@andrewchen

I’ve had two recent conversations in which people have mentioned the “grow first, monetize later” philosophy as one of the signs of the coming bubble apocalypse, and this post is to argue why it’s very smart and rational to focus on getting millions of users first. (This post is part of my 2011 blogging roadmap)

Regarding monetization, I’ll note that…

• in general, consumer products mostly suck at monetizing
• any business model built on 1% subscriptions of 0.1% ads need millions of users
• costs are ridiculously low for new startups, and N millions of users is not expensive
• ignore this for products like marketplaces where monetization is part of the value prop

An ad-based example
Here’s some quick math- let’s say that you are a typical seed-stage team of 4 trying to get your startup off the ground, and your burn is approximately $40k/month. If you monetize at $0.25 CPM, which is a pretty typical ad rate for every thousand ad impressions, then that means you need a whopping 160M ad impressions per month to break even[1]. Even if you get 2X or 10X that ad rate, you’re still in the millions of users to get there. Scary right?

A subscription-based example
Similarly, if your site has a freemium business model, you’ll find that something like 1% of users subscribe for a pretty nicely tuned freemium configuration. So if you have 1% of registered users paying you $5/month, that means your average user is worth $0.05. Given this, you’d need 800k registered users, and if only 10% of your users register, you’ll need millions of users to get there.

Ultimately, the key is new user growth
Given the difficulty of monetization for consumer products, ultimately the best way to get to breakeven isn’t to try to optimize the 1% subscription rate to 2%, but rather to pick a huge market, create a killer product, and try to acquire millions of users. Because this is the biggest risk, you want to focus on growth first and foremost.

Here’s a different analogy that Steve Blank uses to get at this- let’s say that you wanted to create a cancer-curing drug. You don’t need to crunch the business model for that- if you had it, it’s valuable. You don’t need to price test or do customer development. All the risk is in the science, so you just focus on the science.

Similarly, I’d argue that in consumer internet, the real risk is that you can’t get millions of users actively engaged in your product, and that risk is ultimately driven by growth and long-term user retention. Thus focus on that first, then figure out the monetization once you’re at scale.

Stuff is so cheap these days
Note also that running a site with millions of users is cheap. The cost of hiring developers/designers will vastly overshadow the cost of maintaining the infrastructure- all you need are a few dedicated servers or just use Amazon Web Services- unlike the 90s, you don’t need a huge datacenter to get started. Because these costs are pretty low, you can just focus on making sure your designers and developers are productive and you’re getting to product/market fit.

Ignore this advice for products where revenue is part of the value prop
Of course for products where you are helping people make money as the central value, you need to do this sooner rather than later, so that you can make the entire network happen. So if you’re building a marketplace, collect money early, even if you don’t take very much profit. Same with Groupon-esque startups.

[1] CPM to revenue calculation
$0.25 CPM = $0.25 for every 1000 impressions
$0.25 / 1000 = $0.00025 per ad
$40k burn / $0.00025 per ad = 160M ad impressions per month

This post is part of my recent 2011 blogging roadmap post, where I created an outline of going from zero to product/market fit. Getting to this endpoint is obviously a good goal in theory, but question is, what does it even mean to hit this goal?

The original definition
In Marc Andreessen’s original post on the topic, he writes:

Product/market fit means being in a good market with a product that can satisfy that market.

You can always feel when product/market fit isn’t happening. The customers aren’t quite getting value out of the product, word of mouth isn’t spreading, usage isn’t growing that fast, press reviews are kind of “blah”, the sales cycle takes too long, and lots of deals never close.

And you can always feel product/market fit when it’s happening. The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can. Reporters are calling because they’ve heard about your hot new thing and they want to talk to you about it. You start getting entrepreneur of the year awards from Harvard Business School. Investment bankers are staking out your house. You could eat free for a year at Buck’s.

His partner, Ben Horowitz, follows it up with a bunch of other observations about the fact the event isn’t a “big bang” kind of event – instead, there’s lots of gray area as your product starts working for the market: I’d encourage everyone to read his subsequent post here.

So the short answer is, there’s no easy test.

Now given that caveat, I’m going look at this through the lens of consumer internet to add some additional thoughts.

What is a market anyway? And how do you validate it’s real?
How do you even define a market for consumer internet? Ultimately, I concluded that the most useful definition of “market” is 100% consumer-centric. Here’s an attempt at a simple definition, focused on consumer internet:

A market consists of all the consumers who can search for and compare products for a use case they already have in mind.

This definition is very focused on the notion of pre-existing demand for products in your market, and is scoped narrowly to avoid confusion.

The most concrete test of pre-existing demand is using the Google Keyword Tool, which tells you how many people are searching on Google for a particular keyword. To try this out, you’d execute the following steps:

1. What keyword do people search to get to your site?
2. Put those keywords into Google Keyword Tool
3. How many people are searching for this keyword?

If the answer to #3 is large (millions or more), then you have a large market. This test is very concrete, and also very finicky. By design, terms like “vacation package” score high on this test, whereas “travel experiences” do not, even though an educated entrepreneur or investor might abstractly group them together. Similarly, by design, a person who’s building a “social network for musicians” might be inclined to list the # of musicians in the US as part of their market sizing, but under this test, you’d quickly see that there’s not too many people are specifically looking for that. Also interestingly enough, you’d never say there was a “Photoshop market” but a quick search will show that in fact almost 40 million searches per month on “photoshop,” and it might be a great strategy to position yourself relative to that keyword.

Validating that you are part of a pre-existing market comes with all sorts of benefits, which I’ll address in later posts. But for now, the most important benefit is that you know the # of potential customers is large.

(In general, I’ve been constantly confused about how to even define a market in consumer internet, given that there’s so much similar featureset between otherwise very different products. For example, early on, people talked about “social” as if it were a type of site, whereas now it’s seen as an aspect for all new products coming to the web. Similarly, people sometimes talk about “Facebook apps” as if it’s a market when, again, it’ll probably just end up an aspect of every new online service.)

What’s a great market?
What are other attributes that make a market attractive? For consumer internet, a great market is commonly defined by:

• a large number of potential users
• high growth in # of potential users
• ease of user acquisition

Not competition, in my opinion, because for consumer internet there is often literally billions of potential users, and you’re mostly competing against obscurity. So even if there’s a ton of competition, if it’s easy to acquire consumers to your product, that’s great! Then get a good enough product, and you’re ready to go.

Not monetization, in my opinion,  because making money is pretty straightforward. You can throw on some ads and get $0.1-$1 CPMs, or you can charge subscription rates and get 1% to convert, or you can do the virtual goods thing. The biggest risk in all of these monetization models is really about whether or not you can get millions of users or not.

Picking a great market leads to better products
Leading with a great market helps you execute your product design in a simpler and cleaner way. The reason is that once you’ve picked a big market, you can take the time to figure out some user-centric attributes upon which to compete. This leads to a strong intention for your product design, which drives a clean and cohesive UX. In a market of all black Model Ts, you can sell otherwise identical cars of different color and that’ll work. Picking the right attribute is it’s own topic though!

The important part here is that you can usually pick some key things in which your product is different, but then default the rest of the product decisions. This means that your product’s design can be more cohesive because you’re trying to do less, but better.

Once you’ve executed your product, then there are various ways to validate that it’s “good enough” and your product fits the market:

• When user testing, do people group your product in with the “right” competitive products?
• Do they understand the differentiation of your product versus your competitors?
• Will some segment of users in the overall market switch to your product?
• Are some users who’ve “rejected” the products in the market willing to try your product?
• How do your underlying metrics (DAU/MAU, +1 week retention, etc.) compare to your competitors?

All of the above are signals towards product/market fit. Thee above tests are interesting in that they fundamentally anchored on pre-existing competitive products in the category. In a new market, you don’t have the luxury of comparing yourself to other things.

In future posts, I’ll try to give some more concrete metrics based on my research for what are good numbers in each of these cases, but for now, the important idea is just that in a large existing market you have more datapoints to at least say, “my product is at least as good as the other guy’s.”

New markets are a danger to good product design
In fact, one of the scariest things to me about new markets is that doing great product design for them is extremely hard. It’s so unconstrained that it’s hard to do anything other than add features, see what sticks, and iterate. This is fun except that keeping a cohesive product experience is quite hard, and removing features is usually harder than adding them. So at the end, you incur tons of product design debt that never gets paid off. (It’s not a surprise to me that Apple has a history of simplifying already successful product categories, rather than inventing brand new ones from scratch)

Conclusion
To summarize my main points in this essay, I’ve come to some simplifying definitions on how to validate product/market fit in consumer internet. For market, if you constrain the definition to people who know how to search for products in your category, you can develop a pretty concrete test evaluating pre-existing demand. And by leading with a market, you can develop a central design intention that leads to better product design. This in turn can then be validated by comparing your product metrics to competitor numbers, as well as user tests that focus on grouping and differentiation.

This leaves lots of unanswered questions, but hopefully is a start to my new blogging roadmap! More to come soon.

One important question that comes up all the time is, what makes a product easy to market?  I had a fun chat about the topic with Eric Florenzano and Eric Maguire who worked together at Mochi Media with my sister Ada. They also recently did YCombinator.

After the chat, eflo wrote up a helpful summary of some of the ideas we covered. I wanted to quickly share them with some comments:

1. Come up with one resounding use case–one thesis for how people should use the product.  Preferably this fits in with something that users already do and already understand.