How Startups Should Use Social Media

I’ve been reading the excellent Startup Marketing Blog by Sean Ellis. Although Ellis doesn’t specifically talk about social media in his blog, he does talk about various free and paid “channels” for growth. The various forms of social media are some of these channels.

Product/Market Fit

But Ellis does not advocate working on growth right away—in fact, he advocates spending no resources on marketing until a startup has found what he calls “product/market fit”. Ellis, who is very metrics-oriented, defines product/market fit as the point where 40% of customers say they would be “disappointed” or “very disappointed” if they could no longer use the product.

Imagine losing your iPhone or your internet connection. Feel lost? Ok, that’s product/market fit. If customers feel that way about your product, you’re in good shape. Ellis even has a survey tool you can use to measure this.

Until a startup has reached product/market fit, the focus is on product development. Social media can be used as a source of customer input, but it should not be used for growth or to generate company awareness. Indeed, generating awareness about an immature product is not only a waste of money, it can create the opposite of what you want – a bad reputation.

Then Growth

Once a startup has found product/market fit, the focus shifts to finding growth channels – any channel where the cost of customer acquisition is lower than the lifetime value of a customer is acceptable. The role of social media here is that acquiring customers through social media—having them find you through natural search because of your blog, or having them discover your product through a friend’s post on Facebook—is often cheaper than advertising. But, if your customer lifetime value is high, then you should use all channels—including social media AND advertising—to generate high growth.

An Example: Enounce

I thought I’d illustrate this with an example startup, and chose Enounce, a startup selling MySpeed, software that allows you to watch video faster or slower than its recorded speed. I know nothing about Enounce other than what I’ve learned from their website, although I am scheduled to talk to someone at Enounce next week so this was an opportunity to review their product and work on my blog at one time.

Using Ellis’s formula, the first question to ask is:

• Has Enounce reached product/market fit?

There’s no way to tell just browsing their website, but the Enounce execs have some excellent tools to answer that question. In particular, there’s a 14-day free trial of MySpeed. While it’s a slightly different metric than Ellis’s, I would say that if 40% of people who take the time to download and try out the software don’t end up buying it, there’s still work to be done on product/market fit.

Of course, many factors play into the purchase conversion, including price and target market as well as how the product works. In addition to working on the product features, Enounce should be exploring markets – where is this product valued? Most of the examples seem to be education, which makes sense – but perhaps the entertainment or publishing industries would have a greater need and deeper pockets. This is a great time for Enounce to use social tools – forums, fan comments, a blog – to gather as much customer input as they can get.

After product/market fit is reached, the next question is:

• What is the lifetime value of an Enounce customer?

At $29.99 for the basic MySpeed, an individual customer who buys only once is still worth quite a bit – let’s assume product costs are $9.99 and the lifetime value is $20. This means a Google Adwords campaign that returns anything below a $20 conversion cost is worthwhile. Sending the ads to a Facebook page, where users can read honest testimonials from users who love the product, may increase the conversion rate and make convert a campaign from unprofitable to profitable. See how it works?

Through all of this, Ellis advocates careful measurement of the right things (eg. how many people purchased, not how many became fans) and experimentation to see which factors affect performance. Does the conversion rate increase if the software is $5 cheaper? Does one industry repeatedly buy the Premier version? Of course, this is much easier to do in a web business than in many business where sales are made offline through a relationship-based sales cycle. But the principles are the same. If you can learn to follow these formulas carefully, and measure the right things, it’s a clear path to profitability and growth.

Next week: A dentist’s office, and the difference between a newsletter and a blog.

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