Sequencing Business Models: The Types of Marketplaces

Leave a reply

This is part two of a three part series on sequencing business models. This essay is a collaboration with Gilad Horev.

Casey’s first sequencing business models essay talked about the transition from a SaaS business model to marketplace business model, and why it’s so difficult. In this essay, we’ll go deeper into the gradients of marketplace models that a company can sequence to, and as a follow up, we will do the same for platforms. Models on this spectrum may seem similar to each other at first blush. Especially adjacent ones. But sequencing between models is always hard, and failing to appreciate the practical differences between them makes executing that transition even harder. If the previous essay was about the organization, this essay is more about the roadmap.

The Types of Marketplaces

If a company is thinking about sequencing into a marketplace, it’s important for it to understand that there are different types of marketplaces with different components. Having a good idea of what you’re sequencing to eventually is important, but also influences the transitions on how to get there.

In Casey’s last essay, he covered the differences between regular SaaS companies and SaaS-like Networks. Building on the definitions from that essay and introducing a few new ones, here are the types of business models we’ll cover:

  • SaaS: software that businesses access online and purchase via a subscription e.g. Slack, Adobe, Atlassian
  • SaaS-like Network: any number of different models where a business sells software to businesses online and that software supports the interaction between the business customer and their end consumer. The business does not charge via a subscription, but rather fees are transactional or pre-revenue e.g. Square, Styleseat, Mindbody
  • Light marketplace: a network model focused on transactions that happen without facilitation by the marketplace. There are two common modes here in lead gen and peer to peer e.g. Zillow, Thumbtack, Craigslist
  • Managed marketplace: a network model that facilitates transactions between supply and demand by processing payments and ensuring quality of transaction by establishing trust e.g. Etsy, Ebay, Airbnb
  • Heavily managed marketplace: a network model that facilitates transactions by participating in the delivery of the transaction in a meaningful way e.g. Uber, Amazon, Faire
  • Vertically integrated: The company owns or directly employs the “supply” e.g. Clutter, Oyo, Honor

We find it’s best to describe these marketplace types against each other on some common vectors.

Common Marketplace Vectors

Click to view in more detail.

Before we examine these vectors, it’s important to understand there is no one dominant business model, and the larger companies grow, the more likely they are to sequence to new or additional models over time. Google, for example, has an ads business, a vertically integrated hardware business for the Pixel and Google Home, a developer platform in Google Play, an enterprise SaaS product in Google Cloud, consumer subscription with YouTube Music and YouTube TV, and many light marketplaces like Google Shopping and Google Flights. So, which model a company might want to sequence to next depends on quite a few factors.

Now, let’s examine these vectors to help understand, as one type of business model, what it means to sequence to another over time.

Supply Value Propositions
Let’s start with the most important thing. If a business is a marketplace, it is selling incremental demand to customers as its primary value proposition. A business is SaaS or SaaS-like if it sells anything else software-related. If a business starts as a marketplace, it usually means demand is the most important problem customers need to solve. If a business starts out SaaS or SaaS-like, it usually means its customers have ways of driving demand and have other important problems software can better help them with. It could also mean the marketplace dynamics needed to drive demand are very hard.

When a business starts out SaaS-like—solving problems that are more important to customers than demand generation—the most common problems it’s usually solving is payments. Early on, when Gilad joined Eventbrite, accepting payment and selling tickets online was still the biggest challenge for event creators. Unless you were a very large creator who could afford complicated and expensive enterprise software, you were likely stitching together a PayPal merchant account and a spreadsheet. It was common for PayPal to limit these merchant accounts because they didn’t understand the risk profile of events businesses, and for the ticket buyers to endure a pretty unpleasant purchase experience. Eventbrite offered a simple, vertical specific solution to the problem. Like Eventbrite, GoFundMe, Patreon, and Kickstarter were also all about accepting payments for services or raising money online. The difference between them and a pure software payments business like Stripe or Braintree is that they are self-service meaning they don’t require integration work or code, are vertical specific, and both sides of the transaction interact with the service. Other common value props that SaaS-like businesses address are around managing inventory or calendars. Regular SaaS companies that are not ‘SaaS-like’ have many different value props, but they typically exclude those above. Normal SaaS companies have no relationship with their customers’ customers.

As we move to the right of the business model spectrum, the sophistication of value props offered to supply increases. A light marketplace usually offers leads or connections and leaves it up to the supplier to then close the transaction. The marketplace doesn’t vouch for the demand in any way. It’s a bit of a free for all. A lot of people in the industry tend to feel like this is an old business model that goes away over time as the internet matures. We’re not sure. It depends on the willingness of the market to pay for a more sophisticated offering. When price is most important to customers, they sacrifice quality. Just look at airlines.

Moving further to the right, leads gets replaced as a value prop by liquidity. As opposed to creating leads, liquidity requires more of a focus on matching and that the marketplace does work to ensure supply attracts demand. In the more heavily managed version, the marketplace offers a lot more services to facilitate the relationship with demand. They may personally handle delivery like Doordash, take on financial risk to reduce friction of transactions like Faire, or provide loans to suppliers to help them invest in growing their business like Uber tried to do, or do multiple of these services like Shift. In vertically integrated models, the suppliers work for the company, so they don’t have to offer loans or reduce friction. They just own all aspects of the delivery of the product or service.

Demand Value Propositions
For demand, the value proposition landscape is a bit simpler. If I am a SaaS company, I have no relationship with demand, and therefore offer them no value prop. For a SaaS-like network, it’s really about making the transaction with the supplier as efficient as possible. So, a company like Solv or Styleseat may make the appointment booking process really smooth, or a company like Indiegogo may make the checkout process clean and simple. Moving further to the right, a light marketplace will invest in basic search and contact flows. Managed marketplaces up that game by including not only the efficient booking/transactional flows of the SaaS-like networks, but they offer better search plus other discovery mechanisms. Perhaps curations and algorithmic recommendations, notifications, emails, saved searches, etc. They also create signals to help consumers navigate to the best options through elements like ratings and reviews. More heavily managed marketplaces oversee fulfillment and delivery to make sure it happens to the demand side’s liking. Vertically integrated models have everything standardized, not just supervised, to make sure it is delivered to the company’s specifications.

Payments
This is one of the more tricky areas as depending on where the company wants to sequence to over time, it will make different decisions on how to handle payments. If the company only ever aspires to be SaaS or a light marketplace, it will probably not invest in its own 1st party payments products. But if it’s, say, a SaaS-like network on its way to being some sort of managed marketplace, it will not remove its payment infrastructure as it starts to offer light marketplace value props only to rebuild them when it shifts again to a managed model. Why do many of these models care about owning payments infrastructure? Well, the simple answer is they monetize it, but that’s not really it. Payments also allow the company to enforce policies that build trust in the marketplace. At Eventbrite for example, where tickets are typically purchased well ahead of fulfillment, some of the first primitive, but effective, fraud rules Gilad and his team put in place naturally relied on controlling when funds would be exchanged between demand and supply. Moreover, with additional control over payments, the company can offer more bank-like value propositions to customers in the future. Common forms of this are advancing payouts ahead of fulfillment, loans or a stored balance that can be used for purchases of goods or services.

Consumer Branding
SaaS companies that provide software to business have no relationship with the consumer of that business, and therefore, no branding to them. SaaS-like networks have a relationship with the consumer, but that consumer is not considered their customer. So branding is more minimal, and many of these companies allow white labeling of their software that can be embedded on their customers’ websites. Once a company is officially a marketplace, consumer branding takes prominence, and many of these models may not even allow white labeling as it would hurt awareness of the marketplace brand and the marketplace’s relationship with the demand side. Owning demand is one of the biggest predictors of marketplace success, so this is a big deal.

Customer Service
Customer service in SaaS businesses may take different forms. But it usually includes self-service components as well as some ability to get manual support. SaaS-like networks do the same, but tend to find the majority of customer service requests are from their customers’ customers, who they don’t feel responsible for. So they try to have minimal support there, and push that volume directly to the supplier. Even many marketplace models like Airbnb and Etsy try to push customer service directly to the supplier at scale because demand-side customer service requests are very costly. But since the marketplace owns the relationship with demand, it is tricky to pull off. A negative experience will be associated with the marketplace no matter what, like a bad rental on Airbnb or a bad ride on Uber. Casey certainly felt this at Grubhub.

Trust and Quality
SaaS models and even light marketplaces are more of a “free for all.” The consumer risks transacting with a poor supplier, and the company doesn’t guarantee the transaction. We’ve all had sketchy experiences on CraigsList, but we don’t expect them to step in and fix it for us. Once a company moves to a managed model, there is an expectation that the marketplace tells customers who is safe to transact with and gives a lot of detail as to what to expect. The marketplace should fire people on both the supply side and the demand side who cannot be trusted to create a quality transaction. Even early on, when Casey was at Grubhub, they fired restaurants who gave poor service, for example. Uber riders and drivers with low enough ratings will no longer be allowed to use the product as another example.

Refund Policy
This is another tricky one. SaaS-like models see the supplier as their customer and let the suppliers create their own refund policies. This creates confusion for consumers who don’t understand why they would get a different level of support from the company, based on which supplier they chose. Light marketplaces are usually caveat emptor. Managed marketplaces, because they care about owning the demand, usually have very demand-side friendly refund policies and enforce a standard that supply must comply with to continue transacting on the marketplace. Heavily managed marketplaces usually have demand-side guarantees.

Fees
The broader trend you might have noticed is the further right a company goes, the more in general it is doing to manage the business. The only way to make this work is by charging more in fees. Different companies approach this differently, and will have their own mix of transactional fees vs. subscription fees, and vary in terms of how much is paid by supply vs. demand. But there is no way to move to the right of this spectrum without making more in the process to finance all of the extra services. The challenge some companies face when they want to move to the right is there is no extra money to be made from supply or demand to make that move profitable.

—
We hope this helps people building marketplaces understand the different styles of marketplaces out there and what that tends to mean for what a company has to build to be successful in them. Not understanding the spectrum of models means that companies can build the wrong things in the wrong order, preventing them from sequencing effectively. The same is true for platforms, which we will discuss in the next essay.

Currently listening to A View of U by Machinedrum.

Announcing Reforge Fall Programs, including the new Product Strategy Program

Leave a reply

For those of you who’ve read my blog for a while, you know that I mainly discuss product management and growth in the tech industry. My goal is to surface the bottlenecks that prevent companies from growing faster. But a blog post is just the tip of the iceberg; it’s a starting point for a greater exploration. You can go so much deeper on a topic than a blog post allows. That’s why I’ve teamed up with Reforge to develop 6-week intensive programs that string together the best systems and frameworks to help you approach growth problems from different angles. Here are three programs that I’ve personally helped create:

Product Strategy teaches frameworks for building, communicating, and executing a product strategy spanning multiple types of product work. Increase your influence, solve strategic problems, and gain confidence as a product leader. Recommended for Senior PMs and above.

Retention + Engagement Deep Dive. Better retention improves monetization, lowers acquisition costs, increases LTV, and gives you a competitive edge. In Retention and Engagement Deep Dive, you will learn proven frameworks that you can use throughout your career to retain, activate, engage, and resurrect users.

Advanced Growth Strategy explores many growth strategies and teaches a system for creating compounding growth. You’ll break down your company’s current growth loops, identify their constraints, and select methods to unlock new growth. It’s recommended for emerging leaders on a Director or VP career track.

If you are more interested in Marketing, Experimentation, or Monetization, Reforge offers 4 other excellent programs.

Apply to Reforge (Takes ~5 minutes)

Best of all, you’ll be learning directly from some tech industry’s top experts. You’ll get to learn from people like…
Elena Verna: ex-SVP Growth @ SurveyMonkey
Fareed Mosavat: ex-Director of Product @ Slack
Bangaly Kaba: ex-Head of Growth @ Instagram
Brittany Bingham: VP of Marketing @ Guru
Shauwn Clowes: SVP Product @ Mulesoft
Dan Hockenmaier: Ex-Growth @ Thumbtack
Adam Grenier: Ex-Head of Growth Marketing @ Uber
Brian Balfour: Ex-VP of Growth @ Hubspot
And many more.

We hope to see you this fall.

Martech Part II: Why Marketing Analytics is a Bad Business

Leave a reply

My post on martech was surprisingly well received, so I thought I might go deeper on a particular area of martech that no one is happy with, but it seems very few people attempt to solve: marketing analytics. I’ll pull no punches here: marketing analytics is a bad business. Sure, there are successful marketing analytics companies, and you can definitely build a successful marketing analytics company now. But when people complain to me about marketing analytics, they complain about something specific; that the tools to help me understand how well my marketing efforts are doing are harder to use than they should be. Solving that is bad business. The reason is that great marketers don’t understand what most marketers are hiring analytics products to do.

What does an average marketer want at a larger organization? Cynically, I can boil it down to two things:

  • To look good to their boss
  • More budget

It really is that simple sometimes. Yes, there are marketers that are motivated by the truth whether it makes them look good or bad, and marketers who have recommended they should not spend money they are offered because they don’t think they can do it efficiently. I love those people (like the Eventbrite marketing team 🙂 ), but they are the minority. When you get to the enterprise, most people want one or both of the bullets above. So what do most marketing analytics tools that focus on understanding how well a marketer’s marketing efforts are doing actually do in practice? They tell the marketer one of two things:

  • Their marketing spend is not efficient (read: they are not good at their job)
  • They should be spending less than they are currently spending

They literally do the exact opposite role the marketer hired them to do. This creates the Marketing Analytics Death Spiral:

  1. They hire a tool to achieve marketing goals, for which their proxies are their current efforts making them looking good to their boss and getting more budget
  2. The tool tells them the opposite of their goals in Step 1
  3. They think they are good at their job and deserve more budget, so they naturally distrust the data from the tool
  4. Since they don’t use the data, their marketing efforts don’t get better
  5. They look for new tool

The addressable market for marketers who will be willing to have a tool show them how ineffective they are and will use that tool to improve over time is just too small. People who read my first post may ask: why not just change the target customer? Sure, you can target the finance team or the CEO, who may be less biased as to the effectiveness of a marketing team’s current programs. But then your product creates organizational friction between either two different functions or the CEO and the marketing function. This is a tough win condition for most forms of go-to market.

So what are companies doing instead in this space? Well, Amplitude and Mixpanel decided to focus on analytics for product instead of marketing. If product or engineering becomes the position of strength inside an organization, they can extend their tools into other functions like marketing over time. Many other marketing tools focus on making the marketer more efficient through automation. This makes them look better to their boss, which is exactly the job to be done for most marketers. Another variation that is successful is making something measurable in the first place that historically has not. This tends to solve job #2 for marketers of making budget available to them when it previously was not. For example, it was hard to measure mobile app campaigns before companies like AppsFlyer and Adjust came along, so no one was approving large app install ad budgets. Once these tools became available, marketers adopted them so they could prove their CPA’s were effective to get more budget.

—
The marketing analytics space is so tempting because budgets are large, and there are many unanswered questions. But you can’t forget the job to be done for marketers. If you’re not helping them look good or get more budget, your market size is going to be too small focusing on the few that are not motivated by that.

Currently listening to Let’s Call It A Day by Move D & Benjamin Brunn.

The Kindle and the Fire

Leave a reply

Entrepreneurs ask me about how to grow all the time. They ask about SEO, about virality, and about increasing conversion, about onboarding. They ask about hiring local teams, building up new functions, and hiring executives. What almost all of them miss is that all of this is context specific on what stage of company they are in. There are two types of growth strategies: non-scalable strategies to get to scale and scalable strategies. I have come to call these kindle strategies and fire strategies. I’ll explain a little bit more about that, and how to think about them.

Kindle strategies can be very unsustainable. Their only goal is to get the company to a place where more sustainable strategies are available. The classic example is in marketplaces. Marketplaces only work when their cross side network effects kick in. Those network effects can only kick in once you get to liquidity. Once network effects do kick in, they can generally be optimized for very sustainable growth. When I left Grubhub, my former co-workers started complaining to me about how much Doordash, Uber Eats, and Postmates were spending on paid search and promotions. They were losing tons of money. There was no way any of those companies ever made this money back from consumer LTV. I told them that wasn’t their goal. Their goal was to get enough consumers so the cross-side network effect kicked in. Those companies were paying their drivers no matter what. Might as well spend money to make sure they’re actually delivering something. And these companies would be willing to almost spend an infinite amount to get the cross-side network effect going because of its value to the company.

I’ve never seen a company as aggressive with promotions as Postmates besides perhaps Homejoy.

This does not only exist in marketplaces however. Superhuman, for example, does live calls or meetings with most people who sign up. This will never scale if they have millions of users, but until either their LTV increases to make this strategy profitable, or they improve self-serve onboarding, they are doing it, because no one would retain without it. You’re willing to do anything it takes in kindle strategies no matter how silly it might seem long term. This is what Paul Graham is talking about when he says “do things that don’t scale.”

Airbnb sold politically themed cereal to raise money for the startup in the early days.

For kindle strategies, it’s more important they work quickly rather than sustainably or efficiently. A lot of early stage companies, for example, ask me about SEO. SEO, unless you have very clever hacks for content and authority, is a fire strategy. It takes too long to work. It might be a great fire strategy to sequence to, though. A lot of companies also ask me about local teams in each market they launch. This can be a great kindle strategy, but it’s generally a terrible fire strategy. Read more from me on this topic here.

Fire strategies by definition need to be sustainable. They need to be able to scale the company 100x and set up a long-term profitable business. So a question all entrepreneurs need to be asking when they pursue their kindle strategy is what fire strategy am I sequencing to. Pinterest used DIY meetups to sequence to influencer blog campaigns to sequence to virality to get enough content where it could scale via personalization on the retention side and SEO on the acquisition side. Most startups won’t go through that many sequences. I’ve seen many companies that have a successful kindle strategy, but it’s not sequencing them into any eventual fire strategy. For example, I spoke with an automotive startup that hacked SEO to get answer box results for their content to get initial users. That eventually caps on how many users it could drive, and it didn’t sequence them to something greater. They eventually shut down.

There aren’t that many fire strategies. Those that involve network effects are generally the best. Sales, paid acquisition, virality, and user generated content with a scalable distribution channel are the most common ways to create sustainable loops to either scale a network effect or scale a product that doesn’t have network effects. This is sobering when I tell entrepreneurs this. There just aren’t that many ways to scale, and almost all involve having extremely good retention as well. Otherwise, you won’t have the profit in the system to invest in sales or paid acquisition, or you won’t get enough users to invite or create content to attract more users.

There are many ways to sequence to a network effect or some other sustainable growth loops, but there are not that many ways to scalably grow without these loops. If you want to learn more about these strategies, it’s exactly what we cover in the Reforge Advanced Growth Strategy course.

Currently listening to Perception by Grant.

What Type of Company Are You and the Growth 2×2

Leave a reply

At Reforge, we’ve written about how companies actually grow, and built an entire program around it. Most companies, when they talk about how they grow, will usually pick from one of the following terms:

  • Sales Driven e.g. Oracle, Workday
  • Marketing Driven e.g. Hubspot, Moz
  • Product Driven e.g. Atlassian, Github
  • Engineering Driven e.g. Google, Palantir
  • Product + Sales Driven e.g. Slack, Stripe
  • Marketing + Product Driven e.g Uber, Amazon
  • Sales + Marketing Driven e.g. Drift, Salesforce

Most people can’t reasonably answer why they are one of these types, but there are reasons. If people inside these companies have thought enough about it, they might understand the market to have attributes that force these styles:

  • Sales Driven: Custom value props and big customers
  • Marketing Driven: Need to make a “space” that doesn’t exist yet and convince people they need it
  • Product Driven: High viral quotients and/or word of mouth from product differentiation
  • Engineering Driven: Solving hard technical challenges creates markets
  • Product + Sales Driven: Large customer spread with bottoms up adoption
  • Marketing + Product Driven: Marketing fuels network effects
  • Sales + Marketing Driven: Custom value props and big customers and need to make a “space”

That was extremely simplistic, but hopefully you get the idea. The larger a company grows, the more likely singular definitions like this start to break down though. Companies launch multiple product lines that require different distribution models, and these product lines typically build on top of each other that gain from the intersection of them. In the Advanced Strategy course, we teach how to model these systems of loops that power such companies.

What growth teams sometimes miss is that optimization is not always the answer to a growth problem. It may require a new product or building a sales team. Modeling your loops to understand your constraints to pick tactics that alleviate those constraints takes some time to do well. A framework I’ve used for more quick and dirty decision making is using data companies usually have on hand: whether a tactic is reliable or not historically in driving growth i.e. you can predict the output from an investment or not, and how fast the payback period is.

For those who aren’t familiar, payback period is one of the most important metrics you can track for growth. It’s very simple. Given this investment today, how long will it take before I recoup that investment in profit from the customers it impacts. For example, a customer you acquire in Adwords for $10 might take you six months to make $10 in profit, subtracting all marginal costs. So our payback period would be six months.

Most executive teams can start to plot where in this 2×2 tactics seem to sit. For example, brand marketing at all but the most sophisticated marketing driven companies is something that has a slow payback and is not reliable. Similarly, innovative product development focused on entirely new products or value props usually sits in that category. For other tactics, where they sit in this 2×2 may vary. On Pinterest’s growth team, for a more specific example, efforts in product driven growth around UGC content distributed through SEO, conversion optimization, email marketing, and activation were very predictable and had quick payback periods, but viral growth was unreliable. At Uber, I imagine viral growth via incentivized referrals was very reliable, but SEO was not. Now, it’s important to remember that within reliability is a sense of scale that matters for the business. If a tactic gives you .1% growth, and only 10% improvements matter, it actually isn’t a reliable lever. An alternative is to make a three dimensional chart where reliability is separate from impact, and ain’t nobody got time for that.


A sample Growth 2×2 for just Pinterest’s growth team

In the long run, model your loops well and find the constraints. In the short term run, maximize efforts on reliable and quick payback activities until you hit diminishing returns. Then, think about moving excess resources into things that are reliable, but have longer payback periods. And think about how anything with short paybacks that are unreliable can become more reliable.

What you’ll quickly realize in the case where you have built a proper growth model or you’re short term optimizing based on this 2×2 above is the opportunities are rarely siloed to one function. You can’t even build this 2×2 if you don’t have many functions represented. So start talking to all the functions of your company to map the opportunities to grow better so that you can grow faster.

Currently listening to Simplicity is the Ultimate Sophistication by Matthieu Faubourg.

Taking On Too Much

Leave a reply

There is always a time in your career where you’re asked to take on more responsibility. This is normally a good sign! It means your manager or CEO or whoever trusts you and seeks you out when problems arise. If you’re like me when I was earlier in my career, you always said yes. I thought of this as moments to increase responsibility, learn new skills, and have more impact. Now that I’m older, I am no longer so eager to take on more. When these situations arrive in my career now, I take real stock on my capability to handle the increase in responsibility. Today, I’ll walk you through the three most common scenarios you’re likely to find yourself in when this happens, and some recommendations on what to do in each situation.

Option 1: Scale
In the first situation, you have been spending years building up a team and/or some sort of scope you’re comfortable with. It could be an entire function like product, a group within a function like the email marketing team, or, if you’re an IC, an area of the code or a particular skill set the company needs. By all accounts, you’re excelling in this scope. If you’re stuck in this structure for too long, and you’re like me, you tend to get bored and are looking for new challenges anyway. This is a great time to accept the new challenge, and either empower your team with more ownership, or use some of the slack time you’ve built up from automation or process improvement to provide more value. This is usually not a confusing move. I only call attention to it in contrast to the other situations I’ll talk about in the rest of the post.


Sam Porter Bridges carries the weight of the world on his back. Don’t do this.

Option 2: Prioritize
In the second situation, you do not feel as if you’re excelling yet. You might still be building your team if you’re some sort of manager, or still learning the function if you’re an IC. Taking on more responsibility might prevent you from succeeding in your primary job, so it’s a pretty big risk. In situations like this, I generally advise people to do what they do in any sort of situation where they have too many things to do and not enough time to do it: prioritize. The difference in this situation is you have to force the person asking you for the additional scope (if they are more senior) to prioritize for you.

For example, I was working with an analyst, and he got a request from an executive at the company for an analysis he wasn’t planning on. He already had a lot of high priority stuff on his plate, so he was confused as to what to do. I told him to email back the executive, show her everything he was prioritizing and how and where this request should fit in. This forces people to acknowledge the value of the work you are currently doing and the amount of time you realistically have available for work effort. If you’re more senior, you can talk about the scope you currently have and whether it might be appropriate to shed some of that scope or de-prioritize progress to accommodate this new area. That’s a very healthy conversation to have.

Option 3: Stretch
In the third scenario, there is no ability to prioritize or shed scope, and you just have to stretch your ability. It’s important to understand this is not a sustainable state. The only way stretching works is if it is short term until you can figure out how to prioritize. Not doing so will result in failure or burnout.

Triage
There are times in a company’s lifecycle (frequently described as war time) where it feels like you might be in a position for a prolonged stretch. What this really means is you need to switch to a variation of option 2 called triage. Triage actually comes from the medical field, and is a process of extreme prioritization of who to treat when you have a large number of wounded or sick, invented for wars, of course. The process focuses on helping what you have the opportunity to meaningfully help on, ignoring things that will likely get better with you, and accepting that some things will go poorly because you do not have the resources to prioritize everything. This process is mostly associated with bugs as a company always has more bugs than it can possibly fix, but I prefer to reserve its use for periods of war time when some things will fail, and you are acknowledging that beforehand.

A mistake that can be made in triage mode inside an organization is to make a decision on what to prioritize and not re-evaluate over time or check on your assumptions. Prioritization in war time is a best guess on what’s most critical, what can fail, and what might be fine without you. If you make a mistake on the latter, it may become more critical, forcing you to change prioritization. And it can be tough to remember to stop and check up on things you’re not focused on to see how they’re doing, and also to remember to re-evaluate and re-prioritize. But it’s important to do so.

—
More responsibility can be a great or a troubling thing. You don’t want to fall over because too much is on your shoulders. Being honest about your capabilities at the time and the mode you need to be operating in can help prevent you from failing by being burdened with more responsibility than you can handle. Tomorrow is in your hands.

Currently listening to Run with the Floating, Weightless Slowness to by Kelpe.

What Is Good Retention: An Exhaustive Benchmark Study with Lenny Rachitsky

2 Replies

At the end of 2019, I presented Eventbrite’s product plans to the board for 2020. These plans included a lot of the goals you likely have in your company: improvements in acquisition, activation, and retention. One of our board members asked: “I understand these goals for the year. But long term, how high could we push this retention number? What would great retention be for Eventbrite?”

I actually didn’t have a great answer. Soon after, I was chatting with Lenny Rachitsky, and we decided to embark on a holistic study across the industry to ask “what is great retention?” across business models, customer types, etc. Lenny surveyed a lot of the top practitioners in the industry across a variety of companies, and we’re happy to share the results here. You can see the raw data below, but I recommend reading Lenny’s analysis here. Done? Good.

Why is retention so damn important?
Why are Lenny and I spending so much time researching retention? Because it is the single most important factor in product success. Retention is not only the primary measure of product value and product/market fit for most businesses; it is also the biggest driver of monetization and acquisition as well.

We typically think of monetization as the lifetime value formula, which is how long a user is active along with revenue per active user. Retention has the most impact on how many users are active and lengthens the amount of time they are active. For acquisition, retention is the enabler of the best acquisition strategies. For virality or word of mouth, for example, one of the key factors in any virality formula is how many people can talk about or share your product. The more retained users, the more potential sharers. For content, the more retained users, the more content, the more that content be shared or discovered to attract more users. For paid acquisition or sales, the more retained users, the higher lifetime value, the more you can spend on paid acquisition or sales and still have a comfortable payback period. Retention really is growth’s triple word score.

What are effective ways to increase retention?
Okay, so you understand retention is important and want to improve it. What do you do? Well, at a high level, there are three types of efforts you can pursue to increase retention:

  1. Make the product more valuable: Every product is a bundle of features, and your product may be missing features that get more marginal users to retain better. This is a journey for feature/product fit.
  2. Connect users better to the value of the product that already exists: This is the purpose of a growth team leveraging tactics like onboarding, emails and notifications, and reducing friction in the product where it’s too complex and adding friction when it’s required to connect people to the value.
  3. Create a new product: Struggling to retain users at all? You likely don’t have product/market fit and may need to pivot to a new product.

We discuss these strategies in a lot more depth in the upcoming Product Strategy program coming soon from Reforge, and if you really want a deep dive on retention, we build the Retention & Engagement deep dive.

Why does retention differ so much across categories?
One question you might be asking yourself is why does retention differ so much by different categories? This was the impetus for the initial research, and why I couldn’t give a great answer to our board. Every company has a bunch of different factors that impact retention:

  • Customer type: For example, small businesses fail at a much higher rate than enterprise businesses, so businesses that target small businesses will almost always have lower retention.* This does not make them inferior businesses! They also have many more customers they can acquire.
  • Customer variability: Products that have many different types of customers will typically have lower retention than products that hone in on one type of customer very well.
  • Revenue model: How much money you ask from customers and how can play a big role in retention. For example, a customer may be more likely to retain for a product they marginally like if it costs $30 vs. $300,000. A product that expands revenue per user over time can have lower retention than ones that have a fixed price.
  • Natural frequency: Many products have different natural frequencies. For example, you may only look for a place to live once every few years (like my time at Apartments.com), but you look for something to eat multiple times of day (like my time at Grubhub).
  • Acquisition strategy: The way a company acquires users affects its retention. A wide spread approach to new users may retain worse than carefully targeting users to bring to your product.
  • Network effects: Network effects may drive retention rates up more over time vs. businesses that do not have these effects. For example, all of your friends on Facebook or all of your co-workers on Slack makes it hard to churn from either product whereas churning from Calm or Grammarly is entirely up to you.

* In those businesses, the business failing and churning as a result is called “involuntary churn”, though that can also mean a payment method not working for someone who wants to retain in other models.

BONUS: Why are Casey’s benchmarks for consumer transactional businesses lower than others?

For the demand side of transactional businesses, where the retention graph flattens is more important to me than the six month retention rate. And unlike other models, these businesses can take longer than six months to have their graphs flatten. Also, for marketplaces, one of the two common models along with ecommerce in this category, a healthy demand side retention rate is very dependent on what supply side retention looks like and acquisition costs. For example, since Uber and Lyft have to spend so much time and money acquiring drivers due to a low retention rate, in order for their model to work, demand side retention either has to be high or demand side acquisition has to be low cost. For a business where supply side retention is high and acquisition costs are low, demand side retention can be lower, and the company can still be very successful. Etsy and Wag I imagine fit more into this model.

Currently listening to We All Have An Impact by Boreal Massif.

How I Grew This Podcast, and How I Unintentionally Started Working on Growth

Leave a reply

I caught up recently with Mada Seghete, co-founder of Branch Metrics on her new podcast “How I Grew This”. In the podcast, I talk about my career in growth including some of my early experiments before I even had a real job. You can listen here:

I thought I’d go into a little bit more detail in this post despite how embarrassing it is.

When people ask about how I got into working on growth, I usually respond by talking about my job at Apartments.com, and how I had to measure everything the marketing team was doing to grow the business. It turns out measuring everything and its impact on growth gives you a pretty good understanding of the growth channels. And for me, one of the biggest lessons was that it was none of the things you learned about in marketing classes at school. It was things like SEO, affiliate marketing, paid search, distribution partnerships, et al. As I automated more of the tracking, it gave me more time to actually work on optimizing those channels. This is all true, but it’s not actually the start. So I’m going to talk about the start in hopes it helps other people figure out how to find opportunities to develop skills and learn. This is going to be a somewhat autobiographical post, and it may not be useful, but multiple people have said I should write in more detail about it, so I am.

My High School Passion: User Generated Content
I was pretty early to the user generated content trend. In high school. I spent a lot of time on AskMe.com, which was basically a pre-bubble Quora, answering questions about a range of topics including music, video games, and history. I answered over a couple thousand questions there. I also hung around the IGN message boards, which was the 3rd largest forum on the internet at the time. I became a moderator on IGN eventually for some of the music and video game boards. This is pre-Facebook, pre-reddit, pre-most things you spend time on the internet with. One interesting thing is how all of those multi-billion dollar companies existed in some form back then; they just didn’t become the valuable companies:

  • AIM = WhatsApp
  • IGN = reddit
  • AskMe = Quora

My College Obsession: Tony Hawk’s Pro Skater
In college, I started playing a lot of Tony Hawk’s Pro Skater 3 on the GameCube. I got pretty good at it. When I went online, I eventually found a community of the early online players playing on the Playstation. They were a lot better than me, and posted videos for download of them reaching new high scores. This was pre-Youtube, so they used various archaic methods of recording (I, for example, used a capture card and a VCR to record the play), uploaded them to a server, and you had to download them to play the videos locally on your computer.

I watched all of the new videos. Not only were they entertaining, but they helped me learn how to get better myself. All of the best players used loops of the level to repeatedly hit parts of the level that allowed them to do valuable tricks. Many people started to post tutorials of their loops. You can see one of the loops I used for a good score here (sorry for the quality. All of this was recorded before Youtube existed, and when we finally did upload things to YouTube, they didn’t support high quality yet):

When Tony Hawk’s Pro Skater 4 came out, it became super easy for these players to score billions of points in one combo using these loops, so the quest for higher and higher scores lost its luster. Instead, the best players switched to showcasing themselves doing stylish combos without ever touching the ground. They called these videos “no manuals” or “nm’s” as the manual was a trick introduced in Tony Hawk’s Pro Skater 2 to link combos on the ground. Essentially, these players challenged themselves to play Tony Hawk’s Pro Skater 4 as if it were the first Tony Hawk’s Pro Skater. The entire community shifted from a score based system to a style based system.

When Tony Hawk’s Underground came out, the community didn’t love many of the changes. You could now walk to link combos, which made something that was too easy for the best players even easier, and people stopped posting videos. I was dismayed as well, because the volume of content coming from the community dropped precipitously.

My First Growth Loop: The Get There Challenges
Worried that this community I loved was dying, I tried to think of ways to revive the community. I essentially needed a way to prompt people to post stylish videos. I came up with an idea. I would post a screenshot of a piece of a level in one of the Tony Hawk games to start. I’d post another screenshot of a place you had to get to in the same combo. And you had to do all of this without touching the ground (no manuals, walking, or reverts). The first to complete it got to post the next challenge. I posted two of them to make sure someone would bite, called them the “Get There Challenges”, and a player named Milky posted of a video of himself completing the second. I awarded him the win and challenged him to post the next challenge. He did, and the Get There Challenges were born. Within a day, someone had beaten Milky’s challenge. The loop had officially begun.

By the eighth challenge, the community started adding variations, such as shortest to complete, coolest version to complete, and sub-challenges. Eventually, some even allowed manuals. A website was built (not by me) to host them officially, and a bunch of copycat websites tried to start their own. GT’s (as they had become known) became a pillar of the Tony Hawk’s Pro Skater online community. Over 300 challenges were consecutively posted and completed over the course of the next three years.

Most of these videos are lost to time. Mike, one of the best players in the community, did create a video commemorating 100 challenges, which is probably the best introduction to the concept. Apologies for the video quality, the out of context teenage jokes, and most importantly, the music choices used in the video.

Now, I am probably an idiot for not using this concept to build a billion dollar business ten years before esports and three years before Youtube became a thing. But the framework of the Get There challenges continues to serve me in my career in other ways. I have come to call these loops content loops and not viral loops as what they do is generate content that attracts people instead of invites. I have built a course on them and talked about them. The Get There challenges have a similar dynamic to how Eventbrite (event listings), GrubHub (menus), and Pinterest (boards) have grown. People mistake this as an SEO strategy, but it’s not. As long as you have a place for the content to be discoverable, it can be a loop if enough people interact with it.

There is much more of an opportunity today to leverage your hobbies for learning opportunities than there were when I was a teenager, whether it’s new creation tools available or all of these new online communities. You may be surprised what you learn from them and how they can inform your eventual career.

Bonus content with much better music:


Currently listening to Ritorno by Andrea.

Buffing, Nerfing, and OP: What Video Games Can Teach Us About Talent Management

Leave a reply

One of the more interesting, but less talked about, dynamics in the video games industry in the last few decades is that the product they initially ship to customers is no longer the final product. Because of online connections via mobile phones, PCs, and consoles alike, video game creators can push constant updates to their games to make them better over time in response to real-time player feedback and behavior. This makes their approach to development much more like other software in that it can be more agile and less like producing a film or a piece of hardware.

Like any change in the video game community, gamers notice, and a whole lexicon has been created based on these new abilities of game developers. One of the more common genres of video games that receive these changes over time are fighting games and shooters. If you grew up pre-internet like me, then examples include Street Fighter and Mortal Kombat and GoldenEye. If you’re, the youth, as they say, then you might be more familiar with Overwatch, Fortnite, and Call of Duty.

What these franchises do now is ship their initial products, watch the community play, and make adjustments over time. As the community plays, players and developers notice that certain characters or items are incredibly powerful, perhaps more so than the developers intended, or they change the game in some unexpected way. The community deems these OP for overpowered or OD for overdone/overdosed.

Before game developers could update their games over the air through the internet, that would mean certain characters would stay overpowered and make games lopsided if you didn’t use those characters. Players would create rules to adjust for these issues, like not allowing anyone to play as Oddjob in GoldenEye, or just blaming losses on your friend using a “cheap” character.


Oddjob was considered OP in GoldenEye because he was smaller than other characters, making him harder to hit.

What developers now do is notice these patterns and update the games over time to re-balance the game. When this occurs through over the air updates, serious gamers read through the patch notes to figure out who has been buffed and nerfed. Buffing is when a character or item is underpowered, and the developers do something to make it stronger. Nerfing is when a character or item is overpowered, and the developers do something to make it weaker. When these patches occur, the power dynamics change overnight in the game, leading to a lot of players trying new characters to see who they can gain an advantage with. This also can extend a game’s lifetime because it forces people to try new things in the game.


Cassie Cage was nerfed in the first major update to Mortal Kombat 11. Holy graphic improvements, Batman!

I find the concepts of buffing and nerfing fascinating and incredibly relevant to organizations, where employees are the players. All organizations are going to, intentionally or unintentionally, overpower people or areas of the company over time. Organizations need more tactful ways to adjust when these mistakes occur, and the buffing and nerfing of the video game industry is a concept I think can be applied successfully to organizations in this case.

So, how do founders and executives get good signal as to the current dynamics of their “players”? Video game developers watch play data and observe the community. Founders and other executives don’t usually have the same analytics video game developers have, so they need to rely on qualitative signals. Many organizations use business results and culture surveys as a signal into organizational success, and use performance reviews, 360’s, 1:1’s, calibrations, skip levels, Q&A’s, and all hands to build even more signal. If you’re not doing any of these today in your organization, start. Organizations usually know how to use these tools to identify who is doing well and needs to be buffed, and this can result in more scope, more resources, or official promotions. But our tools for nerfing are incredibly crude today, so I’m going to talk more about how to effectively nerf in an organization.

How To Execute a Nerf — Conditions for Play

One thing I want to call out about being overpowered. This is often the failure of an organization, not an individual or a team. We tend to treat OP situations in companies as a failure of the employee or team because it’s a lot easier, and we have mechanisms for those situations, such as demotions and firings. And this is typically the way organizations fix OP problems. To do a nerf effectively requires an organization to understand that it failed in structure or talent management, creating the OP situation. Talent management doesn’t just include performance management, but mentorship opportunities and career pathing. Only then, can it think about using these nerfing tactics effectively.

Nerf Tactic #1: Change the process

One way an employee or team becomes OP is because they manage a key process in some way that gives them undue influence over others. The easiest change then is to change the process to re-balance some of that power. In order to understand how to do this, you need to a) understand the process and b) understand the failings of it according to others. When members of your team that are OP manage a process, they seldom see the flaws in it because of how much control it gives them. So you have to seek out different people’s opinions in the organization as to what is going wrong. A signal that revisiting a process may be a good solution is when other senior team members complain, or if they have enough power, start opting out of certain other processes.

Nerf Tactic #2: Change the structure

Another way an employee or team becomes OP is the structure itself. This tends to happen when functions are grouped. For example, if a GM also has control of sales and marketing, they may become OP. Or if your CMO owns customer service, they may become OP. Neither of these are bad if they occur, but they may end up giving that executive too much power, so they can bully other teams, or they may not be as effective at managing either the scope or the function they’re less familiar with. In this case, the easiest path is to separate these functions or create more dotted line ownership to re-balance the teams.

Nerfing Mistakes to Avoid

#1: Don’t Wait Too Long to Nerf

The longer a power balance is allowed, the higher the chance that the organization will blame the strife on the person/team that is OP rather than the structure itself. Even when that person or team is nerfed, animosity will remain that may make the organization not want to work with the person or team, and continue to impair their performance. When you wait too long to nerf, you’re effectively destroying people’s careers in your organization, which may lead to them leaving. The worst situation is when you have to let go of someone who could have been great with a less powerful scope, but you waited too long to do it. In this case, firing or radically moving the person to something else is the only option.

#2: Don’t Change Titles When You Nerf, Especially Downward

As I said earlier, the most common way organizations nerf today is through demotions, which implies the employee failed instead of the organizational structure. If you absolutely have to change titles because the scope change is that significant, I prefer keeping the level the same, just changing the functional name of the role. Say, for example, you have a Director of Strategy, and they became OP, but you want to retain them. Changing their title to Director of Competitive Research is better than changing their title to Manager, Strategy. Why is this? The demotion indicates failure not only to them, but the rest of the organization. These people usually exit their organizations shortly after the demotion.

Organizational Mistakes That Prevent Effective Nerfs

#1: Inflate Titles

I was talking with a startup recently who hired someone to be their first product manager. They had made a mistake that happens commonly in startups — to make the role attractive or to reward performance once in the role, startups inflate the role title (to be more senior than what that role means on the market). One common example is calling your initial Product Manager a VP Product, or worse, a Chief Product Officer. When the company grows 3x and you’re now asking that product manager to manage people for the first time, these people frequently aren’t ready. Then, in order to fix your organizational mistake, you either have to change their title, which will look like a demotion to them and the organization to hire someone more senior, or try to seek out on the market effective mentorship for them to scale up their career progression faster than is normal.


In the words of Keith Rabois: Wrong.

It’s enticing to inflate titles to make people happy or to attract talent, but it removes your ability to nerf without demoting. In practice, I like to reserve C level titles for public companies and VP titles for managers of managers, though I will be the first to admit that impact is not defined by the number of direct reports. This is not always possible with companies that need their employees to do a lot of external to company work. “Head of” is a happy medium startups are starting to use, but it can still feel like somewhat of a demotion when that title is converted to, say, a Director, when a VP is hired.

#2: Confuse Being OP and Poor Performance

I want to be perfectly clear: do not nerf for poor performance! You nerf when someone was performing well, and a process or scope changed to unintentionally give them too much scope. If you have a good CMO, and you ask them to take Customer Service, and they don’t manage it well, you still have a good CMO. Change the scope, not your performance management strategy for the CMO.

What if you promoted someone to a new level, and they are not meeting it? Well, that is not following performance management best practices. You should be promoting someone when they are already performing at the next level for some time, which eliminates the risk of overpowering them. This is why you want to have career guides with clear levels and expectations for them, so you promote only when it is appropriate. Hired someone at too high a level? Do not nerf; demote or fire. Yes, they will most likely leave, which is why you want to be careful about the titles you give just based on interviews and not actual job performance. What if you have a big hole to fill in the organization and have to do it internally with someone who hasn’t demonstrated all the skills necessary? It happens, but recognize this should be more of a last resort situation.

What about people who move into new roles where they are not effective? This is also a situation I prefer not to have happen. I much prefer creating apprenticeship programs within organizations where individuals try the role for a while before they are permanently placed in that role. Apprenticeship is therefore the evaluation of whether the person can meet the expectations of the role. I recognize this is not always possible, but it’s a sound strategy nonetheless. We do this in product management at Eventbrite today. Those in other parts of the organization in good standing with their manager can work with a product manager on a project to see if they like it, and for the organization to see if they would be good at it.

Nerfing Best Practices

#1 Take the Blame

If you are nerfing an individual, it’s important to make sure they don’t feel like it’s a demotion. When announcing the nerf to your employee, make sure they know the reason for the nerf to occur, and that it is your fault, not theirs. You gave them too demanding a scope, and you’re fixing it. If you’re nerfing a team, this is usually less of an issue. Also, make sure that others in the organization that were affected by the OP individual or team know that you believe this to be your fault, and they should not hold animosity toward the individual going forward.

#2 Thank the Individual You’re Nerfing

Whether the change that made the individual or team OP was intentional or not, thank them for their effort to help the company, and say that the nerf is a way to make sure they can create a positive impact for the company with the right scope. People should not be penalized for trying to step up for the organization.

—
I think it’s incredibly important to manage performance of people and organizations. The gaming community has created a vocabulary that provides a solid analogy with corporations, allowing us to separate performance issues from structural mistakes. The more companies can separate those issues from each other and use different tactics to manage them, the stronger those organizations will be.

Currently listening to my 2019 playlist.

Thinking Outside the Job Title Box: How to Thrive in Undefined Roles

Leave a reply

As a leader of a large team, the members of my team tend to have pretty well-defined roles, like designer, or product manager, or researcher. They also tend to interface with other employees of the company with pretty well-defined roles like engineers, analysts, data scientists, etc. Now, most of the time, these well-defined roles operate in cross-functional teams. But, what if you don’t operate within one of those roles, or don’t want to fit the mold of these well-defined roles? How do you work with teams? To answer that, it may first be helpful to understand how these teams form.

“In the beginning, there was an engineer.”

Most startups begin with an engineer building something from scratch. As the company scales, usually a designer is added next. Then, as keeping track of projects between the designer(s) and engineer(s) becomes onerous, a product manager is added. Then, as the team scales and problems become harder, the product manager and engineer(s) don’t have enough time to fulfill the analytical needs of the team, so they hire an analyst. Then, keeping up with users becomes too time consuming for the designer or product manager, so they add a researcher, etc. This is an overly simple example, but all cross-functional teams grow larger as the company scales, with more specialized roles over time. One issue you may have if you don’t fit into this model is that you want to perform a more specialized role than the company has scaled into needing yet.

The opposite can also be true. You may want to do bits and pieces of a well-defined role, but not all of it, or may want to combine some elements of a few different roles into your job. Either of these situations can be totally fine. But each require a more tactical, subtle approach to working with teams than fitting within well-defined roles. When people outside of the cross-functional teams want to work with these cross-functional teams, they frequently perceive friction. They interpret this as political, when in fact, it is structural.

By definition, when you don’t have a clearly defined role to others, they do not know how to work with you. The onus is on you to prove value so that they want to work with you, because they don’t have to. Usually, my advice when people come to me with these problems is to switch to a more defined role. There may be a valid reason to leave your role less defined though, and in this case, I propose a framework for finding a valuable fit within a cross-functional team.

While all cross-functional teams have well-defined roles on paper, in reality, for all the needs of a team, people within the cross-functional team trade off responsibilities based on skill set and interest. You may have a PM who’s better at execution, so the designer takes on strategic duties, for example. What you’re trying to find with a less defined role is a team that has a need for a skill set, and wants someone to fulfill that need.

What happens in each of these boxes? Well, if your role is not needed or wanted, then you don’t get an opportunity to help. If your role is wanted, but not needed, you tend to be superfluous and lowly leveraged. If your role is needed, but not wanted, you experience rejection. If your role is wanted and needed, that’s where the magic happens. You integrate into the cross-functional team well, help them achieve their goals, and likely are happy in what you’re doing.

Two Tips to Make These Roles Work

#1 Get a senior leader to sponsor your effort
It’s almost impossible to make this type of role if your manager and ideally someone very senior in the organization support it. If senior leaders are very strict about team formation, it just might not be the company where you can be successful in a non-uniform role. Also, if your manager doesn’t support the direction you’re targeting, there will be a big mismatch come review time that will stifle your career.

One way to be more successful with managers and senior leaders is to be very clear why you want to work this way and what value it adds to the company. I would not recommend going to managers and senior leaders suggesting you not fit a typical role in the organization, and then ask how you can be effective. You are not giving them two problems: 1) someone who won’t fit into the traditional organizational structure and 2) someone who doesn’t know how to help the company. For many managers, this would trigger them to ask why you’re at the company in the first place if you don’t know how to help.

#2 Approach teams with humility
Your approach to talking to managers and senior leaders about your role should be very different from how you approach teams. While with managers and senior leaders, you want to make a clear case of the value you can add and what you want to do, that can not work so well for approaching teams. A better approach gets across a few key points:

  • You’re interested in the problem they’re working on
  • You think they are doing interesting work
  • You’re just here to help in whatever way you can
  • These are the skill sets you have that may be valuable
  • Finally, the ask: What can I help with?

Whether you have a traditional or non-traditional role in a team, the first step is building trust, and that is usually earned by doing smaller tasks the team is not getting to and would like help on. From there, you earn the right to work on more critical tasks. It may take some time to get to the role you’re most interested in playing on the team, and that is normal.

—
At Eventbrite, we have multiple people who sit outside the traditional paradigm of well-defined roles who are thriving. They all found a way to add value to a team that was wanted and not competitive, and the team operates better for it. But this all happens on an opt-in basis. The teams chose to accept them. If you want to play outside the lines, you have to understand that other teams playing with you is entirely opt-in on their part. This is the risk of not participating in the structure the company operates in; you may find opportunities to help that the team isn’t welcoming to, and there’s nothing you can do about it.