We have been assisting tech start-up clients with their product launch strategy. They are developing and plan to launch a customer-centric product (service). In the past, investors have shown an interest in these types of start-ups. This has been amply demonstrated by IPO’s of Facebook, Twitter and the like. It’s interesting that these IPO’s were made on the basis of customer base growth (in the short term) and not on standard financial measurements of revenues, profits, etc.
Facebook, started in 2004, is now used by 1.23 billion people globally. The company is worth around US$135 billion. In 1Q14, its net income was US$780 million and operating margins were 56 percent. The company had US$11.45 billion in cash. And it keeps adding new features and revenue streams. Its key challenge is to keep growing, both users and revenues.
So how can we utilize this fact to help clients develop and launch a customer-centric product?
It has been suggested that these types of tech start-ups go through three stages.
In the first stage, the product or service is offered for free to grow the number of customers. If the customers see value in the product, there will be a good uptake of the product and a growing base of customers results.
The second stage, the business model is adjusted to generate revenues. This is most likely done through advertising, with a limited access to customers for the advertisers. Although, limited, it is a highly targeted base of customers.
And in the third stage, the business model is adjusted again to enable the customer’s interaction with the advertisers. This could be offers or coupons or some other inducement. As this last stage develops, the advertising is still limited, but the customer engagement is increasing.
Of course, it is critical that two key measurements are maintained:
- the number of customers using the product/service does not decline and,
- customers remain actively engaged.
The second point is very important; measure and monitor the ‘active’ customers. Many businesses look at total customers, but it is the ‘active’ level that matters. This demonstrates customer confidence in the product.
And as long as the customers have confidence, and the investors have confidence that the business model is still innovative enough to keep customers engaged, investors will likely give a company time to refine their revenue streams.
What the investors are really looking for is that exponential growth in customer numbers that can allow it to use its dominant position to grow its advertising and pricing to generate revenues.