We start companies because we think the world needs what we’re offering: a new product or a new service. But what proof do we have that this is actually true? Traction, which comes in the form of either revenue or users.
My favorite definition of traction is “growth in repeat customers.” Let’s unpack this.
The easiest type of business to start is one that makes money. I know it sounds obvious, but I talk to so many people who don’t agree!
I recommend focusing on revenue right from the beginning, as this gives you the most options:
- Making money forces you to understand your customers: what are their pain points and what are they willing to pay to solve them?
- Making money proves your business model and it gives you flexibility: do you want to keep growing organically or do you want to find investors?
Airbnb and Uber are examples of companies that had revenue from the beginning. Sure, Uber gave lots of rides away, but they also had a pricing model that worked from day one because people were willing to pay for transportation on demand.
Uber then chose to lower their pricing below alternatives like taxis, and they paid for it by raising more money than the competition (I would argue that they didn’t need to lower their price as long as they were winning on features, but that’s a separate topic).
When is it okay to not make money? When you’re attracting new users like crazy. Great examples of this are Snapchat, Facebook, and Instagram.
It’s critical to note that all of these companies sell advertising and therefore need a giant user base in order to make any real money. So they give away value for free in order to sign up users. They turn around and sell these eyeballs to advertisers and sponsors as soon as they reach critical mass.
But the math isn’t friendly for making money from advertising. The last Facebook campaign I ran cost $1 per 1,000 impressions, so you’d need to have 10 million page views to make $10,000 per month. That’s a lot of page views! Your customer growth has to be impressive to raise money.
Peter Thiel was the first professional investor in Facebook, famously providing $500k for about 10% of the company. Why? Thiel describes it as a “no-brainer” because Facebook was so popular that their servers were crashing. So he felt he wasn’t really taking a giant risk.
It can be harder survive on user growth because you have to raise money in order to pay the bills. This makes you dependent on investors, which means you need impressive numbers to attract their money. You have fewer options in the beginning than you do with revenue. But these companies eventually become some of the most valuable in the world.
Here’s the hard part: regardless of whether you’re growing revenue or users, it actually doesn’t matter how many new customers you find. In fact, you can go out of business signing up new people.
What actually matters is how many of those customers come back repeatedly.
If everyone only uses Airbnb one time, the company will eventually go out of business.
If Uber pays everyone $20 to take their first ride and no one ever comes back, the company will eventually go out of business.
For both revenue and user growth you’ll need repeat customers to stay alive.
I know two companies that both charge an initial fee to new customers. For one of them, that’s it. The other also charges a monthly subscription and is seeing a 90% renewal rate after the first year. Guess which one has been able to attract millions in investor money?
What to expect
What does this look like in real life? Here’s an example from Airbnb:
Airbnb had painfully slow growth at first. So painful, in fact, that they weren’t able to raise money and the founders were famously forced to sell cereal during the 2008 election in order to make ends meet. Fortunately their breakfast operation netted $30k in a few months! Plus their hustle impressed Paul Graham enough that he let them into Y Combinator’s 2009 class.
Airbnb had to constantly reinvent themselves in order to grow. Their first growth hack was to tap into Craiglists’ enormous user base. Smart! But it wasn’t enough.
Brian Chesky, one of the founders of Airbnb, says:
“We start with the perfect experience and then work backward. That’s how we’re going to continue to be successful.”
Chesky means it! In the summer of 2009, Chesky lived in Airbnb listings in order to get first-hand experience with the service. That led to multiple improvements including the crucial realization that Airbnb needed to provide professional photographers to make their listings stand out.
Traction typically happens on an exponential curve, so it’s painfully slow to gain momentum. But once you find product / market fit the traction curve steepens dramatically. In Airbnb’s case the photographers were the final piece in the puzzle.
Regardless of whether you’re finding traction with revenue or signups, it’s crucial to understand your customer so well that you keep them coming back for more. It’s these repeat interactions that will ensure the success of your business—and grab the attention of investors.
Written by Mike Lingle — Read more practical suggestions for startups atmikelingle.com.