Turning One Thousand Customers into
One Million
How Uber, Etsy, and Airbnb climbed from
one thousand customers to one million.
Few companies in the past few years have
rocketed to success faster than Uber, Airbnb, and Etsy, which together have
transformed the way we hail a cab, plan a vacation, and shop for handmade
gifts, respectively. In a previous HBS Working
Knowledge article, How Uber, Airbnb, and Etsy Attracted
Their First 1,000 Customers, we explored how these two-sided
platforms got their start and attracted a significant number of early adopters
based on a Harvard Business School case that professor Teixeira wrote with
Morgan Brown.
As impressive as that accomplishment was,
1,000 customers is hardly enough to ensure long-run success. For that, these
companies had to scale up dramatically, from 1,000 to over 1 million, which is
the subject of a sequel case study by Teixeira and Brown.
Importantly, the strategies that made these
companies successful starting out are not the same ones to take them to the
next level.
To get from zero to 1,000 customers, the
three startups faced a chicken-and-egg problem: How could they attract
suppliers if they didn’t have any users? For example, how could Uber recruit
drivers with only a few customers, and at the same time, attract customers if
there were no drivers? How could Airbnb convince potential room renters to join
its platform without a large catalog of potential places to stay?
To overcome those challenges, the startups
followed similar strategies, initially focusing more on the supply side than on
the demand side.
In addition, they worked hard to find early
customers by matching them “by hand” with early suppliers (e.g., Etsy scoured
craft fairs to sign up artisans); acquiring them in bulk (Uber ran promotions
during concerts and events); and doing whatever it took to make their offerings
attractive, even if it wasn’t scalable (Airbnb hired professional photographers
to take inviting photos of hosts’ apartments).
Following those guidelines, they were able to
gradually improve their products and identify what made them resonate most with
customers and suppliers. Only after that was scaling a possibility, requiring a
gradual—not abrupt—shift from catering to the supply side toward catering to
the demand side.
Building on the initial 1,000
After surpassing 1,000 customers, organic
opportunities for the companies to acquire more customers and suppliers in bulk
became increasingly rare. So Uber and Airbnb turned to digital marketing as a
targeted way to reach new people. Unlike traditional mass media advertising
such as local TV commercials or print ads, which are expensive and
time-consuming, paid digital media such as Google search ads, Facebook ads, and
YouTube video ads offer many benefits that make them better suited for platform
startups.
Among them are low setup cost, allowing
companies to start advertising for as little as $10 a day; precise targeting—to
specific demographics, or based on life events such as birthdays or similarity
to current customers; short creative development time and deployment of ads
within minutes; and ease of experimentation.
Taking all these factors into account, a
startup can create dozens of ads within just a few days, and learn quickly and
cheaply what is most effective to attract suppliers.
Uber, for instance, made extensive use of
online advertising in various social media platforms to recruit more drivers.
It created a model to understand and identify factors that caused individuals
to be interested in signing up to be a Uber driver. Were they part-time workers?
Did they own a car? Were they in cities with low wages or in cities with high
unemployment? (In fact, given its extensive data on drivers, Uber today is
arguably as well informed about low-wage workers as the US Department of
Labor.)
By gathering this information, Uber was able
to use the online ads to identify the right drivers.
Etsy followed a different track. Rather than
market through digital media, it let suppliers do the advertising. To do this,
it provided support to the sellers to market their crafts and in turn, market
the Etsy platform to their loyal customers. Etsy created a “Seller Handbook”
and other internal management tools for sellers to better process orders and
stay in touch with customers through integrated social media. Eventually, Etsy
fostered an ecosystem of more than 150 third-party apps and tools to empower
and support the sellers.
Shifting from supply to demand
As these platforms began acquiring new
customers using digital marketing and social media, those customers started behaving
differently from the early adopters who had been acquired in bulk or by word of
mouth. In particular, they were not as forgiving of lower-quality products and
services, and not as willing to pay premium prices for anything less than
perfection.
To retain these new customers, platform
entrepreneurs needed to deeply understand their needs and wants—and how their
offering was differentiated from others in the market. One obvious way to do
that was to ask customers what they wanted. As Airbnb cofounder Joe Gebbia put
it, “People told us what they wanted, so we set off to create it for them.”
Airbnb maintained a culture of testing many
features on its website and soliciting feedback from its most loyal and vocal
customers. What the Airbnb team learned: If you provide a channel and listen,
people will tell you what they want once. But to get that a second time, you
need to quickly respond to their prior requests.
Very quickly, they learned that cleanliness
mattered, so a cleaning and laundry program was created to support the hosts.
Trust, they realized, was another issue, so Airbnb Social Connections was
introduced, which leveraged customers’ social graphs via Facebook Connect so
that hosts were no longer anonymous. Finally, they realized that price was important,
so they concentrated on growing in cities with high priced hotel rooms, where
hosts could charge from 30 percent to 80 percent lower prices than hotels in
the same location.
While that kind of direct feedback was
helpful to Airbnb in shaping its offering, it wasn’t enough for Gebbia and
cofounder Brian Chesky. In order to uncover more opportunities for improvement,
they made the unusual move of using their own services, envisioning a perfect
experience and working backward to see what needed to be changed to meet that
vision.
Those two paths—asking customers what they
wanted and building it forward, and envisioning the perfect experience and
creating it backward—aren’t an either-or decision. As Airbnb’s experience
shows, both approaches should be followed jointly.
Write a market expansion playbook
By first going after the supply side and then
shifting to the demand side, all three platforms gained traction in the markets
they initially entered. At that point, however, they faced a critical decision
in the life of every platform business: where and how to expand. Few startups
answered that question better than Uber, which ramped up its business
incredibly fast.
Having proven the original business model in
San Francisco and New York City, Uber’s founders realized that in order to
choose their next target cities, they needed to understand the “accelerants”
that worked as tailwinds to catalyze adoption by customers in a particular
locale. Analyzing their successes, they distilled the factors down to a few,
among them density of restaurants and nightlife, destination for holidays and
events, availability of strong sports franchises, and temporary bad weather.
Together, all these factors ensured a steady
stream of people who went out at night either to drink with friends or to
attend concerts and sporting events and wanted to avoid the hassle of parking
or looking for a cab on a rainy or snowy night. That was the case for Chicago—a
city with a great nightlife, intense weather, and tons of sporting events—where
Uber’s initial viral growth was double that observed in other cities.
These accelerants became the basis of Uber’s
market expansion playbook, and were some of the factors it looked at to drive
its launch as it expanded into new locations. CEO Travis Kalanick explains:
“After a platform finds a formula that works, it needs to distill the formula
into principles, catalysts, and a to-do list to transfer the formula to
managers it hires to expand in different regions or industry verticals.” His
advice to startups: create that playbook as quickly as possible.
Shifting away from what worked
Going from zero customers to 1,000 customers
can be a slow process for platforms because of the need to acquire both
providers and customers of products and services in a balanced manner. By
contrast, going from 1,000 to 1 million can be a fast ride—but only if
companies are willing to shift their tactics to try something new. The
strategies that incentivize early users to join are fundamentally different
from those required to scale up the platform.
The hardest decision faced by any growing
startup is when to abandon the actions that made it successful in the first
place in order to achieve more success in the future. Failure to do so at the
right moment may result in a strong reduction in the momentum of the company.
By contrast, having the courage to change in favor of new marketing strategies
can help a company succeed in the long run, and position it for even greater
growth going forward.
by Thales S. Teixeira and Michael Blanding
http://hbswk.hbs.edu/item/turning-one-thousand-customers-into-one-million?cid=spmailing-13791177-WK%20Newsletter%2011-16-2016%20(1)-November%2016,%202016
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