(102) Beyond MVP: How to build your product traction model?

This post is in continuation of my last post on how to test the viability of your business model.

In the last post, we learnt how to calculate the customer throughput as a minimum success criteria goal for a startup.

However, this success criteria time box is still several years into the future. This goal needs to be broken into smaller milestones.

There are three stages in a product traction:

1. Problem/Solution Fit:
2. Product/ Market fit
3. Scale

Each stage is driven by a high-level goal and a strategy for achieving it.

Stage 1: Problem/Solution Fit

The high level goal of this stage is testing whether your idea represents a significant enough problem worth solving.

In the problem solution fit, you test your offer. An offer is made up of three things:

1. Your unique value proposition
2. A demo
3. Pricing

Your unique value proposition: This represents the finished story benefit or promise that you make to your customers to get their attention. If you were building a job-hunting site, for example, rather than rattling off your unique features, focus on what job seekers want: Get a dream job in sixty days.

A demo: Your demo isn’t intended to be just a collection of pretty screenshots or a working prototype, but rather a carefully scripted narrative that helps your prospects visualize your unique value proposition. It should walk them from their current reality (riddled with existing problems) to your envisioned future reality for them (one where these problems are solved with your solution).

A Pricing model: And finally, your offer should include an appropriate call to action. Depending on your business model type and the readiness of your solution, this may be an actual money exchange or some sort of derivative currency exchange.

Solution interviews, teaser landing pages, smoke tests, and crowd-funding pages are all examples of offer types you can use at this stage.

Stage 2: Product/Market Fit

The high-level goal of this stage is demonstrating your business model working at small scale.

You need to demonstrate that you can both create value for your customers (through your solution) and capture some of this value back (through your revenue streams). The key insight here is that:

You don’t need lots of users, just a few good customers.

Stage 3: Scale

There is a marked shift in strategy at this stage from product to growth.

This stage is less about driving your solution to perfection and more about finding the right engines of growth to realize the full potential of your business model.

The question to ask is:

• What is the measurable goal of each stage?
• How do you measure progress toward this goal?
• When do you transition from one stage to the next?

Because each stage is characterized by a different strategy and goal, it is important to constantly locate yourself on your journey from ideation to scale. That is the job of your traction model.

While your Lean Canvas describes your business model story, your traction model describes the desired output of your business model.

Growth as a series of steps

They have a few paying customers, which is a great start.

The next question to them is:

“Do you know how you’re going to get your next ten paying customers?”

You see, the first few customers came in from friends, others from adviser referrals, and the rest were seemingly random.

The problem with random is that random is not repeatable.

We should stop trying to go faster in every possible direction and instead slow down and try to figure out the repeatable pattern across their customers. The goal should be to identify a handful of actionable demographic and psychographic cues that triggered their purchase decision.

The reaction I often get is that we need to accelerate traction and go fast on everything. But accelerating on a plan that isn’t yet repeatable just gets you lost faster.

You may have managed to achieve a one-time spike, for instance, by getting TechCrunched or doing a product launch at SXSW. A lot of companies used to scramble to secure investment after such a spike, but the more savvy investors know to wait and see if the spike sticks.

On the other hand, if you can demonstrate repeatability coupled with impressive customer throughput metrics even at microscale, you can extrapolate the business model story to paint a big picture.

This was the reason Facebook was able to command much higher valuations than its closest rivals, even though it had a lot fewer users and little revenue.

Facebook Won on Strategy

• While all his competitors had opened up their platforms to the public from day one, with the goal of growing as fast as possible, Mark did the opposite.
• He initially launched Facebook on just a single college campus — Harvard University. By initially limiting its launch to just a single college campus, Facebook was able to focus on first getting its product right without the distraction of having to also scale to millions of users at the same time (as its competitors did).”
• “Within the first thirty days of launch, Facebook managed to demonstrate impressive user engagement metrics. Over 75 percent of Harvard students were on Facebook and more than half of them were logging in multiple times a day.*”
• “Facebook then methodically rolled out its platform from one Ivy League university to the next, and eventually to other colleges. Not only did a staged rollout allow Facebook to play up exclusivity and desire, which was part of its overall strategy, but it had the more important effect of demonstrating repeatability in its business model. This was key to securing the investment capital it needed to grow. Facebook managed to raise just under $13 million within its first year of launching, with a postmoney valuation of more than $100M. Its two closest rivals, Myspace and Friendster, had both raised funding also at the end of their first year based on $46M and $53M, respectively.”
• “While most of us on the outside were left scratching our heads, investors could already see the bigger picture of what Facebook had really built: a repeatable and predictable system for turning new, unaware students into happy, passionate users. It had built a customer factory.”
• “Facebook achieved its goal of building the largest social network not by pursuing a land-grab strategy like its competitors but rather by following a carefully orchestrated staged rollout strategy. Even though it wasn’t first and didn’t start with an inherent unfair advantage, its staged strategy ultimately led Facebook to victory.”

Building the Customer Factory in Stages

Startups dont grow linearly.

To hit 4,000 customers in three years, you’ll need to add 111 new customers every month starting from month one. This isn’t realistic.

The hockey-stick curve tells a more realistic story. The flat portion of the hockey-stick curve provides a slower ramp at the beginning. You need this time to get your business model in order. The rate of growth (or the slope of the curve) picks up quickly from there. That’s when the exponential part of the hockey-stick curve quickly outpaces a linear model. This slope is your measure of traction, or customer throughput.

Startups don’t grow forever

Even the hockey-stick curve is only part of the story. Business models don’t grow forever. Either markets reach saturation or the business model gets disrupted. Even Facebook’s user growth will reach saturation because there is an upper limit to the number of people on the planet.

We can map the three stages of a business model to this S-curve:

1. The Problem/Solution Fit stage is the flat portion of the curve when you validate customer demand for your value proposition.

2. The Product/Market Fit stage is the inflection point which marks the rapid or exponential growth stage of the business model.

3. Because it is hard to predict the saturation point of a market, I don’t define the Scale stage as the top of the S-curve but rather the point when your minimum success criteria are met. ”

What are the right customer throughput rates at each stage?

WHAT IS A GOOD TIME BOX FOR THESE STAGES?

In this example, 4,000-plus customers/year at scale represented $10M revenue/year, so Product/Market Fit would be one tenth of that number. Achieving a $1M/year revenue run rate seemed like a reasonable transition point to shift from product to growth for this product, so I stuck with the numbers.

Where some further breakdown is usually needed is at the Problem/Solution Fit stage. At this stage, you are usually not yet creating customers, but leads or users, who are in the process of being converted to customers (through trials). So we need a way to turn the desired customer production rate to a leads or trials production rate.

If you don’t have any better numbers to go on, use a power-of-ten estimation. I simply assumed that 10 percent of leads would convert to trials and 10 percent of trials would convert to customers.

So in order to achieve a customer throughput rate of 40 customers/year by year one, I would need to generate (40/12 × 100) = 333 leads/month or (40/12 × 10) = 33 trials/month. I rounded the last number down to 30 trials/month, which became my Problem/Solution Fit success criteria.

You can probably appreciate now why you don’t need three-digit precision in your calculations. Our goal is to take a big fuzzy number out in the future and turn it into something actionable and concrete in the present. Once you reduce your Scale number by a couple orders of magnitude, it becomes pretty actionable.

Facebook’s traction Model

Summary:

• “Establishing repeatability in your business model is a prerequisite to pursuing growth.”
• “Growth is not a continuous function but a series of steps best described as firing rockets that get you from one stable orbit to the next.
• “A staged rollout strategy works to automatically prioritize the right risks in your business model.”
• “You can break the product life cycle into three stages: Problem/Solution Fit, Product/Market Fit, and Scale.”
• “At a macro level, the only difference between the three stages is the customer throughput rate.
• The distance between each stage can be modeled using a 10x rule, which works both top down and bottom up.
• You can take on 10xing your business as a series of 2x steps.”