Startup School: Creating Scarcity

24/05/2013  |  There are 2 Comments. Leave yours!

Week 3 of Startup school by Seth Godin. Important questions are piling up but they all go back to the root. Are you filtering your project though these questions?

These are very though, but hard fact is that if you don’t answer them in the right way is unlikely your project will succeed and grow. You will hit a wall. And as you are building it from the gound up, you get to decide exactly how you will create it. Your choice.

Seth is going very fast through lots of concepts he has developed in his publications for many years and applying it to entrepreneurship, so there is a lot to take in and to drill down into. Books such as Tribes, All Marketers Are Liars are being referenced, while we have not gone into other essentials such as Permission Marketing. Long but necessary way to go. and a fun ride as well ;)

Find here the third podcast of Start Up. Looking forward to your comments!
Are you solving my problem?

If someone is going to do business with you that means they are hiring your product to solve a problem.

Base on a study someone at MacDonalds came up with data that indicated that 30% of milkshakes were sold for breakfast – Problem that it solves: how can I have something for breakfast while I’m driving that I can eat with a straw. The, MacDonald’s expanded the breakfast segment.

So the question is. Would I hire your product to solve my problem after I hear the story you are telling me? If your product solves my problem, probably I’ll hire you.

Is key to go down to emotional motivations: I won’t hire you because I need 6 widgets instead of 5. I’ll do it (in an internal level) to impress my boss, impress my family, to connect with people to figure out how to feel less afraid. Emotional motivators are the reasons we do stuff.

The placebo effect

Good reference so Seth’s book “All Marketers Are Liars”. There are very few professions (some very old) where people were extremely honest about what you were buying but in general that’s not the way human beings what to be marketed to. Human beings usually will think that if they buy a 90 dollars bottle of wine tastes better than a 10 dollars bottle of wine even though we could switch the lights and they could not tall the difference (well, at least most of the people). When you go to the person on the table you don’t tell them “would you like the more expensive bottle because the placebo effect will cause you to enjoy it more?” I have to put the wine show in order to make the placebo effect to work. You need to make your own ethical decisions to see is the ends to the means are justified. You might spend more money for a haircut just because it will it will makes feel better, although we might get the same haircut for cheaper 4 blocks away.

You can’t tell people truly why you are there and expect the placebo effect to work. It wont. That’s the magic of the placebo effect.
The challenge you have to deal with is to break from “manipulation”. Manipulation will be “I’ll get you to buy something that you will regret latter”, while marketing is “I’ll get you to buy something you are glad you bought”

That’s your opportunity. Is to tell a story about why someone should hire you. If they hire you and they love what you did for them, they will recommend you, and you have achieved you goal. So the art of this is:

Can you tell the story to the person that needs to hear it in a way that resonates with them?

Lock-in effect

Next question: Now, if the thing you are doing catches on, what’s to keep someone else doing the same for half price and everyone with switch to them? There are a lot of answers to these questions.

Is just too hard for me to switch. Eg. Once Apple has persuaded a school to use them, once they have installed everything and are set up, even if Dell shows up with a better hardware deal they won’t switch because if they do, all their software won’t work. Also, the lock-in effect many times is emotional, as you would have to admit to your peers you were wrong and now you will stitch to something better. Some people are immune to lock-in and they switch all the time, but that’s not the most common case and get stuck into a solution.

Good examples of generating lock in are loyalty cards and frequent flyers miles.

Are you building something that will spread itself?

Are you building this house in the land you want and with the structure you really want in a way you are going to be glad you did? Or is it a one-time pony and then you will move on to the next thing?

Let’s look at apps and why they can be a success or fail.

Eg. Angry Birds: huge hit, but if they wanted to do is make a hit and retire it was perfect. But if they are looking for a lock-in, they had to build a direct relationship with the person that bought the games: they needed an Angry Birds universe that would keep you buying the games.

The aps market is a sucker’s game in most cases for a few reasons: no one has ever heard of you and there are million apps to choose from – huge haystack and you are a tiny needle.
Once you get someone to hear from you, most apps forget to be social. Good example of achieving this: instagram. It works better if I get my friends to use it. One person will get 5 more because it will be more fun. It scales. If I make you an app so you can see the starts better, you will use it and love it, but you won’t get more people to use it. So, it ends there. They need to lend themselves to spreading.

Third thing that quick’s in: if you want to sell your app, no one will know how good your app is until they give you money to try it, and people don’t like to do that with digital goods. We never buy a music record or song whiteout hearing it first for free. The radio is this huge free sampling tool that made the music industry work.

In the app work a great model is to let you use them for free, and if you use it a lot then you will pay. Free is a great sampling tool. If they are not using it, they should not pay. And if they are, they will not fight you not to pay for it because it is giving them what they were hoping for. That means, them most important thing with an app is: make sure its viral.
Going back to the question about what you are building (as you can build whatever you want): Don’t build something that is not going to work.
There are so many apps where the person that built the app thought it was a good, idea. Because if everyone knew what they knew, they would love it. But fact is, everyone will never know what you know.

If you are going to do it anyways, you need to build an app with the cost of selling included. That’s the way the world on traditional marketing worked for over 100 years: very high cost of marketing. The cost of selling it must be included in your profit. If you app is great and it costs 5 dollars and you have to go have a meeting in order to get someone to buy it, you are in really big trouble. If you can charge the app for 500 dollars and every meeting cost you 100 dollars, then that probably will work. Otherwise, you need your creation to spread itself.

Going back to the initial example of 37signals, they don’t spend any money in traditional marketing. They just make sure their products will generate virality, because they just need 1 person in an office to use it to spread in that space.

The funnel

The top of your funnel is the population of your market (let’s say, everyone in USA). And the bottom of your funnel is people giving you money. The funnel is very leaky. Lets of people leak out of it.

Let’s take an interesting niche-marketing example: people that need to get divorced.

They have to talk to a lawyer, and they have to talk to a lawyer that is charging a flat fee, and they have to talk to a lawyer charging by a flat fee who knows you. You have to be very cognisant about how many people in the universe are left at the bottom of your funnel. You need to price accordingly. If the value you are creating is really significant and the cost of making the sale is really high, then is not worth 5 dollars. Maybe it’s a 1000 dollars service. It has to match the funnel that you want to create.

If you are evangelical, and you want to transform the way people get divorced, that’s a totally different discussion. You can say “I’m going to use technology to change the way people get divorced” you can find a bunch of thing you can do to disintermediate lawyers and make the process way faster and less painful. I’;; create a whole suit of solutions so that every time people are in this situation, they someone will tell them “have you hard of X?”. Then, that’s and audacious thing to go after and you will get people to give you the money to go after it ad have a shot at getting there. But in order to succeed, you need to do the whole thing, not just part of it.
Now think about the mediator. That person wakes up every morning with a problem (so, you need to think “what problem is my customer waking up every morning with?”) and they say: I need to get more of my share of mediations. And you say to that mediator that your tools gives them a dashboard that will make getting new clients easier, that’s their incentive. And they will say to you “I have been waiting for someone to offer that to me” or they will not listen to you.

So, everything goes back to: Do people know you? Do they trust you? Will they listen to your story? Will that story resonate with them enough so they are willing to give you a try?

If you have a hundred of mediators who are you customers, your job is not to find more customers for your product. Your job is to find more products for your customers. Because now you have 100 people that are willing to your technology to get more clients and to service my clients better and thus make more money. So, you growth will come from asking yourself: what other tools can I give them to achieve their goals? Then, I can use the connection economy to leverage this.
Eg, I could generate new charts that could show the mediator clients: compared to other couples that make as much as you do, this is how this usually goes. Now you are the arbitrary of community standards, and thus you can’t be replaced. You are the one who has the data.

The point now is not to answer the question of how to build something that will work; the point is to know that the question is essential. At this point of building something, you can change whatever you want.

What’s the hard part of your business?

If your business doesn’t have a hard part, then is not a business. And that’s where you need to spend your focus and time on. If someone asks you “how’s your project going” and you answer “I applied for the DBA certificate, I think I finally got some better office space, I’m getting the logo redesigned, I’m about to lunch my website finally” and you go through the list of all the stuff that doesn’t matter because is easy. The logo is important, but not the hard part. The hard part is being know, being trusted, being able to create something that people can’t live without.

What’s the scarce part?

Scarcity is the only thing that is worth paying for. You can create scarcity without doing something very difficult. You are and musician you want to create scarcity, you make a concert only for 200 people and sell those tickets for a very high price. Done. The hard part was getting to the point where people wanted to pay money to see you perform – they know you and they trust they will enjoy it. Once you are there, is easy to create scarcity.

As I use your service more and more does it become more valuable or less valuable?

Email becomes more and more valuable. You would pay more now than you would have paid 15 years ago because is more important for a company. As the project scales, it will make it better or worse?

Is someone going to steal my idea?

Probably not. Many people can have ideas, but the complicated part is to put the effort on executing them. Your problem as an entrepreneur is not that someone will try to copy you; the problem is that no one will try to copy you.

If you get it right, your momentum will go faster that any competitor. Because they are afraid and you are not. And you need competitors to make an industry work.

Picking my tribe

Tribes is a concept Seth has been talking for a long time and it does make a lot of sense. Take a read to his book Tribes, start with the TED talk bellow or take a quick read to this ebook about tribes.

I don’t want to pick one tribe, because if that tribe rejects me I will have failed, thus I want to pick 20 tribes so there’s always another one. If you do that, they know that and they know you are not obsessed with them thus they will not be obsessed with you. If you can show a tribe you care bout them and you are committed to them, they will care about you. Then, you can take the stories from that tribe when you go to the next tribe.

A tribe is not a group of people. Left handed people, not a tribe. They don’t care about each other. A tribe must have a goal, a culture, a sense of community; they must care about each other. They talk the same stories.

You will always do better in the connection economy if you are building something if the tribe embraces you. We are hardwired to what to do what other people are doing. If we see other people in our tribe is doing it, we will want to do it.

2 Responses to “Startup School: Creating Scarcity”

  1. Marcin says:

    Another great one Juan and I’m impressed how much work you are putting into those articles. Impressive Mate and I’m sure you will get much more out of that Podcast by having a deeper connection with the content. So, I had at least couple of “aha” moments out of that part. 1. Lock-in effect / it’s a first time I hear about that concept and I’m building whole start-up around that concept as it’s based on recurring SaaS model. Challenging model and concept, but looking forward to see it working. / 2. What’s the hard part of your business? > Many times I was messing around with easy part and didn’t focus on the hard part, like I do nowadays after listening that podcast.

  2. Juan Ortiz says:

    It makes sense to put time into this Marcin.. is like being back in Uni but knowing that this knowledge builds mental models that will be game changers in the future.. and on the other hand, is a lot of fun!

    When I used to work in Story Worldwide I discovered Seth, as the agency based itself on the post-advertisement theories… which is basically what Seth discusses with Permission Marketing.. great book BTW!. So, for a long time I craved immersing myself into Seth theories a bit more. The Startup school is a great way to see all the stuff he has been talking about applied to the generation of business models.

    Interesting to see our conversations about the app model reflected here uh? It was worth spending time on that over the last year!.

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