235: When Growth Hacks Can’t Save You

 
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In today’s episode of the Startup Chat, Steli and Hiten discuss the current trend of applying personal growth hacks to business issues. As they’ll highlight, it’s critical to step back and analyze whether there are any fundamental issues with your business model before thinking about the applying any growth hacks. If you don’t, any growth hacks or other incremental solutions you try will only result in failure. Tune in to hear Steli and Hiten discuss when it’s appropriate to applying growth hacks.

Time Stamped Show Notes:

  • 00:42 – Details of the software company that sought out Steli for advice
    • 00:42 – Looking for growth hacks to convert free trials to paid customers
    • 01:32 – Cash-flow positive company that has built an open source software tool
    • 02:02 – Looking to make a SAAS offering where people can enjoy a free trial
    • 02:49 – Out of 40,000 unique website visitors, 2,000 create a free trial and less than 10 upgrade to a paid account
    • 03:16 – Product costs just $15 per month
  • 03:40 – Client was considering sending out drip emails and building an onboarding step by step guide to improve conversion
  • 04:15 – Steli advised client against these. A good conversion rate is needed before considering optimization
  • 04:40 – Client is not targeting the right audience yet
    • 05:20 – If the numbers are really bad, it means that there is something fundamentally wrong with the business
  • 05:47 – 1990 people who took up the free trial did not find value in the product
    • 06:35 – Brand is known for selling open source software tools which makes it all the more difficult to convince people to pay up
  • 07:41 – Poor conversion rates indicates a value mismatch
    • 07:58 – Talk to customers and understand their mindset in order to improve conversion rates
  • 08:15 – An open source brand makes it difficult to control the kind of traffic driven to the website
  • 10:15 – Can really poor conversion rates be improved by better onboarding?
  • 10:50 – Even a poor product will sell well if your product is really unique and addresses a market need
    • 11:20 – Close.io was successful in spite of not having a reporting functionality
    • 12:16 – Founders tend to work on optimization techniques rather than concentrating on product fundamentals
  • 13:05 – Are you setting your business up for success?
    • 13:11 – “There is no growth hack that will save you if you don’t understand why your customers are signing up for your product”
    • 13:30 – Need to build a product that people love, and that has value outside of any growth hack
  • 16:30 – Looking at other successful companies, people often believe that it is the growth hacks like drip emails and a great website which are driving their success. However, it is the product that matters
  • 18:32 – “It is easy to look at parts of your business that are not that great yet and think that is the reason for zero success”
  • 19:36 – Fundamental issues can’t be fixed through incremental solutions
  • 19:50 – The route to fix your business issues is through your customers
  • 20:11 – End of today’s episode

3 Key Points:

  1. If you are staring at really poor conversion rates, it is likely that there is a fundamental issue with your business.
  2. Do not attempt to fix fundamental issues through incremental solutions such as sending out drip emails or improving your website.
  3. Understanding customer mindset is critical if you wish to improve your conversion rates.

Steli Efti:

Hey everybody, this is Steli Efti

Hiten Shah:

And this is Hiten Shah.

Steli Efti:

In today’s episode we wanna talk about situations, as a startup or as a founder, where growth hacks can’t save you. Here’s why I wanted to talk to you about this. I was in a phone call recently with a founder and basically he wanted advice on a number of experiments, and growth hacks that he was planning to run, in order to improve his conversion numbers from free trials to paid customers. He sent me a little like overview presentation of his company and in one of the slides he had a bunch of KPI’s, and just taking a glance at that slide made me give him advice that I realized I’ve given to many people before, and I felt like a lot of people need to hear this, so I wanted to discuss this with you. I’m gonna give you a little bit of context on this company and this founder, and then the numbers I looked at, and what I told him, and then I am dying to hear what you have to say about this.

Hiten Shah:

Perfect.

Steli Efti:

So, here’s the deal. This is a company that’s been around for a few years. They are cash-flow positive, they have built a software tool that’s basically open source, and they’re making most of their money … I mean, all of their money really by doing really large skill implementations at enterprise companies for that software. Kind of like, customizations and all kind of stuff for these big companies that want to use their software. Then for the past two years, two to three years, they wanted to start a self service part of the business where people … You know, typical SaaS, where people could just come sign up for a free trial, play around with the product and then just put in their credit card, and use it. The hope was that, that business would be a significant part of the business or eventually be much bigger than the enterprise stuff that they do because it seems like the enterprise stuff they do is nice, but they can only service one or two of these big customers a year, and it takes all of the attention, all of the energy to do. They’ve been trying this SaaS thing for like two years or so, and here’s the slide that I look at right. I look at the slide where he shows me their numbers and it’s basically close to 40,000 units that come to their website. Out of those, around 2000 per month create a free trial and out of the 2000 people that create a free trial a month, less than ten upgrade to a paid account, and out of those who become paying accounts, they have a 5% customer return rate every month. This is a product that costs the customer … I don’t know, some obscurely small amount of money, like $25 to $50 a month or something. So, those were the numbers and then he showed me a very long list. Like, he was planning the next six months to put in a lot of effort and lot of energy, and make a really big push to improve his conversion numbers. He had ideas like, “Let’s start sending drip emails for free trial users. Let’s have a really good onboarding experience.” So like, kind of one of these onboarding step-by-step guides that he wanted to build and just a bunch of like … 20 different ideas from things he wanted to do to take these over 2000 trials that would come in and convert them at a much better rate than the less than 10. When I looked at those conversion numbers, I basically told him that my advice was to do none of these fucking hacks, none of these conversion optimization things ’cause he doesn’t have a conversion rate that’s good enough to even try to optimize it, and that when something that looks as bad out of 2000, six pay, and out of the six that pay, 5% of them return every month. Although it’s a product that costs very little money. My hunch is that, he doesn’t know his audience yet, he doesn’t know his customer yet. He’s not focused and targeted on that customer base. The traffic he’s getting is probably all over the place and trying to optimize … Even if he did all these things and he doubled his conversion rate from six people upgraded to 12, it’s still horrible and it won’t really work, and doubling is really tough to do usually. So, he’s at one of these points where I’ve seen many entrepreneurs being this, where they do something that’s not working and their solution is to put in all these extra energy and effort to do AP testing, growth hacks, and this, and that, and the other, but what they really should do, in my opinion, is step back and look at it. If the numbers are so bad, it typically points that something more fundamental is wrong. Maybe the product market fit is not there, maybe you don’t understand your customer or your audience, your marketing is totally off. Like, something really fundamental is really is going wrong and you can’t fix it by writing more Drip emails or something like that. There’s a long discussion that came after that, but I want to pause here to just get your reaction on this.

Hiten Shah:

Yeah, I agree with you. To me it starts with math, where it’s like, Okay, 10 people pay, 2000 signed up. There’s 1990 people that didn’t end up getting the value that they signed up for most likely and so they didn’t convert or they signed up, and never actually did anything meaningful with the product. Now, because of the context you shared, I think there’s a big implication and a reason why he might be having this. You basically said that his product’s been open source and then they added a self service sort of model.

Steli Efti:

Yup.

Hiten Shah:

Right?

Steli Efti:

Yup.

Hiten Shah:

Well, so the implication is … Whatever the brand is, everyone … Not everyone, but the brand is known for the open source product. Open source is essentially free.

Steli Efti:

Yup.

Hiten Shah:

You don’t have to pay for the cut of it. You obviously have to pay for engineers implementing it and all that stuff, but you’re not paying the company anything. So, the brand is known for something different than what the self service is intended to do, which is, make people try it and then buy it. Right?

Steli Efti:

Right.

Hiten Shah:

This actually points to the fact that they’ve got a great brand if they have that much traffic, I would say. Right? Maybe they’re doing some stuff that is generating a lot of traffic that’s irrelevant, that’s a different story and just pushing people to sign up. Maybe, they got some growth hacks, if you want to call it that. They got that 5% sign up rate, which actually isn’t like the best either.

Steli Efti:

Yeah.

Hiten Shah:

So, there is lot there … I just wanted to make sure everyone has the context ’cause when you can be contextual like this, it’s actually pretty easy to identify the real problems. So, I agree with you. A lot of people when it comes to growth hacks would say “Oh you need to make sure you have a great product” and stuff like that. I think this is even … I would say it a different way kind of related to what you’re saying, which is like, there’s a value miss match, somewhere. Right? The company probably doesn’t know what people are signing up for and then what to deliver to them in order for them to buy. So this is a, talk to customers, talk to potential customers. Understand what the mindset is when they’re signing up, is the first thing I would do ’cause there’s so many, literally 99% of them, that are not signing up. I mean paying, you know?

Steli Efti:

Yeah, so I couldn’t agree more with you. I think that when I briefly looked at what their traffic sources were, it was all SEO, it was basically keyword phrases like, “Open source, XYZ.” I don’t want to give away what they did because if you type in open source in the category of software, you’ll find them kind of in the top results. I was just wondering, the type of people that type in … Let’s say somebody typed into, just take my category, open source CRM, right? The question is, what kind of people would type in open source CRM? Maybe there’s a lot of developers that just want to play around with it, maybe it’s students. It’s not clear. What is the audience that is coming through the search terms and is the audience really who they built their tool for. When people sign up for trial, is it because they want to play around with the developers. Do they just want to get a sense for how the tool looks like before they download the source code or is it because they’re legitimate companies and teams that would want to use the software that they’re selling, or the service software that they are offering? So, they have like very little control over the kind of traffic that would get in. The open source part of their brand, I think, plays a major role in all of this. We can even talk about like the … They’re doing both this like enterprise business, as well as wanting to grow and scale up the SaaS part. This is in and of itself an interesting situation that I’ve been encountering more and more, where start ups want to do kind of both things. They want to work with big enterprise clients, while they also want to grow like the self serve part of the business. They encounter some of the challenges and implications in this, but maybe that is for a separate episode. I think the core thing that stood out to me, that sometimes … When the basic numbers look that bad, a lot of times the reaction I found was after that is like, “Oh yeah, it’s really bad because our onboarding is really bad. Yeah, we don’t try to do anything to try to convert people from free trial to paid. We don’t send Drip emails, we don’t call them. If we only put a little bit more effort this number would be significantly better.” Not to say that can’t be true, but if the number is so bad organically, that’s typically a bad sign. Something is not at a healthy place. Right? I bring up the example often times with , when we launched … I often tell people that if your product sucks and people still want to buy it, that’s a really good sign that you might have product market fit, versus trying to think that you have to have the perfect product for people to buy, because that’s never going to be the case. That’s kind of the source of excuse for founders to be like, “Yeah, we’re not doing well, but we’re missing all these critical features”. That’s very rarely true if you have something unique that has a product market. When we launched didn’t have reporting. Right? It seems kind of critical for us here to have reporting functionality and we didn’t. The productivity gains that were kind of one the main value propositions, were big enough that people would buy and we would grow every single month. Of course our customers would start eventually complaining that they really wanted a reporting, but they loved so many things about the product that they bought despite our shortcomings, and then they would beg us every day to please fix these. That is a very strong sign that you have something special and you have something that has product market fit, versus saying, “We launched, nobody’s buying our CRM, but of course we need better reporting. We don’t have a mobile app and we don’t have real Drip email campaigns to convert people, and we don’t have this, and we don’t have that.” When you start, you’re not gonna have most shit. There’s going to be a million things you’re not doing, or you’re not doing well and a lot of founders take these as excuses for why they’re getting such poor results. That just makes them go down a path with the build more and more things, and they work on all these optimizations, and improvements. “Oh, we need a better website. Oh, we need a Blog. Oh, we need drip emails. Oh, we need better this, better that.” Then like a year or two, or three into it, still they don’t have anything because they never truly looked at the fundamental thing that was the issue, Maybe it’s positioning, maybe it’s not getting … In this case, I think, it’s not understanding who their customer should be on the self service side. I find that’s a critical mistake that so many founders figure out one way or another, that I talked to.

Hiten Shah:

Yeah. I’m a little speechless because we started off talking about this as a growth hacking and growth hacks. To me it’s absurd because this is not about growth hacking or growth hacks, it’s really just about, “Are you setting your business up for success?” What I mean by that is, there’s no growth hack that is going to save you when you don’t actually understand your customers and why they’re signing up for your product, and why they might even buy. It feels like people who just go after the growth hacks and want to like implement all these optimizations, are totally missing the point. The point is that you’re building a product that people love and that product needs to have its own value in itself, outside of any growth hacks, and if you don’t understand the customer, you’re not going to be able to create that product. To me, I think what people have forgotten because there’s so much talk about these big conversion optimization and growth hacking, and all of the things, which are actually all fine and dandy, but what they have forgotten is that even those principles, those tactics, they’re rooted in learning. They’re rooted in the customer or the user, or the visitor to a website, and what you know about them, and how to make their experience better. That’s what this stuff was meant for. Instead, people are just looking at these blog posts about these tactics, and just all trying to blindly apply them to their businesses because they think that’s what is going to solve their sort of a business problem. When really, a business problem is solved by improving part of the business, not by growth hacking it. So, I don’t know. I’m kind of speechless that we’re still running into this problem continuously ’cause … I get why. I get that there’s a lot of founders out there that aren’t business people. There’s a lot of founders out there that have learned from the internet. The internet has been full of growth hacks in terms of creating online businesses, at least for the last … However long. But man, this is just a fundamental business problem. Like, if you had coffee shop, and a lot of that people came in, let’s say 2000 of them a month, and only ten people bought. You wouldn’t have a coffee shop any longer. Right?

Steli Efti:

Yeah.

Hiten Shah:

So, this is like … Let’s take analogy of the real world and then we sound absurd in software like, “Oh yeah. Yeah, it’s cool.”

Steli Efti:

Yeah.

Hiten Shah:

Not many people are coming in, only ten people are buying. We’re going to like, manipulate them in order to buy.

Steli Efti:

Oh no, you don’t know what we’re going to do.

Hiten Shah:

So, we’re going to make them pay to come in.

Steli Efti:

You know what is our problem? That our toilets are not really as nice and upgraded and you know what else? We should have more fliers and we should have a loyalty … You know what we need for our coffee shop? A loyalty program, because we need to get people back into the store.

Hiten Shah:

Yeah, the coffee shop across the street has a loyalty program. That’s why they’re always packed, right?

Steli Efti:

Exactly.

Hiten Shah:

And people are buying. No, it’s actually your coffee. Your coffee sucks dude.

Steli Efti:

Yeah.

Hiten Shah:

Yeah. I’m leaving you with that analogy ’cause I think when we start putting it into that framing, you get away from the growth hacks and you realize that the real problem is your business, your core business, your product. Right? More than anything else. Before you grow, you need to figure that out and I know … I thought this was common wisdom at this point, that you’ve got to have a product that people care about and that people love before you try to grow it, but I think that people are just trying to solve these problems in the sort of, “I’m just going to tactically try to think of all these hacks or implement these hacks other people have tried,” and then it’s worked for them. The reason these things worked for them is because their product doesn’t suck.

Steli Efti:

Yeah, and I think that it’s so easy to look at other companies, and feel like they have built this huge monster in terms of, their product is really feature rich, they have really a beautiful optimized website, they have all these different marketing properties. They do all of this advanced stuff in terms of converting people, from customized messaging, Drip emails, all that stuff. You look at all that and when you start, you don’t have any of this shit in version one, hopefully in your MVP. Then when your numbers are bad I think that a lot of people take the easier route to just go, “Well of course our current version never sounded good because our website really sucks and we don’t send Drip emails,” but that’s not really the reason. Drip emails and all this stuff should help improve something that’s already kind of working. It’s not going to make something work that isn’t working at all right now. If people … To make this more extreme. If you had to even make this more extreme. If you had like 10,000 people sign up for a trial, and zero upgrade to pay, Drip emails are not gonna save you. Like, it’s not working. Now, if you have a good conversion and you are not sending Drip emails, and you write a really good Drip email campaign, it will give it a lift, it will increase it incrementally, but it will not fundamentally fix your issues. Having a better website, like again, to bring up as a good example for all the things we did wrong and we still succeeded with it because we had product market fit. We launched a website that took us like three hours to put together, just a single landing page, and for four years we hadn’t changed the fucking website. Right, and it was not a great website, but it was just working well enough because our value proposition, and understanding of your customer was good enough. So, I feel like a lot of founders just-

So, yeah, I bring up as an example often, but when we launched, it took us two, three hours to put together a single landing page for to launch. For 3 1/2 years, we didn’t change the website at all. It was not that great of a website, but the reason why it still worked, and converted really well for us, is that we understood our customer, and we had a really great product, and product market fit. So really, I think what I want to round up the episode with … I love your real life example. I think this is such a great thing, framework, that I’ll use now in many situations, where it’s when you have a difficult problem as a tech company, or a company to be like, “If I ran a coffee shop or a pizzeria”-

Hiten Shah:

Yeah, what would happen-

Steli Efti:

And three out of … How would I look at this? That’s pretty brilliant. But I think my last parting words here is that often times, I think it’s easy to look at parts of your product or business that are not that great yet, and think that’s the reason why you see zero success or why things don’t work at all. But, that is really rarely the case. A perfect website will improve things incrementally. Better drip emails will improve things incrementally. Whatever kind of growth hacks to get more traffic should improve things incrementally. But, the fundamentals need to be there for you to scale something. When the fundamentals aren’t there, when … Most people that come decide not to buy your coffee or the people that buy your coffee never want to return to buy another coffee, there’s something fundamentally wrong with your product and you understanding who you’re serving and what your customers need. And no nicer toilet, or no better like, lighting of the storefront … None of that stuff will really fundamentally fix things. So, I think that that’s my main message to people. And it doesn’t really matter if you’re in the early stages, later stages. We all have situations with something fundamentally doesn’t work. And we try to fix it by working with incremental things, and tactics versus taking a few steps back and ask ourselves, “Why isn’t this working? Like, what’s fundamentally going on here? What’s wrong?” And trying to fix that. And the route to fix these things always, always, always, as we’ve said so many times on this podcast, is your customers. You don’t understand your customers well enough. You’ve lost touch with your customers. You don’t have the right insight when it comes to serving your customers. That’s always the place to go back to really understand what to do next in your business.

Hiten Shah:

Completely agree.

Steli Efti:

Also, from us for this episode. We’ll hear you soon.

Hiten Shah:

Later.

The post 235: When Growth Hacks Can’t Save You appeared first on The Startup Chat with Steli & Hiten.

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