Author points to innovators on how to acquire your first 1 million customers

By Shelley Seale

INMA

Austin, Texas, USA

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What can news media publishers learn from the early customer journeys of Facebook, Netflix, Airbnb, Etsy, and Uber? Plenty.

Thales Teixeira, professor of marketing and author of Unlocking the Customer Value Chain, took the stage as keynote speaker at the INMA Media Subscriptions Summit in New York to discuss how news media companies can get to 1 million subscribers.

The Harvard Business School professor was invited to talk to Facebook in 2011 and, through those conversations, learned the path the company took to acquire its first few thousand customers. Teixeira went on to do the same thing at Netflix, Airbnb, Etsy, and Uber, among others.

Harvard Business School professor Thales Teixeira leads INMA members on the journey to one million subscribers for companies such as Rebag, Airbnb, and Uber.
Harvard Business School professor Thales Teixeira leads INMA members on the journey to one million subscribers for companies such as Rebag, Airbnb, and Uber.

To demonstrate the path to 1 million customers, he used the case study of Rebag, a secondhand luxury handbag company founded in 2014 by Charles Gorra. The start-up raised US$5 million to buy bags and acquire customers online, inviting them to sell their bags via consignment on the site.

The problem they immediately faced, however, was that although people were interested in selling their handbags, they didn’t want to go through the whole process of consignment — having to mail in the bag, wait for it to sell, wait to get paid, etc.

“He started with Google and Facebook ads to acquire his first thousand customers,” Teixeira said. “As he did this, however, he realised it was very expensive to acquire those customers.”

At a cost of US$300 per customer, most of the potential profit was spent on the ads.

“He had to find other ways to acquire customers.”

The high cost of customer acquisition through platform ads

Teixeira explained why that method of customer acquisition is so expensive. First, you have to get the prospects’ attention. At 1.5% per user click, you’re paying about US$3 per user click — but 70% of these visitors will bounce.

“When you look at the cost of a user that actually browses your Web site, it’s US$15 on average,” Teixeira said. Only a quarter of those will actually consider buying or place an item in the shopping cart, and half of those will abandon their cart. If they do complete the purchase, there is a 25% return rate.

“For every 1,000 people you get to your Web site, you only capture .01125% of them,” he concluded.

“It’s a crowded space, very expensive, and a very uncertain place to acquire customers. It’s a large numbers game, and to play it you have to have deep pockets. It doesn’t work well for new or startup companies.”

The Rebag team realised that to get their next 1,000 customers, they needed to do something different. Google and Facebook were too expensive. Gorra came up with the strategy to advertise to buy the customers’ handbags upfront instead of using a consignment model. This way, he avoided competition, saved money, and acquired potential customers who might go on to purchase another bag.

Getting early customer feedback

At this point, Gorra took a very important step: He went back to those early customers and asked them why they had signed up. He wanted to know what they liked about Rebag, and just as importantly, what they didn’t.

“He started seeing that his early customers could do so much more for his company than just being customers,” Teixeira said. “He started an influencer programme. He learned that most of the people who ended up buying the bags were actually influenced by professional sellers of luxury handbags.”

The Rebag influencer programme, therefore, targeted sales people in high-end stores who would tell their clientele about Rebag and how they could monetise their closets through the programme. These influencers helped Rebag acquire many customers at once — and drastically reduce the customer acquisition cost.

“But to go from 100,000 customers to a million, this strategy wouldn’t cut it,” Teixeira added. “There are only so many luxury stores and sales people.”

Rebag had to change its strategy again. Gorra realised he needed to access a much wider customer base and pay a higher cost to do so.

Cost versus scale

Through this trial and error as Rebag grew, Gorra experienced one of the challenges of digital marketers: the issue of acquisition cost versus scale.

“You start off trying something, such as search engines,” Teixeira said. “But you can’t really influence this process. With the influencer program, [Rebag] was able to reduce cost dramatically. But eventually they tapped out of this, and realised they needed to scale.”

Rebag moved its customer marketing strategy to local television commercials, then social media, and then mass media. “[Gorra] saw he had to give up cost in order to be scalable.”

The place of low cost and scalable doesn’t exist, Teixeira said. Rebag needed to move to other channels and give up low customer acquisition cost in order to grow and scale.

“The evolution of customer acquisition requires trade-offs. Which of the evils are you willing to do?” Teixeira asked the audience. “Low scale but low cost, or high scale and you have to pay more? The important thing is that you find the right method for you.”

As he worked with Rebag and other companies like Airbnb, Uber, and Etsy, he began seeing a pattern in the steps each one took to acqure their first 1 million customers.

“Subscription is a solution to a customer problem — not to your problem,” Teixeira said.
“Subscription is a solution to a customer problem — not to your problem,” Teixeira said.

The five-step journey to a million

Teixeira led the audience through a five-step process to acquiring 1 million customers: 

Step 1: Acquire customers in bulk.

“Acquiring one customer at a time is very expensive and too slow,” he said. “Start-ups do something else. They use other people's networks (OPNs) to get access to a large group of customers at once. They say, I’m going to find out where there’s a network that has a large group of customers that I want.”

Airbnb for example, knew its potential home rental customers were on Craigslist. So they contacted Craigslist posters to bring in customers to the Airbnb platform.

Uber thought about another network: They looked at late-night events when people were leaving but there were a limited number of taxis available. “They tapped the network of venues and they got many customers at a time,” Teixeira said.

For Etsy, the natural network to go to was Ebay.

“Thinking about OPNs that you can tap into, they can be online like social media groups and online communities, or offline like events, schools, churches, and malls.”

Step 2: Avoid direct competition as long as possible.

“If you advertise in mass media, your competitors will be the first ones to see your ads,” Teixeira said. “The competition will emulate, counteract, fight, and copy these startups. They need to stay under the radar. Startups started to go for the marginalised or neglected customers of established companies.”

For example, Airbnb went to big event cities, such as Austin, Texas, during the SXSW Festival, where there were many more people who needed a place to stay than there was available supply.

“Stay under the radar and capture customers at the fringes before you go mainstream,” Teixeira advised.

Step 3: Do the necessary offline networking.

Many entrepreneurs make the mistake of thinking that online tools are better and more scalable. “These companies really realised they needed to go into the real world to acquire customers, not just work from their computer,” Teixeira said. “In reality, offline activation is much more important in the beginning.”

Etsy went in person to arts and craft fairs to talk to people. “You get supply and demand, then it snowballs and grows.”

Airbnb looked at their New York market, which wasn’t doing so well. They looked at listings on their site and realised the pictures were largely awful. So they started offering to send customers professional photographers to go out and take the photographs for free. The quality of the listings improved dramatically, and this brought renters to their homes.

“Quickly, Airbnb became a big thing in New York City,” Teixeira said. “They went one-to-one to really get there.”

Step 4: Have your early customers do more for you.

“As a nascent business, you probably don’t have the ability to hire marketing people, R&D people, and sales support,” Teixeira said. “What these platforms did was [say], if we don’t have the money to do that, we’re going to let our customers do it for us.”

Airbnb asked its first guests to tell them about their experiences, and what needed improvement (R&D).

Uber asked first riders to tell others about their experiences (marketing).

Etsy had its early and most experienced sellers and buyers answer the questions of other customers (customer service).

Step 5: See things through your customer’s eyes.

“This is so important,” Teixeira said. “The way you can treat customers better is going through what the customers do, and see the pain points that you need to improve.”

In the beginning of the process with students, Teixeira tells them, “You should treat a sale as an aberration. There’s no reason your first customers should pay to buy your product. There are probably other established players out there. Why should they take the risk to buy your product?”

Treat your first customers as a puzzle to be solved, not as something you deserve. “They will reveal the drivers of their purchase, that you can exploit for acquiring the next million customers. Go after customers that have the same issues,” he said.

He added that there are certain questions that publishers should ask of their first customers:

  • Why did the customer buy?
  • Why did they buy from you and not a competitor?
  • What prompted them?
  • How did they find you?
  • Why did they take such a large risk with an unknown company?

Once these companies saw that experience through their customers’ eyes, they began treating each city differently, as separate and distinct markets, and created playbooks for each different market. They customised their solutions to the customers’ pain in each city market.

“If you think about it, readers might be the same thing,” Teixeira said.

Should you play this game?

Teixeira back-pedaled a bit to suggest that publishers ask if they should even be chasing subscriptions. “We should think a little bit about this question first. Subscriptions may not be for everyone.”

He looked at how subscriptions came about in the first place. There is a difference between a transaction (one time or only every now and then, such as college or a car purchase) and a recurrence (buying your coffee every day).

What is unique about subscriptions?

  • Frequency/recurrence.
  • The customer doesn’t need or want variety, they want the same thing consistently.
  • They don’t want to pay constant transaction fees (discount).

“Subscription is a solution to a customer problem — not to your problem,” Teixeira said. “The customer wants recurrence, they don’t want to pay a transaction cost every day, and they don’t care about the variety of vendors. You should think about what you’re solving for your customer. Some readers might not have that problem, and trying to push them on subscription is like trying to sell meat to a vegetarian.”

Then — who pays?

So, how do you get revenue if you don’t have subscribers? Teixeira suggested that publishers ask themselves this question: If you were to disappear off the face of the earth tomorrow, who would miss you the most?

The answer could be one of several options, and this answer can influence whether a company should even pursue a subscription model, and, if so, who they should target.

  • Advertisers (this was the main answer in the past).
  • Readers is the more common answer today, and also includes the writers.
  • Subscribers are the people who consume your product regularly and often.
  • Retailers might miss you.
  • Influential individuals supporting journalism (such as The New York Times' Sponsor a Student subscription program).
  • Local society.

“When you identify the people who would miss you the most, those are the people who should be paying you,” Teixeira concluded.

Customers or consumers?

The platforms he worked with realised that customers and consumers may be different entities. “The customer we charge, the consumer consumes the content. That doesn’t have to be the one who pays. Disassociating these is very common for the modern business model.”

He advised that publishers should do their research on startups in many different industries, such as the ones he used as examples. There are two reasons for startup deaths:

  • They don’t create enough value and can’t get enough people to pay for it.
  • They do create value for their customers, but fail to capture a large enough portion of it.

How risk grows over time

Teixeira used the example of free solo climber Alex Honnold. He asked Honnold how he manages risk as he climbs higher, when the risk increases. He wanted to know if the climber started more aggressively, and then became more cautious as he climbed?

But the answer surprised him. Honnold said that after the first 30 feet, the risk is the same: death. He told Teixeira that the risk changes as the rock face changes, and a climber needs to change their strategy accordingly.

“The biggest points of increase in risk is when you have to switch from one strategy to another,” Teixeira said. “But if you don’t take that risk and change your strategy [as the landscape changes], you increase your risk even further.”

To a point you should be cautious, but if you don’t change your strategy it becomes even riskier, and the possibility for failure higher.

“I thought, I’ve heard this story before,” Teixeira told the audience. “It’s exactly what Uber said, and Airbnb, and the others. They all had to abandon strategies that had worked for them in the past in order to get to the next level.”

No matter what you decide to do, don’t keep doing the same thing you did before, he advised. “Learn to adapt and change your strategy in order to keep going.”

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