you can acquire customers for less than you’ll make back off them (LTV > CAC), that’s fairly scalable – you just poor more money on. Google, Microsoft and other ad exchange networks really don’t care whether you’re the shinny new thing.

If you’re in Boston and are looking to share notes on customer acquisition modelling (not social media marketing!) there’s a pretty cool group of people forming, drop your name in the comments and I’ll be in touch.