3 Pillars - Nir & Far - Episode #12

Hi, I'm Nir Eyal and this is the near and Far Podcast. This podcast is about business, behavior and the brain. On this show I do a few things. I read quick articles I've written about topics shaping your behavior. I interview authors of books I enjoy, and from time to time I devote episodes to answering your questions. If you want to ask me a question, visit the podcast page on itunes, go to Ratings and Reviews and ask me a question. By leaving a review, I promise to read it and possibly include your question in a future episode. So please ask me anything now. Enjoy the episode and for more, you can always Visit me@nearandfar.com this podcast is brought to you by X AI. You know, a lot of times when you listen to a podcast, the host will recommend a product because they're the sponsors and that's as simple as that. Well, I want to tell you about a product that I actually use. I've used it for about a year and a half now. It's called X AI. X AI is an artificial intelligence virtual assistant that will schedule your meetings for you. So every time I schedule a meeting, I don't play the email ping pong game back and forth. All I have to do is CC myvirtualassistance AI with a simple email address and the artificial intelligence will take care of the rest. It's a great product, highly recommend it. And right now you can get one month free by going to X AI nearandfar. And you want to enter in the discount code and near and far. Now remember, near is spelled like my first name, Nir. Check that out at X AI, near and Far Three Pillars of the Most Successful Tech Products By Nir Eyal if you've started a tech company to make a lot of money, chances are you're just bad at math or simply delusional. Statistically speaking, your odds of a big time payday are somewhere between zero and almost zero. 92% of startups fail within three years. Only 1% of apps in the Apple App Store are financially successful. And even for the fortunate few companies that raise venture funding, 75% will fail to generate a return on investors capital. Why do some companies scale to millions of users while others wallow in obscurity? What explains the runaway success of a company like Facebook, while a startup like Vidi, a mobile app for video, attracted millions of users and millions of dollars in financ financing, only to lose both? When it comes to a startup success, there's never a magic bullet. Yet as the British statistician George Box Once wrote, all models are wrong, but some are useful Perhaps the hardest part about running a new business is knowing what to prioritize. There are hundreds of decisions to make, and keeping sight of what's important and what's not is a constant challenge. But when it comes to helping teams stay focused, I have found one model to be extremely useful. I call it the GEM Framework. A company's job is to find a sustainable way to deliver value to customers, employees, and shareholders. To do this, the company must never lose sight of its gems, its growth, engagement, and monetization. Growth Growth is all about how a company finds new users or customers. Fundamentally, it's about getting the right message in front of people who need what you have. I call these messages external Triggers External triggers are delivered through various channels, including television commercials, salespeople, emails, or word of mouth. Some external triggers, like one satisfied customer telling another about your product, cost you nothing. Others, like running ads on Google or buying billboards along the highway, can cost big bucks. There's nothing inherently better or worse about one external trigger versus another. What matters is whether the trigger fits your business. Viral growth is wonderful, but can be difficult to engineer and sustain. Meanwhile, buying media can produce a steady stream of customer interest, but can be expensive. The growth question to answer is are we getting better at drawing the attention of people who need our product? And quantifying the answer to that question means tracking the number of new users or customers over time, as well as the cost of earning their attention. It's important to recognize that growth is a process and a practice, not an end state. Companies satisfied with their growth strategy are at risk of losing customers to their competitors. The growth hackers I know maniacally look for new channels and relentlessly test how many potential customers can be found and for what cost. The growth question is, are we getting better at drawing the attention of people who need our product? And the growth metric is the number of new users or customers and the cost of finding them. Engagement with some products and services, customer engagement is naturally infrequent. Think of the way people buy real estate or book vacation travel. Other businesses require constant, habitual engagement just to survive. Apps like Facebook, Slack, and Salesforce need to become a habit, or else they go out of business if the service isn't used. Often these products become less useful and eventually customers never return. Retaining customers means keeping them engaged, whether they're checking in on an app or checking out on a purchase. Some businesses depend on repeat customer engagement more than others. But most critical for investors, founders, and employees is to understand what brings people back? To track engagement, companies should calculate the percentage of people using their product or service frequently enough to be classified as retained. For some products it's once a year, while for others it's once an hour. The question are we getting better at engaging people who need our product? Is answered by calculating the growth in the percentage of retained users. So the engagement question is, are we getting better at engaging people who need our product? And the metric to track is percentage of retained users or customers. Next, monetization. Finally, companies need to turn some of the value they create into cash or they go out of business. There are many ways to capture value. Companies can charge a subscription fee, sell a one time purchase, or create marketplaces where they take a share of the transaction between buyers and sellers. When it comes to monetization, the most crucial question is are we getting better at capturing the value we create? And the metric here is profits. But it's essential not only to ask how the company is doing today, but also to understand how much untapped demand exists for the product in the future. This is the only way to predict whether a company will be sustainable in the near term and to make bets on how big the company can get in the days to come. This is where people get lucky with startups. While skill diligence and process drive user growth and product engagement, predicting future markets is notoriously tough. So much so that being smart can actually be a disadvantage. Smart people tend to try to predict future markets by reading industry reports, designing models and running numbers. However, with access to similar information, people tend to come up with similar conclusions. That's why being right isn't enough. Paradoxically, if you are right and everyone agrees with you, competitors will see the opportunity too. They'll enter the market and they'll eat away at your profits. Therefore, when it comes to monetization over the long term, there's only one way to achieve it. You've got to see a future market. Others don't. Next, if you can spot that big untapped market on the horizon, you've got to, as Warren Buffett advises, protect it with unbreachable moats. There are only five ways to defend your market from economies of scale. Network effects, Regulatory protection like intellectual property, brand and habit. Without a big unseen market and a way to hold onto it, future profits are no sure thing. So the monetization question are we getting better at capturing the value we create? And the metric to track is profits. The necessary trinity. Growth, engagement and monetization are interlinked and each is insufficient on its own. The most highly engaging, habit forming product will fail if it's used only by a small number of people who pay little for the service. The overwhelming majority of apps in the App Store are never found by a critical mass because the companies behind them have failed to find a way to profitably draw users users attention. Similarly, an amazing growth strategy using the latest viral hacks is pointless without a way to retain and profit from the growth. Vidi, the video sharing service and Snapchat predecessor, shocked Silicon Valley in the spring of 2012 by acquiring nearly 3 million users in just one month. But shortly after investors plowed $30 million into the company, it became clear the app was a leaky bucket that could not retain its users. Finally, huge market potential is useless without a way to profitably reach and engage customers. For example, music streaming services like Spotify and Pandora are a daily habit for millions of people. But if song owners manage to extract all the value by imposing stricter copyright terms, they have the power to destroy the streaming services. Of course, businesses have to worry about all sorts of other things, but thinking through the GEM Framework is extremely effective for keeping teams on track. As Tomas Tungas, a partner at Redpoint Ventures, told me, these three criteria help make sure the team is allocating resources correctly. When it comes to monitoring and regularly communicating what matters, the GEM Framework is precious. Thanks for listening to this article from nearandfar.com and check out nearandfar.com for more articles like this. Thanks for listening to this episode of the near and Far Podcast. You can always find more at my blog, nearandfar.com and don't forget, if you have a question question you'd like me to explore in a future episode, leave me your question. The former review for the podcast on itunes.