While projections for the social casino (free to play slots and poker) industry continue to be overwhelmingly positive and the industry has never seen a revenue decline on a sequential basis, there is an ominous KPI that nobody is discussing. While the industry continues to grow, that growth is from better monetization, not bringing new customers into the market. This fact potentially puts a ceiling on potential growth or worse portends to a future decline.
- Creating a great new innovative products does not guarantee success, people have to find and try it.
- The first key is to build something that people will search for. If there is little innovative or differentiated products, people will not even search for a new product.
- If customers will not find a product via search, you need to develop cues so they will infer that the product is different and valuable to them.
One of the most frustrating results in business is launching a great game or product and then seeing it fail. Unfortunately, this phenomenon happens more often than not. In the game space, at least 80 percent of new launches (from established studios, new studios have a worse rate) are never ROI positive (that is, they never have an LTV that allows for ad spend). Even in retail, according to a recent study of 9,000 new products that generated strong distribution, only 40 percent were sold three years later.
Although I am a huge advocate of Blue Ocean Strategy, one central challenge is getting customers to adapt the new product. In the game space, many innovative and extremely fun products fail because they never gain traction with players.
A recent article in the MIT Sloan Management Review, Why Great New Products Fail by Duncan Simester, shows why so many good products fail and how you can reduce the risk of experiencing this fate. What Simester shows is that while most companies focus on customers’ needs, they do not understand how customers decide what to purchase. By understanding the customer search and inference processes, you can build a better strategy for the customer to discover a new, innovative product.
People don’t search for innovation
The first thing you need to realize is that in a market with little innovation the customer may not realize the value of looking for a better solution, they do not even think they exist. Thus, they may not find your innovative product because they do not know to look.
Alternatively, people may think the cost of searching for an alternative or innovation is too high despite knowing of the benefits. Somebody may realize there is a game in the App Store they would prefer to what they are currently playing but do not believe it is worth the effort to search through the thousands (or millions) of alternatives, download and test tens (or hundreds) and then find the innovative product they prefer.
Additionally, your best customers are the ones least likely to search. Research cited by Simester shows a strong relationship between the amount of prior expertise a consumer has about a product category and the extent they search for information before making a purchase decision. Effectively, the person feels they already know what is best so they see little incentive to search.
Compounding this problem is that potential customers with virtually no knowledge also will not search. They do not know what questions to ask, where to find answers or how to interpret the information if it arrives. Potential customers also do not understand the features that would benefit them. Thus, innovation would not increase the chance of a sale to this type of customer, no matter how much value the innovation adds, because the customer does not understand the value of the innovation.
Customers’ Inference Process
When search is incomplete, customers shift to forming inferences. They use what they observe to infer what is too difficult or costly for them to search for. A good example Simister uses is McDonald’s obsession with keeping parking lots clean. While customers do not really care if the parking lot is messy, if they see a dirty parking lot they will infer that the restaurant itself is dirty and go somewhere else. As Simester writes, “Although purchasing decisions are a different neural process than the visual process, a similar phenomenon occurs when customers are evaluating different products or services. Customers often do not realize they are forming inferences, and even if they do, they are powerless to stop it.”
Branding and inference
The most common cues customers use to infer product value are brand and pricing. Brands infer more than only product quality as consumers use brands to signal information about themselves.
The importance of brands differ by the market and consumer. When it is easy to search and generate information about the product, brands take on less importance. This is particularly the case with the sophisticated customers described above, as they can process the product information and make informed decisions about the opportunity. Conversely, an unsophisticated customer is likely to rely on the brand because they do not know how to process the product information.
In the game space you see very little value of brand because so much information is available to players. They can look at an AppStore description, process screenshots and watch videos to determine if they like a product, rather than care whether the game is from King.com or Supercell.
The role of the brand also varies across product features. Features that are on the spec sheet typically can be discovered by search. Other features, however, such as reliability and ease of use, are not easily available and thus it is these features where the brand’s role are most prominent. Going back to the earlier game example, a player may rely on their perception of a brand to determine how aggressive monetization will be, how often the game will be updated and how reliable the back-end is.
What you should do differently for innovative products
Given the challenges of conveying to users the value (or existence) of an innovative product, you need to build new products where customers can recognize their value. Thus, during your green light or incubation process, you should look at three aspects of the potential product.
- Motivation to search. Will customers discover your innovation? An innovative offering will not succeed if customers do not discover it. First, are customers motivated to search? Are they willing to invest time to find a better option than they are currently using?
- Ability to search.Can customer search effectively? Can reviews, customer or professional, help alleviate the issue.
- Customer inferences. If customers cannot or will not search, you need to understand what cues consumers will use to infer the absent information. You may want to create cues to help customers with this inference process.
Innovation is not just about great products
The key is that innovation is not just about building a great product. When you are planning your new products, you need to understand if and how customers will find out about it. Build that into the product, or possibly seek an alternative if there is no clear way to educate users.
In February, I discussed the challenges companies have dealing with a changing business environment and a corollary to that challenge is how to reignite growth once your company has stagnated. Chris Zook and James Allen tackled this problem in an article, Reigniting Growth, in the Harvard Business Review. In the article, the authors point out that almost all companies eventually face stall-out, “a sudden large drop in revenue and profit growth or a collapse of once high shareholder returns to well below the cost of capital. Stall-out occurs when the growth engine that powered a company to success stops working. This rarely happens because the business model has suddenly become obsolete—a common misconception. Rather, [their] research shows that the business has almost always become too complex, most often owing to bureaucracy that slows the company’s metabolism, or internal dysfunction that distorts information and hampers managers’ ability to make rapid decisions and take swift action on them.”
There is a consistent theme when looking at big companies that have stalled-out. They talk about being swamped with bureaucracy, overwhelmed by Powerpoints and an inability to act decisively even on great opportunities. While competition impacts your growth, success hinges on remaining fast, perceptive, innovative and adaptable. 94 percent of leaders of companies with $5 billion plus revenue believe internal dysfuntion was the main barrier to growth, not competition or lack of opportunity.
The authors identify three qualities that can help overcome stall-out. By rediscovering your insurgent mission, obsessing over the business front line and instilling an owner’s mindset, companies can reignite growth.
Rediscover your insurgent mission
The first key is to regain the focus and mission that drove your company’s growth. When stall-out occurs, it is almost always connected to creeping complexity. The authors suggest companies experiencing stall-out need to liberate resources, narrow focus and harness the vigor that drove early growth. The company should shed noncore assets and businesses. Then attack complexity in the core processes. Finally, your company should focus on reducing product complexity.
Part of the problem is the democratization – or socialism – of resources. As companies grow, internal budget processes spread resources evenly across businesses and opportunities. While this may feel fair to the management team, and all employees, it impacts growth and drives the company to mediocrity. Successful leaders instead make bold budget decisions to redifferentiate the company, usually establishing a major new capability that set off waves of growth.
Even after growth is reignited, companies need to renew their approach as being business insurgents. Companies should view their customers as underserved and their industries as setting insufficient standards, and should constantly emphasize what is special about themselves. Bold goals—not just the aim of living to fight another day—will sustain growth.
Conversely, you should not be scared to shrink your company to become more efficient and focused. By cutting back, it forces your company to focus on what is most important and reduce bureaucracy that does not increase value. It also allows you to dedicate more resources to growing your company.
Obsess over Your Businesses’ Front Line
The second key to reigniting growth is focusing on the front line of your business. As Zook and Allen write, “this obsession, which can often be traced back to a strong founder, shows up in three ways: an elevated status for frontline employees, a preoccupation with individual customers at all levels of the company, and an institutional curiosity about the details of the business.”
Usually, this obsession is what generated growth initially and the layering of bureaucracy chipped away at it. Other companies likely responded to the weakening relationships and provided better customer relationships and hired your best employees. By moving the focus back to what built the company, you can reignite growth.
Instill an Owner’s Mindset
The final component to overcoming stall-out is instilling an owner’s mindset throughout the organization. This is not just P&L responsibility, but giving employees personal responsibility for their actions and deployment of resources. Allow, and encourage, your employees to take risks. Eliminate the bureaucracy (think risk committees or really any committee) that takes decision making out of their hands. Allow them to partner with external companies. Encourage people to form internal teams to test new ideas. The key is give people the power to get things, important things, done.
While the article focused on how to overcome stall-out, more importantly it also implicitly shows how to avoid stall-out. Rather than reaching a situation where growth has stalled, if you leverage the three keys above while still in a growth stage you should continue to grow rather than have to deal with a turnaround.
- Most successful companies eventually face a sudden, large drop in revenue or growth, stall-out, that is largely caused by an increase in bureaucracy.
- To overcome stall-out, companies need to focus on what made them great initially, obsess over their customers and front-line employees and instill a true owner’s mindset where employees are empowered to make key decisions.
- In addition to overcoming stall-out, these practices can help growing companies avoid the problem altogether.
While everyone discusses the importance of growth and companies continue to spend millions on marketing, they are often neglecting the biggest shift in product success in the past one hundred years, quality. Most understand the benefit of good online product reviews and its impact on sales, but this understanding usually generates efforts to game the review system. In truth, the underlying quality of the product is now the key driver of success and growth.
Fifty years ago, it was the gurus of Madison Avenue, glamorized in Mad Men, that meant the difference between failure and success. Pan Am became a leading airline through great marketing rather than a differentiated product, General Motors dominated the global automotive market through great promotions and ads, Crest became the top toothpaste through fantastic branding, etc.
Now, regardless of how brilliants your growth team is and how often they post on growthacker.com, your success will largely come down to the quality of your product. More accurately, you will not be successful without a great product (you can still fail with a great product and poor growth/marketing).
Why product quality has become paramount
The need for a great product is the result of virtually unlimited online product and service reviews. When people are considering a purchase, not only do they see the messaging from the vendor but they cannot avoid feedback from other users. If you are considering buying a new razor, the cool new features and catch jingle are likely to get you interested, but if the razor has 1.5 stars with a glut of negative reviews saying the product is worse than a razor half the price, you most likely will not try the razor. This effect is not only present with a consumer good but any product. Why buy a book that everyone says is filled with plot holes or a car that most people say they would not buy again. Again, the marketing message is less powerful than the actual experience of users.
Not only physical products
Not only does the principle of paramount product quality apply to physical goods but it is even more important with digital goods. While growth marketing for apps has become an art and science, if the underlying app has two or three stars even Chamath Palihapitiya (the brains behind Facebook’s growth team) would not be able to gain traction. All the great virals and cool apps may drive people to the app page, but then when they see the rating and reviews they are unlikely to download.
Even the retail environment has been rocked by this change to having a great product. Years ago, restaurants could survive by having a terrific location or being in a central tourist area. If they were in the right place, they could always attract new customers even if they had poor food and were over-priced. They would not get return customers but there would always be new ones. Hence the term tourist trap.
Now, if a restaurant aims to take advantage of customers, it will be punished by poor reviews on Yelp and TripAdvisor. Thus, the naïve new customers they have counted on will not materialize. Anecdotally, whenever I see a restaurant with three or less stars, I assume they will not survive. When I check back, most of them are gone within six months.
Changes who is important
The principle of paramount product quality also changes who your key partners are. In the past, many companies succeeded by focusing on the distribution layer. Having salesman in retailers promote your product over competitors was one of the strongest “growth” strategies. Carmakers spent more on their dealerships than on their product development. Even video game companies devoted the same resources to creating a great box as they did to create a good game.
Those strategies no longer work. A salesperson trying to drive a customer to the big new game that is actually not very good will have no credibility, as the customer is likely to check online and see the awful reviews. The car salesman who tries to sell the pre-owned Yugo will get laughed at when the little old man pulls out his phone and sees that the car should have been junked ten years ago. Even the retailer who charges for an end-cap display will not be able to convince retailers of bad products to invest in the marketing when people scan the bar code of the product and learn it is over-priced and does not work well.
Only the good shall survive
If you look at the companies that are thriving and growing, it is the ones that customers love. Tesla cars have universally great reviews, compare them with the reviews for Jaguars. Clash Royale from Supercell, the newest billion dollar game, has over 89,000 reviews averaging 4.5 stars. Airbnb, which has changed the hotel industry and is worth well in excess of $1 billion, also rates at 4 stars. The challenge is finding a successful product or service that does not enjoy great reviews.
Build a great product
While most acknowledge the importance of building a strong product, the necessity of having a great product to success is not yet understood universally. Building a great product should no longer be one slide on your Powerpoint or a nice to have element of your strategy, it needs to be the central focus. You need to devote the same or more time and resources to your product, not just at launch but continually keeping it great, if the other elements of your strategy are to succeed.
- The plethora of user reviews of all products and services has the formula for success, no longer can you rely on great marketing, distribution or branding.
- The fastest growing and best performing products now are also best of breed, whether Clash Royale in the game category or Tesla in the car category.
- From the start, you need to dedicate sufficient resources to product development, rather than just ensuring you have enough for marketing or distribution.
I was recently speaking with a former colleague who is a leader of one of the most successful businesses I have been part of, a mini-corn (a near unicorn, $500 million – $1 billion valuation), and I realized that there is one overriding driver of large scale success, and it is determination. Anyone who reads my blog (and by definition that means you) realizes I am a huge advocate of analytics based decision making, blue ocean strategy, open management, customer driven products, etc. These are all great and will help you grow and optimize your business but the truly huge companies get there because of the sheer determination and take no prisoner attitude of their leaders.
I was fortunate enough to be part of a team like this and people often ask what was the secret to its success. They often assume it is great technology, design genius or some black box, even internally most of us did not see it (myself included), but the key driver of greatness was the sheer determination of the top leadership. The leadership’s entire focus was on growth, always grow, never stop, never slow down, never let anything or anyone get in the way.
Not a popularity contest
This attitude would often make people uncomfortable but they would never stop pushing. This often meant taking risks that other companies would not take or risks that others in the company did not want to take. It often meant hurting feelings, not just of competitors but those internally who lost resources or prestige to the steamroller.
What stands out is that this leadership team that ended up generating huge success never cared if they were liked internally or externally. All they cared about was getting the most resources and making the decisions that drove their business higher, and only drove their business higher.
It also meant never being satisfied, and this last principle is what helped me see the overall determination. Even when this leadership team had seen more success than anyone else I have ever met, they still have as much hunger as the first day I met them. It is still all about growth, not just winning but owning the space and then it will be about further distancing themselves from number two. It’s probably very much the same as why Bill Belichick does not stop when the Patriots are up by 10 in the fourth quarter, but will still continue passing and competing until they win by 31. Continue reading
Many companies, especially game companies, build out their products based on how early customers like the product but this approach can inhibit growth. An article in the Harvard Business Review, “Focus On the Customers You Want, Not the Ones You Have” by JP Eggers, shows that the hard part in creating a successful product or game is not appealing to users early but sustaining.
The problem with early users
Early players are by definition early adapters. They probably have a higher preference for innovation and are more likely to take risks. They may have different ways of making decisions, including whether they monetize in a game, if they invite friends or if they come back. An early player may be very enthusiastic and tell friends but then go on to the next shiny object, so basing decision on their play would suggest you should focus on getting them to bring in as many users as possible before they leave.
Companies run into problems if they base product decisions on these early adopters, which is often the case. Eggers also points to research that shows early adopters are different. According to Eggers, “early adopters are typically younger, more willing to take risks, more eager to try new things, more affluent, and substantially less numerous … First, what worked with early adopters isn’t likely to work with later adopters. In launching new products or services, start-ups tend to accumulate deep knowledge about customers at the leading edge of a technology. But that knowledge doesn’t necessarily apply to other consumer groups; that’s one reason so many new firms struggle to create second rounds of offerings. To be successful, companies need to innovate for the consumers they want, not the ones they have.”
Another issue comes up because early adopters do not want to see the product expand to the mass market. A chess app may appeal strongly to grandmasters but if it becomes something the mass-market plays, the grandmasters may no longer want to use the product. Similarly, Facebook lost some of their young users when their parents started using it, but there were hundreds of millions more adults than teens. Although it worked for Facebook, the influx of users so alienated the early users of MySpace, you may no longer even remember MySpace.
There are several strategies to combat the problem of having a product that either is not attractive to new users or alienates existing users:
- Innovate for future users. Build features and new content so it appeals to new users, what people not currently using your product would want.
- Engage early adopters. By engaging your customers, you ensure they feel connected to the product. Letting them have a voice, even if you cannot always listen to it, keeps them engaged and likely to cope with changes they do not consider ideal.
The key is understanding that what appealed to your first users, and their behavior, is not necessarily what will drive your growth.
- Early users will not have the same preferences and consumption patterns as customers you attract later in the product’s life cycle.
- If you slavishly build features and new content for existing users, it may not appeal to new users.
- The key is to innovate for new users while keeping your early adopters engaged so will tolerate the changes to the product.
I came across a great blog post on how Fractl, a digital marketing agency, used content marketing to increase its referral traffic by over 6,000 percent. In the blog post, Fractl discusses several lessons that they learned, which helped them achieve this success. These lessons apply to almost any business and can help game and tech companies grow.
Don’t limit large scale campaigns with narrow-scope ideas
A mistake commonly made is creating a narrow focus for your campaign, implicitly limiting the reach. Content marketing, however, can be used in every stage of the customer journey. You also need to realize that one campaign will not impact every metric that you track but you need a diverse strategy to reach customers in different stages of their journey and thus impact more metrics.
In the blog post, there are four stages of the customer buying cycle. The best content marketing strategies focus on developing a long-term strategy that target all fours stage of the customer journey:
- Viral campaigns. A campaign tangentially related to the brand that achieves a deep emotional reaction and thus encourages hockey stick levels of sharing and traffic.
- Conversion-driven campaigns. These are targeted to a specific audience that is ready or almost ready to monetize.
- Awareness campaigns. These are designed to increase exposure to the brand and attract and engage consumers who are at the top of the sales funnel.
- On-site content. he multipurpose content is designed to build the brand and engage with the target market.
The key takeaway is that you should build your content roadmap so it touches potential users and existing customers at all parts of the customer journey. If you create a campaign focused on one niche goal, you are missing the broader opportunity.
Heavy research earns more press than knowledge curation
Fractl initially built campaigns that cast a wide net but they learned that sites that would republish their materials were primarily looking for exclusive research. They found data curation had moderate engagement while heavy research based campaigns have the highest engagement and syndication because they bring something new. This is relevant for even consumer facing games, if for example you bring new research into how people compete in casino games, it is more likely to be spread widely.
Quantitative research is stronger than qualitative
In Fractl’s research, sites and other potential influencers wanted to see more data-driven articles, infographics, and mixed-media pieces, followed closely by data visualizations, images, videos, and interactive maps. They were less enthusiastic about Press releases, interactive projects, quizzes, flipbooks, widgets, and badges. While articles might do well with qualitative results, most of the other top-ranked content formats require a type of data visualization that is most valuable when it features quantifiable results.
Gated assets create a value-add and incentivize people to give you their information
Fractl learned that there was limited value to being mentioned on other websites. Creating a white paper, eBook, list, or any other gated asset that adds value to your original research creates an incentive for people to go back to your website and continue engaging with your brand. By gating the asset, you enable your team to capture the contact’s information and further nurture them in your sales funnel.
A related suggestion is for you to save at least a quarter of your findings and then feature it in your gated asset. Make it explicit in your content marketing that there is more information for people to learn about if they click through or go to your homepage.
Learning which publishers drive the most qualified lead flow is critical to your success
It is important not focus your promotion around sites you like or you find prestigious, but to identify objectively the sites that will generate the most leads or reactivations. Fractl suggests creating audience personas to understand the optimal channels. “Audience personas are a characterization of your businesses ideal customer. Creating these personas forces you to consider what your customers value, what they hope to achieve, what they fear, and much more. By putting yourself in the shoes of your prospects, you can begin to get a sense for where they get their news and which blogs they might read—allowing you to improve your pitch targeting for brand awareness and conversions.”
- Content marketing can be a strong user acquisition and reactivation channel but it takes good planning.
- The key is to build your content marketing strategy around the full customer experience, not just narrowly targeting acquisition or conversion.
- If you create gated content, it can help capture leads and drive customers to your site.
There was a great blog post on the Mode Blog, “Facebook’s Aha Moment is Simpler Than You Think,” which provided a straightforward strategy to creating Aha moments. Aha moments when a player or user understands the value of your product are widely considered the key to growth.
The key point of the post was that you create the aha moment through simple math and strong messaging; it is not a complex task that requires advanced analytics. Take Facebook’s self-defined aha moment, acquiring seven friends in ten days. In practice, this is not a binary. Some people may fall in love with Facebook after getting three friends in a week; others may need to get twenty friends in thirty days. This fact does not take away from the aha moment, it is actually the point of the aha moment. The blog post states, “Facebook’s decision to define their ‘aha moment’ in such simple terms suggests they weren’t trying to optimize it to be precise as possible. Other “aha moments”—30 follows, 1 file upload, 2,000 messages—follow the same pattern: they emphasize simplicity over science…. Because “aha moments” aren’t about precision, but about defining a core principle and a quotable rally cry for the entire company. “
Defining the aha moment
To create a useful aha moment, you need to tie it to a metric that defines customer value. Keep in mind that it is not one “moment,” Facebook’s aha moment is over ten days and requires seven different actions (friending seven people).
The most useful metrics for quantifying your aha moment are based on retention. Customers who find value come back. If you identify which actions separate retained customers from lost ones, you will know what drives customer value and then have your “aha moment.” Continue reading
I came across a great post by VC Tomasz Tunguz on a great growth mechanism: negative churn. In effect, negative churn creates the same compounding effect as a high-rate bond; over time it generates tremendous growth. Negative churn means that the actual churn rate, the number of customers or players moving out of a collective group over a specific period of time, is lower than the increase in the value of the retained customers.
What is negative churn
Tunguz uses a great example to illustrate negative churn. Say your company has a five percent monthly churn rate, which means that five percent of your users quit each month. In Tunguz’s example, the remaining 95 percent of the customers increase their spend with your company by ten percent, so total revenue from this cohort (group) of users is equal to 105 percent of the revenue from the previous month. Even with 5 percent monthly churn, each month this cohort of users becomes increasingly valuable.
In the 5 percent monthly churn case, the company exits the year with $919 in monthly recurring revenue and the customer lifetime value (assuming a one-year lifetime and no virality) is $77. In the negative churn case (where you have a 10 percent monthly increase in spend), your company’s revenue is 73 percent larger at $1592 and the LTV is worth $133.
In both cases, the company has the same number of customers (or game, players). But with negative churn, revenue is over 70 percent higher. This shows the power of compounding growth every month.
How to achieve negative churn
There are two ways of looking at employees, and for them to look at themselves, either a fixed mindset where they either possess or lack talent, or a growth mindset, where your team can develop new skills. An article in the Harvard Business Review, “How Companies Can Profit from a ‘Growth Mindset’” by Stanford’s Carol Dweck, shows the benefits having a growth mindset has for your company.
According to Dweck’s research, failure is the end of the world for some people but an exciting opportunity for others. People with a growth mindset enjoy challenges, strive to learn and consistently see potential to develop new skills. Conversely, those with a fixed mindset view talent as a quality they either have or do not have.
In the article, Dweck extends her definition of mindsets from individuals to companies. Dweck and her colleagues found that some organizations believe their people have a certain amount of talent, thus a fixed mindset. Others held the opposite view and those companies were considered to have a growth mindset.
Dweck also found the company mindset had a significant impact on its employees. In organizations with a fixed mindset, employees largely felt there was a handful of “star” employees that were highly valued. The employees who felt this way were less committed than employees at growth-mindset companies and did not think the company had their back. These employees worried about failing so they pursued fewer innovative projects. They regularly kept secrets, cut corners and cheated to try to get ahead. Continue reading