Why Customer Network is the next big thing that every startup needs to master

2019 was the year when VCs and startup founders soured on paid acquisition.

Contrary to what most thought a few years back, CAC (cost of acquiring a customer) didn’t go down as many D2C startups scaled. The costs instead went up.

The explosion of D2C brands and mega rounds of funding led to massive amounts of capital deployed into advertising. All this cash flooded Facebook, Instagram and other social channels, and bid up the costs Google ads.

We’ve heard that these channels have become saturated, and that the companies are seeing diminishing returns on spending additional advertising dollars.

We also heard that consumer’s attention has become fragmented and that, combined with increasing competition for eyeballs from the brands and saturation of the channels, has led to increases in CAC.

While all of this is absolutely true, this is only 1/2 of the story.

Why startups struggle to scale

The reality is that unless you have a strong word of mouth, you are forced to spend money to grow your customer base. And that relationship between the spend and the growth is linear.

The more you spend on marketing and advertising the more customers you get. On the surface it sounds great, but if and when you dial down your spent – your growth stops.

This is not a great business. From my point of view, there is no product market fit.

You, at best, have linear growth as you spend money, but your business is not attractive because it has no economies of scale in terms of acquiring customers.

And this can be true not only for D2C startups, this same problem exists in B2B, although it manifests a bit differently.

In B2B world, the lack of word mouth manifests itself in a struggle to scale your sales and sales team.

As you grow, you keep adding more sales people to get more revenue. On the surface, this is what everyone does. Yes, but here is the problem – at scale, this becomes the race against entropy – managing ever growing and complex sales organization against ever growing and more aggressive revenue targets.

Your Customers as a Network

So what is missing here and what is the solution to both D2C and B2B scaling problem ?

I’ve been thinking about this problem through 2019 and I believe that the answer is to re-think your approach to customers.

Instead of thinking of customers as a set of rows in your CRM, we should think of them as a Network.

Why would you think of customers as a network instead of a list ? Because networks have super powers when it comes to word of mouth, network effects and stickiness. Because networks outlast and overrun lists.

To put it simply – unless you patiently and deliberately nurture and scale your customer network you will forever be stuck in a linear growth, and have to fight entropy in a form of churn and competition.

3 key ingredients of your Customer Network

Let’s start with the businesses that are natural networks, for example, Twitter or Facebook. These business organically benefit from the network effects, because they depend on building the network to begin with. As I post a tweet, you read it, and then I read your tweets, and at scale one big sticky network emerges.

What about D2C businesses, where they don’t have a natural network ?

There are 3 things that need to be in place:

1. Truly exceptional product, which is so great it leads to  a word of mouth
2. Strong focus on early adopters and fans
3. Ongoing and deliberate nurturing of community of customers to create a network

Build an Exceptional product

To begin with, if you don’t have an amazing product, nothing else will matter.

As Andy Rachleff pointed out in his recent podcast with Mike Maples Jr. unless customers scream when you take away your product, you do not have a product market fit.

If you don’t have a truly great product, you will always be stuck buying customers. You will not be able to get a word of mouth. Your CAC will never go down. The main way that great products reduce CAC is through a word of mouth.

Focus on early adopters

Provided that you have a great product, you need to focus from day one on building a strong core of early adopters.

It is not enough to just sell the product. You need to make sure that you have early adopters who love it so much they become advocates.

These early adopters have to talk about your product at parties and on social media. They have to be obsessed with it. You should be able to see and measure this obsession. This obsession should be obvious.

Grow and nurture your Customer Network

And finally, beyond the early adopters, you need to deliberately nurture and grow the community of your customers.

Union Square Ventures – perhaps the best firm (along side with Benchmark) known for its focus on businesses with network effects. Part of USV’s new thinking, as partner Rebecca Kaden wrote here, is that a community is as a defensive mesh that a company can create to ensure customer stickiness, and word of mouth.

Realize that this dynamic is much different from Twitter and Facebook situation. There are no natural need for connection, instead, the community is deliberately nurtured and grown by the company. A community, or a network, is an overlay on top of the existing customer base.

Your customer success team should not just focus on an individual customer, it should focus on building a community – a network around your product.

The need for a new kind of CRM

This new way of thinking – your Customers as a Network, requires a fundamental shift in how CRMs and Customer Success are done today.

In that new CRM customers won’t just be organized into rows, they will be connected into groups, and networks. Much like Twitter and Facebook analyze the strength and dynamics of these connections, so will these new D2C brands.

These CRMs will have network-centric thinking built into your customer management:

  • Don’t have a connected network ? Your business won’t scale.
  • See a bunch of customers that aren’t part of your community ? They might be at a higher risk of churn.
  • See a growing vocal group of dissatisfied customers ? You may need to address the feature they dislike quickly.

The Network-based approach to your Customer Success will become critical to success of your business

Customer Network for your B2B business

And what about B2B businesses ?

In a way, it is even more natural for B2B companies to think about their customers as a Network.

The customers of your B2B business already likely known each other. They go to the same industry events, follow each other on Twitter, and likely even had a few beers together.

In a way, it maybe even more natural to create and to leverage the network of your customers if you are running a b2b company.

So this is the takeaway – networks become critical in customer success and in scaling of your business.

The next generation of D2C brands and B2B companies will need to satisfy all 3 criteria above – great product, strong early focus on early adopters and smart weaving of community around their product and brand. They will need to both – build an exceptional; product and to nurture defensive network around it.

Leave comments and let us know what you are doing to nurture your Customer Network.

Product and Marketing Startup Advice Startups

Alex Iskold View All →

Engineer, Immigrant. Vegan. 3x Founder, Managing Partner @2048vc. Previously ran @techstars in NYC. I write #startuphacks: http://alexiskold.net .

19 Comments Leave a comment

  1. Pingback: Marketing |
    • Larger companies that do conferences and events. Companies like Slack, just because the product is viral. No one has done it specifically as a network of customers to my knowledge though.

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  3. Absolutely love this – we’ve been working on exactly this problem at Duel for the past few years. Firstly, I don’t think I’ve ever seen the problem and solution as articulately put as in this blog, so thanks. It’s been incredibly hard to convince brands to depart from their addiction to Facebook ads – even when (in many cases) word-of-mouth really drove the purchase, but the ad is the last click, incorrectly attributing the sale. However, you’re dead right in that this has all changed in 2019 and there now appears to be a hunger for something new.

    We studied or spoke with 200+ of the most advocacy focussed brands we could find to identify their secret sauce, and it’s exactly what you put – customer networks, communities and groups. Most people seem to think a community is a customer-to-customer channel (e.g. a forum), but we believe these people are a tiny subgroup of superfans (<1%) who want to speak with other customers. It's the top 20% of fans who consume content and advocate to friends that are still massively underutilised. These customers feel a personal connection to the brand and will contribute to helping build it. This certainly includes talking about it, but also creating UGC, leaving reviews, product feedback, market research and sharing to their various social channels. And the more they contribute, the more they talk about it with their network and the more they purchase themselves. In many cases, it seems this top 10%-20% of customers can, when attributed correctly, drive 80%+ of growth.

    The second point you made about a new kind of CRM being required. We came to the exact same conclusion, adding that the new CRM needed to focus on customers' contribution/collaboration with the brand – two-way communication rather than the conventional one-way model (often just results in bombarding customers with emails containing discounts). The customers then need to be segmented by groups and tiers based upon their level of dedication to the brand – the fan club model is much more appropriate than the conventional CRM approach.

    We've actually built this platform, calling it a Brand Advocacy Platform (www.duel.tech). It's only just emerging from beta but the new approach seems to be resonating strongly with our initial brand partners (we're based in London, so predominant D2C brands in Europe) but there's still a long way to go establishing the new category. However, if you (or anyone else) is interested in helping bang the drum to change brand behaviour (or just chatting about advocacy), I would love to chat.

    (apologies for the long comment – we live and breathe this stuff so quite passionate about what you say!)

    Liked by 1 person

  4. Good point! While in B2B enterprise there have always been user groups and related conferences and events, such as ASUG for SAP, there is still more work possible in linking customers and partners through more modern networking platforms.

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    • Correct. And re-thinking the whole thing bottom up with the focus on building a network that ultimately reduces CAC and helps acquire customers more efficiently.

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  5. Hi! Very insightful article, I completly agree with your point of view Alex.
    What do you think about B2B2C? Maybe is more difficult for a company who mainly sells through another platform to build a community, because the first intention of the user was not to buy from your brand (they may not “buy” or know your value proposition) Example: you focus your acquisition strategy to appear in aggregators portals.
    I can imagine the onboarding and customer service are key in this case, just wonder if anybody knows an example of a B2B2C brand with a strong community and how did they achieve it?
    Thanks!

    Liked by 1 person

  6. Hi Alex,

    I didn’d explain it correctly, what I mean is acquiring customers through partners (B2B) but bringing them to your website to complete the journey, payment, experience… also the customer service would be in charge of the company and not the partner…

    Liked by 1 person

    • In that case, the part of my post thats relevant is about B2C.
      What you are doing is using channels to get to customers and you are likely paying for that, and then as you scale and build Customer Network out of your B2C customers, thats when you are going to reduce CAC and see increasing returns.

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