3 Cornerstones of Successful Technology Products
92% of all startups fail within the first 3 years, why? They don't follow these 3 vital cornerstones to be successful.
Why do so many startups fall short and fail to deliver?
Chances are, if you’ve started a technology company to make a lot of money, it turns out that you are bad at math—or simply delusional. Statistically speaking with startups, your odds of cashing out with that big-time payday are somewhere between zero and almost zero.
Ninety-two percent of startups fail within the first three years. Not only that, about one percent of apps in the Apple App Store are even financially successful. For the fortunate few companies that raise a round of venture funding, seventy-five percent will fail to generate a return on the investors’ capital.
So why do some companies scale to millions of users while others get lost in obscurity? What quantifies the runaway success of a company like Facebook while a startup like Vine, a social app for video sharing, attracted millions of users and millions of dollars in financing and backing from Twitter, only to lose both?
When it comes to startup success, there’s never a silver bullet or golden goose. Although as the British statistician George Box once wrote, “All models are wrong, but some are useful.”
Perhaps the hardest part about running a new business is knowing what and when to prioritize. There are hundreds of decisions to be made, and keeping sight of what’s important and what’s not is a constant upkeep. When it comes to helping teams stay focused, we have found one model to be extremely useful: it’s called the GEM framework. The origin story of the framework is uncertain but we’ve heard a similar model was first used during the early stages of LinkedIn.
The company’s job is to find a sustainable way to deliver value to customers, employees, and shareholders. To do this, the company must never lose sight of its GEM: its growth, engagement, and monetization.
Pillar 1: Growth
Growth is all about how a company acquires new users or customers. Fundamentally, it’s about getting the right message in front of people whom you're solving a problem for. We like to call these messages “external triggers.” External triggers are delivered through various channels, including tv commercials, salespeople, emails, or word of mouth.
Certain external triggers cost you nothing, like one satisfied customer telling another about your product. Others, like running ads on Google or buying airtime on your local radio station, can cost big bucks.
There’s nothing inherently better or worse about one external trigger versus another. What matters is whether the trigger fits your business model. Viral growth is wonderful but difficult to engineer and sustain without constantly feeding the monster. On the flip side, purchasing media can produce a steady stream of customer interest but can also be expensive. The ultimate growth question to answer is: “Are we getting better at drawing the attention of people who need our product?” And quantifying the answer to that question means tracking the number of new users or customers over time as well as the cost of earning their attention.
It’s important to recognize that growth is not just a process but a practice, and not an end state. Companies that satisfy their growth strategy are at risk of losing customers to their competitors. The term "Growth Hackers" comes from manically looking for new channels and relentlessly testing how many potential customers can be found and for what costs.
Growth question: “Are we doing a better at grabbing the attention of people who need our product?”
Growth metric: The Number of new users or customers, and the cost of acquiring them.
Pillar 2: Engagement
With some types products and services, customer engagement is organically infrequent. Think of the way people purchase real estate or book vacation travels; AirBnB and Uber are great examples. Other types businesses require constant, habitual engagement to survive. Apps like Twitter, Instagram, Facebook, Slack, Salesforce, and Snapchat need to become a habit for their users, or else they go out of business. If the service isn’t used often, they go out of style. These products become less useful, and eventually customers never return.
How can apps retain users? Retaining customers means keeping them engaged, whether they’re checking in on an app (SnapChat is constantly updating filters) or checking out of a purchase. Some businesses depend on repeat customer engagement more than others (AirBnB relies on it's users having a great experience on their stay and recommending it to their friends). Probably the most critical metric for investors, founders, and employees is to understand what brings people back, and what makes the app habitual.
To track user engagement, companies should calculate the percentage of people using their product or service frequently (often referred to as the Churn Rate) enough to be classified as “retained.” For some products it’s once an hour, for others it’s once a year. The golden question “Are we getting better at engaging users who need our product?” is answered by taking the calculating growth in the percentage of retained customers/users.
Engagement question: “Are we getting better at engaging people who need our product?”
Engagement metric: Percentage of retained users or customers.
Pillar 3: Monetization
Lastly and probably the most important comes monetization. Companies need to turn some of the value they create for users into revenue or they'll go out of business. There are multiple avenues to capture value. Some examples could be:
- Companies can charge a subscription fee.
- Sell a one-time purchase.
- Create marketplaces where they take a share of the transaction between buyers and sellers.
When it comes to monetization of a web app, the most crucial question is: “Are we getting better at capturing the value we create?” The metric here equates out to profit. It’s essential to not only to ask how the company is doing right now, but also to understand how much untapped demand exists for the product or service that can create for it's users. This is the only way to predict whether a company will be sustainable in the near term and to make bets on how much growth the company can build in the future.
This is where people get “lucky” with startups. While skill, diligence, perseverance and process drive user growth and product engagement, predicting future tech markets is notoriously tough.
People tend to try to predict future markets by reading industry reports, designing models, and crunching numbers. However, with everyone having access to the same information, people tend to come to similar conclusions. That’s why being right just doesn't cut it. Paradoxically, if you are right and everyone agrees with you, competitors will see the opportunity too, enter the market, and eat away at your profits. If you're not first to market, you're first to fail.
When it comes to monetization over the long term, there’s only one way to achieve it: you’ve go to see a future demand for the market that others don’t. If you can spot the big untapped market on the horizon, you’ve got to, as Warren Buffett advises, protect it with “unbreachable ‘moats.’” In days of old, a castle was protected by the moat that circled it. The wider the moat, the more easily a castle could be defended, as a wide moat made it very difficult for enemies to approach. A narrow moat did not offer much protection and allowed enemies easy access to the castle. To Buffett, the castle is the business and the moat is the competitive advantage the company has. According to Buffett, the wider a business’ moat, the more likely it is to stand the test of time. He wants his managers to continually increase the size of the moats around their castles.
There are only five ways to defend your market from competitors:
- Economies of Scale
- Network Effects
- Regulatory Protection
Monetization question: “Are we getting better at capturing the value we create?” Monetization metric: Profit - How much is earned.
The GEM - A Necessary Amalgamation
Growth, Engagement, and Monetization are interlinked, and each Pillar is insufficient in standing on it's own. The most highly engaging, habit-forming products and services will fail if it’s used only by a small number of people who pay too little for the service. The overwhelming majority of web apps are never found by a critical mass because the companies behind them have failed to find a way to profitably draw users’ attention.
An amazing growth strategy using the latest viral hacks is pointless without a way to retain and profit from the growth. Viddy, the video-sharing service and Snapchat predecessor, shocked the Silicon Valley in the spring of 2012 by acquiring nearly three million users in a month. Shortly after investors pumped $30 million into the company, it became clear the app was a leaking ship that could not retain its users.
Huge market potential is useless without a way to profitably reach and engage customers. For example, music-streaming services like Spotify, Apple Music and Pandora are a daily habit for millions and millions of people, but if song owners manage to extract all the value by imposing stricter copyright terms (like Taylor Swift did with her music), they have the power to destroy the music streaming services.
Of course, businesses have to worry about all sorts of other things. Thinking through the GEM framework is extremely effective for keeping teams on track. These three pillars help make sure the team is allocating resources correctly. When it comes to monitoring and regularly communicating what matters, the GEM framework is should always be the fall-back the company should go back to.
If you’d like to talk more about Growth, Engagement and Monetization of your next web app, it's as easy as clicking the icon on the bottom right of your screen and starting a conversation. We’ve got plenty of experience in developing web applications for startups and fortune 500s. See how Cali Style's software development can tap the potential for your industry utilizing our own isomorphic web app technology.
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