The Dangers of Discounting and Misleading Metrics for Startups

Steli Efti:

Hey everybody this is Steli Efti.

Hiten Shah:

And this is Hiten Shah.

Steli Efti:

And in today’s episode of The Startup Chat we’re gonna talk about bad lead shortcuts  that founders and startups should avoid. So, you know we’ve seen all kinds of shortcuts  that people take, startups take that they think will get them to the goal faster,  better and easier. And we seen how taking these shortcuts can be really deadly and can make you stumble and make your whole startup really go down the drains. So  we are going to highlight a bunch of these that we’ve seen in an effort  to help you avoid these shortcuts. I can share a bunch of them, Hiten you  can share a ton of them and we’ll go back and forth on these. So  let me kick things off, I think, so one of the shortcuts that I see  a lot of startups take is trying to purchase big lists of potential buyers, lead  less.

Hiten Shah:

Mm-hmm (affirmative)

Steli Efti:

And the way they do this is, there’s many websites that offer you just like,  you know, industry specific email lists and startups just think “Hey if we just go  there and buy 10,000 of these emails”, they do some math, “And then we send  all of them an email. Let’s say out of the 10,000 you know, I’d say  2,000 open the email. Out of the 2,000 that open the email, I’d say 1,000  respond. Out of the 1,000 that respond, let’s say 500 buy, well shit! If we get 500 customers in the next two or three months we’ll have all this revenue  and things are gonna be exploding and this is gonna be awesome”. So they go  and just spend you know, 10K, maybe a dollar a pop on an email. They  send the bulk email to this like really cold and really raw and usually very  low quality email list and then a number of things happen. Number one, these email  lists are usually very outdated. They’re full of people that you know, once somebody puts  that data in, it stays there forever, they don’t really clean their data bases a  lot. There’s no interest to clean their database in most cases. So, right off the  bat what I see is that around 30% of those emails bounce or just inaccurate  anymore, these people don’t work at these companies anymore, whatever. Right? So you purchase 10,000  but you really just got 7,000 emails that are still accurate. And then you send  a bulk email and 7,000 … By the way you might just get your email  account closed right away or you might get so many flags of being spam from  people, that you know, all of a sudden no email that you send anymore is  being received by anybody because it all goes straight to the spam folder. If your  email is hosted by Google you might just get your email account blocked and not  be able to receive or look at your emails at all. So all kinds of  bad things happen to startup that send mass emails, tens of thousands of emails at  once, that is not a good idea if they are cold. Let’s say even the  people that receive the email, that you got 7,000 to open it, usually … Oh  7,000 people to receive it, usually the open rate is really, really bad on these  super harsh and cold emails. Maybe out of the 7,000 you get you know, 2,000  to open it and then the reply rate is really, really low you know, out  of the 2,000 that open it you might just get you know, 100 to respond  out of which a lot of responses are “Not now”, “Not interested right now, please  take me off your list” or “Yeah, this sounds interesting I’ll look into it”. In  most cases you’re not gonna convert even a single customer out of that, just kind  of like 10,000 cold email you know, one to many approach is not really, specific.  Buying massive email lists and then sending like a one bulk email and dreaming that,  that’s gonna get you a win fall of new customers, is a shortcut that will  get your email banned. Will get you on spam lists, which will hurt your startup  forever. Will get you to lose a ton of money and will get you hated  by people; build a bad reputation and it’s not going to get you a lot  of customers. So, it’s one of those shortcuts that’s easy to avoid but I still  see a lot of startups take.

Hiten Shah:

Don’t buy email lists. They don’t work. I like that. So, shortcut, I’d say one  of the most common shortcuts in marketing, is when people decide that they read some  blog posts of some marketing tactic, they didn’t really understand it necessarily, although they don’t  know that and they basically decide to copy it. Here’s the mistake and why I  consider it a shortcut. You haven’t really thought through whether your customers are you know,  in that channel, their using that channel or you can even get customers from that  channel or users; and you decide that just ’cause this person, this other person who  blogged about it had success with that marketing tactic growth app or marketing channel, whatever  way you want to look at it; or whatever you read, that you will too.  So you just go ahead and use it, do it and then you fail. And  then you wonder why you failed. It’s ’cause you took a shortcut and you didn’t  take the time to put the lens on your own business and think through “Is  this applicable to my business” or “Am I just copying it blindly”. So a lot  of people copy these tactics and these marketing things blindly. And I feel like that’s  a pretty big shortcut. A very common shortcut I see and they wonder why their marketing is not working.

Steli Efti:

Love it. Yeah. So, next shortcut that founders take and startups take that will get  them into trouble is, well, the one thing that comes to my mind is, begging.  Right? So what happens, once in a while is that, this happens in sales but  I have seen it in other situations where a startup will want to … A  sales person maybe in a startup will want to hit a certain growth number in  a certain quarter and because they are so behind they start begging their customers. So  they’ll tell customers things like “Hey, I really just need you to, can you do  me just a favor right now? Can you just put in your credit card and  then what I am gonna do is I’m gonna give you a discount or make it in our billing system so that you’re charged in three months and you can  cancel in, by the end of the month if you really don’t want to buy  but I really need to make my quota. So if you just said “Okay” to  put in your credit card information, independently if you buy or not, that would be  a huge help to me”. Right? This is not as uncommon as you would think.  I’ve had a founder friend, I mentioned this in a much older episode, a founder friend of mine text me once and asked me “Hey can you please open a  paid account on our site, I have a board meeting next week and we just  need to hit certain numbers and we’re way behind, so I am trying to get  as many of my friends to put in their credit card and have a paid  account. I’ll pay you the money personally back afterwards”. And I was “Wow”, this is  soul crushing right? And we talked about that. Like how painful it is to hear a founder you know, this is not even just begging, this is actually more in  the lying category of like just faking these numbers in a way that’s desperate. To  hit certain quote en quote milestones that are important to investors or somebody else. Don’t  do this shit! This is so short sided. Your quote en quote thinking you’re fixing  your today problem but what you’re doing, you signed your death penalty for tomorrow. You’re  literally fixing a small problem today in a way that creates a massive problem tomorrow.  Right? You’re creating all these fake accounts. Now what’s gonna happen next? They’re all gonna  cancel, so your churn is gonna be really bad. You’re creating all these fake accounts,  which means what? That the goals that the company is setting for the next few  quotas are gonna be based on the fake success you had this quota. So all  the goals are gonna be crushing on top of it, not just it was unrealistic  to accomplish these numbers, because you are not accomplishing them right now anyways although it  seems you are, you’re also gonna have even worse numbers than you had this month  because of all this churn. It’s just gonna create all these problems, all these issues  for your startup. Don’t beg people to give you money because you want to accomplish  some goal. Doesn’t matter if it’s customers or friends and family. Don’t beg people to  create accounts. Don’t beg people to give you your account. Sales people often times they’re just like “Hey do me a favor, if you know you’re gonna buy anyways just  buy now so my quota looks good, because I need to hit certain numbers”. This  is a common tacit for sales people and it’s one I particularly hate so please  don’t do that.

Hiten Shah:

Yeah. That’s begging. Okay shortcut. Discounting.

Steli Efti:

Oo oo.

Hiten Shah:

So I find time and time again companies wanting to discount their products; whether it’s  a SaaS product, an e commerce product, anything. And there’s one key thing they don’t  realize, in the short run it might make you money, a lot of money actually  because you’re giving your product away for a cheaper price. In the long run what happens is people start waiting for you to have a discount before they’ll buy.

Steli Efti:

Oo oo.

Hiten Shah:

And it causes so many problems. Where all of a sudden your brand is associated  and thought of as more of a discount brand. And when I drop the mic  on this one I just bring up one company name. You can probably guess what  it is. Groupon.

Steli Efti:

Yup.

Hiten Shah:

And that’s all I gotta say and people are like “Oh yeah. Got it”. ’cause  you know what takes back when you go to Groupon, a discount, a massive discount  of something. And that’s their brand. They can’t branch out of that. And those discounts  aren’t even good for the businesses that they’re brought on and provide the discount. So  I mean think about going to, at least half if not 80% of the Groupons  that I’ve ever done, the service is off because people are just not happy taking  your money at that point. And so that’s an extreme example of what happens when  it’s a discount and what happens to the ecosystem of you know, your customer, yourself,  if you’re a market place, if you’re e commerce like it all adds up. And  I’m not saying like don’t offer a 10 or 20% discount if they give you  an email if you’re running an e commerce sight. I’m talking about the whole discount  sales and all those kind of things. You know? The 20% coupon or 10% or  five percent off for the email, even though I don’t like it, I totally get  why e commerce is doing that. It’s because they built that discount into their margins.  That being said I still think that if you want a brand that people aren’t  waiting for a deal to buy from, don’t ever offer a discount.

Steli Efti:

Another shortcut that I see startups take that I hate is picking really bad metrics  to report on, or vanity metrics. A lot of times in the early, a startup’s  trying to figure out, “How do we communicate our progress? How do we keep track  of that progress? What are the numbers that are growing?”. They’ll look for the number  that’s the most convenient for their ego, and for communicating success, versus trying to discover  what is the number that is the closest to the truth of what is really  going on. This happens all the time. I talk to startups all the time and  they’re telling me, “We already have three million users and we’re growing by this and  this metric”. I go, “Oh, three million users. How many of those are daily active  users, or monthly active users? How many of them have signed up in the last  30 days, versus have been around for a while? What’s the activity level?”. Without fail,  if I bet money on this I would have made millions just on this bet.  Every time someone’s giving me their massive user massive growth in terms of user traction  numbers, every time, they either don’t know their active numbers, or when they know they’re  like, “Yeah. You know, we kind of changed what we were doing in the early  days. A lot of these accounts were not really active, but we’re currently fixing that.  Da da da”. I’m like, “I’m still waiting for the number. What’s the active?”. Out  of the million users, last month they had 8000 active. I’m like, “Alright, don’t do  this. Don’t do this to yourself. Don’t do this to others. Everybody in your startup  is going to be delusional about how successful you are, because you have the ego  pleasure of telling everybody you have more than a million users. But the truth is,  you have only 8000 users. You had a million accounts opened for whatever reason”. Then  if you dig deeper, it turns out they created some kind of viral fakety fake  thing on Facebook with chat bots, and made people interact with the chat bot and  not realize that now they have an account and they are counted as a user  for that thing. It’s just all a bunch of bullshit, right? Smoke and mirrors to  make them feel good. It makes their team feel good. In some cases, in the  worst cases, it even makes their investors feel good. But they’re doomed to failure, because  it’s the famous, at this point the famous MySpace and Facebook example. Where MySpace was  focused on new accounts created, and Facebook was focused on active users and active accounts.  It made all the difference in what kind of decisions these two companies were making.  For a while it seemed that MySpace was doing a lot better than Facebook, and  growing more, and had more accounts. But Facebook really focused on the user experience. They  knew, “Somebody opening an account and then we never see them again, that’s not worth  anything. We need people to come back everyday. We need people to spend as many  hours of their day on our platform. That’s when we’re going to create all the  value, and that’s when we’re going to be able to really take over the world”,  and that’s what they did. Picking the wrong metrics. Looking at metrics that make you  feel good, make your ego inflate, make you feel excited. Your metrics to a certain  degree should make your life difficult. They should not be convenient. They should be inconvenient. It should push you, and they should be as close to the real reality as  possible. Not just numbers that look as good. Most startups just ask themselves, “What’s the  best numbers we can report?”. That’s the absolutely wrong approach. That’s a shortcut that I  would try to avoid at any cost, and I still see way too many startups  if not most startups commit that shortcut.

Hiten Shah:

Yeah, that’s a pretty bad one. I’m going to give one final one which we’ve  talked about. Well, final one for me. Maybe you have one more. Which is something  we’ve talked about a lot. A lot a lot. To me it’s a shortcut. We’ve talked about it on multiple podcasts in lots of different ways. It might be even  a theme of the podcast, which is, I think a shortcut is to take the  easy way. The easy way is the way, just like I was referring to. A  lot of these things even in all these shortcuts we’ve mentioned, it’s like you’re taking  the easy way out. You’re doing the easy thing. You’re doing the thing that is  the path of least resistance. But you might not have evaluated whether it’s the right thing for you. A great example is when you buy those email lists and they  don’t work for you. That was the easy way out. You didn’t build the email  list, you bought it. It just didn’t work. This has been consistent. Most people believe  that and have seen that these lists don’t really work. At the very least, go  on LinkedIn yourself. Use appropriate tools. Find people’s emails. Send a personalized message. Tends to  work a lot better. The same with the marketing one where you’re taking the easy  way out if you think that what worked for someone else is going to absolutely  100 percent work for you. To me it’s just a shortcut in general to think  that the easy path is the first thing you try, that it’s just going to  work. That also goes to the fact that I think it’s a shortcut to think  that you do things and they just magically work. Most things that are worth accomplishing  or worth doing or get you significant gains are either through a lot of trial  and error. Or through very deliberately thinking through what you’re doing, why you’re doing it,  why it’s right for you and your business, then actually executing properly on it. Usually  things that work are a combination of both. Of being very deliberate about your audience,  your customer, your product, your business, and using that as your lens to decide whether  certain things are going to work, in marketing, in sales, and almost every other part  of your business. Then doing a ton of trial and error with that framework in  place to figure out what the things that really work are for you. Don’t take  the easy way out. I think that’s the thing we all want to do as  humans. It’s a shortcut. It’s not necessarily going to work for you unless you get  lucky, and luck doesn’t really, you can’t count on luck.

Steli Efti:

Yeah, amen. I don’t have anything to add to that. I think that’s a beautiful  way to wrap this episode up. Do the right thing. Don’t go the easy route.  Think long term, and really understand that shortcuts often lead to places nobody wanted to  visit in the first place. They don’t really lead to where you want to go,  what you want to create. I think that’s it from us for this episode. We  will hear you very soon.

Hiten Shah:

Later.