Traction Channel Analysis for Startups [Startup, Marketing]

“Most startups don’t fail because they can’t build a product. Most startups fail because they can’t get traction.”

— Gabriel Weinberg and Justin Mares

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Good products don’t sell themselves. So find ways to bring your products to customers

I have been invited to be judges for many startup events. One of the most popular mistakes in the pitches I’ve seen, is that founders spend all of their time talking about how cool their ideas are. Some will talk about market opportunities, better ones will talk about product market fit on the persona level.

Only the best ones have an idea on traction channels for their products.

At today’s world, good products no longer sell themselves. You need to somehow blast through irrelevant (or sometimes relevant) noise to bring your product in front of people who need it.

Traction channels are essentially the “ways” you will use to

1. Get your target audience to know you exist (yes this cost quite a bit of time/money today)

2. Get them to consider you as one of the options (this cost even more time/money)

3. Convert them into your customers (this cost even more time/money than item 2)

Part 1: Divergent ideation: let’s come up with some traction channels

To start, let’s explore what are some ways we can reach our target. The following is a very rough example of the exercise. (NON-EXHAUSTIVE! Do spend time doing your homework to come up with your own list):

Let’s take a look at marketing… combining digital and traditional methods we have many ways we can reach our customers through this channel. This list is non-exhaustive!

A quick mental excercise will also give us quite a few possible routes through PR related methods. This list is non-exhaustive!

Before we dive into anything with calculations, we should spend enough time exploring possible traction channels. Don’t rule out channels at this phase; this is the step where we want to think of as many routes as possible as we want to consider most options. Keep in mind that social media marketing channels, while useful, can also be irrelevant in some cases. For example, if you need to run a one off event in a local community, sending people to hand out fliers can be a whole lot more effective than running a Facebook ad, regardless of how good you are at social media marketing.

After you have done your mental exercise on exploring traction channels, we can home into our initial sets of key traction channels. Most startups start with around 10 channels, and spend 80% of their time on top 5. Unless you have a huge team, anything more than 5 channels at the same time likely means that you are not putting enough time into any of the important ones.

Start with an educated guess (ask mentors, other ppl in the industry, etc), then iterate. Doing the next excercise will help you evaluation your traction channels.

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Recommended reading: Traction: How Any Startup Can Achieve Explosive Customer Growth by Gabriel Weinberg & Justin Mares

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Part 2: Convergent analysis: Traction channel analysis. This is one of the most important go-to-market (GTM) framework a startup can and should use

This table helps you list out your top channels with foundational analysis and help you achieve the following:

1. Identify your top performing channels (in terms of ROI, top-line contribution, and much more)

2. A good foundation to calculate your startup’s marketing expense, revenue streams, return on investment for your marketing initiatives, your bottleneck, etc

3. A very actionable analysis that tells you what you should spend time/money in. (more than half of a startup’s work is building traction/getting customers)

4. Startup health diagnostic

5. and much more

Okay let’s dive in.

A very rough version of traction channel analysis based on very early stage EONIQ’s marketing

Column: ChanneL, description

The first column is where you enter the top traction channels that you’ve considered important for your startup. While EONIQ started as a pure online company, for demonstration purposes I also included a sales related channel into the table. You’ll notice that if you want to break things down into very fine bits, it’s possible. For example item 1: Instagram Post Ads can be broken down into IG boost posts, feed 4:5 posts, story posts, KOL sponsors and more. I’d advise against breaking down the analysis to too much fine details as that will make certain top down decisions difficult and short term fluctuations will make some rows’ calculations and analysis inconclusive at the least.

The description column basically details of the 1st column. The content should be pretty self-explanatory.

column:cac

This is one of the most important analysis any startup can do. CAC stands for Custom Acquisition Cost. Some people call this CoCA which stands for Cost of Customer Aquisition.

In a nutshell this is basically the amount of money you need to invest in any particular channel before you get 1 paying customer. In this table, you see that for Instagram Post Ads, I can get a customer after paying 30USD. In digital marketing channels these days with tracker installed this number can be automatically calculated and should be easily accessible from your ad dashboard (e.g. Facebook Ad dashboard for both Facebook and IG ads). By default these dashboard shows how much you have spent for each ad/ad sets/campaign, and they will show you how many customers you’ve gotten through the relevant ads.

Dollars spent per channel / number of customers resulted in the same channel = CAC

In our example table, channel #3, you can see the CAC is calculated to be 1000USD, as I need to pay my business developer a salary of approximately 2000USD, and he is bringing me on average 2 customers per month. 2000USD/2=1000USD per customer for this channel.

Then, shall we ignore all channels with higher CAC? Afterall the cheaper we can pay to get one customer the better that’s going to be right?

Not exactly. For two reasons, which bring us to the next two columns:

1. Customer Lifetime Value for each channel can be different

2. Each channel usually has a saturation point. i.e. you cannot put too much money into the same channel within certain specific time frame.

column:CLV

CLV stands for Customer Lifetime Value. This means how much a customer will pay you throughout the ‘customer lifespan’. To do this the very accurate way we’ll need to calculate a lot of numbers, but to make things simpler, I’ve found the following 2 methods cover most of start-up’s cases:

1. “1-off purchases”: If a user is buying 1 to a few products from you over a less than 1 year time frame, just make an assumption on how many baskets you’ll get, and then multiply it by the basket value. So let’s say on average someone buys 1.1 watch (I just made up this number) over the lifetime they are engaged to any certain brand, and each watch retails for 100USD. Then the CLV will be 100USD X 1.1 = 110USD. Pretty simple math. So in summary:
   CLV = Basket value X Expected number of baskets

2. Subscription (SAAS) or highly recurrent purchases (Amazon and alike): We’ll need to understand that $100 paid to us in a year’s time has a different value as $100 paid to us today. The discount has a lot to do with cost of capital (feel free to look up this term but not required) and the cost of capital has a lot to do with our operation’s risk. Skipping all the jargons and calculations, I can tell you that for high risk startups, the discount rates can range anywhere from 30%-70%. Meaning, $100 paid a year from now, is only worth as little as $30 today. “WHAT?!? 70% discount?” You may think. “I thought back interest rate is less than 10%?”. True, but that’s a bank. Considering that your startup may not exist after a year’s time, 70% discount rate for anything that happen after a year makes a lot of sense.
   Now that we have established that money in the future is worth a lot less, let’s not think that some $9.99 subscription per month perpetually means infinite money. A perpetual cashflow, with discount, the NPV (Net Present Value, which is today’s value) is calculated as such:
   CLV=NPV of customer’s subscription payment= (Payment within certain period)/(Discount rate over certain period)
   So let’s say someone is going to pay you $9.99 per month, with a discount rate of 70% annually, the CLV is $9.99/(70%/12) = $171.36. Notice that the monthly discount rate can be obtained by dividing the yearly rate by 12.

Why is this column insightful? We our understanding that CAC is the customer acquisition cost, and that each customer is going to pay us the amount of CLV, with the CLV we basically know how much we can afford on the CAC, or how efficient we have to be with each channel. CLV gives us the unit economics. Taking watches as an example: CLV - Cost of Goods Sold - other costs - CAC leaves us with a very rough estimate of our profit. For D2C operations, with most of the retail operations online ending up with COGS at anywhere between 10-50%, I’d try to keep the CAC:CLV to around 1:3. So spending 1 dollar to get 3 dollars back (1:3 is also the ROI) is a good start.

“Okay so if I have 1:3 on my channel, does that mean I can spend as much as I want and get 3X back? I’d be rich!”

No, unfortunately. This brings us to the saturation column

column:Channel saturation

This is a surprisingly insightful column for a lot of founders. Most channels have a saturation point, meaning, above which you will invest a lot more but get a lot less in return. Above the saturation point your CAC spikes up, and your ROI goes from positive to negative.

It doesn’t take analysis to show that if you stack 2000 people handing out fliers at a road junction doesn’t help with your ROI, so I’m going to dive a bit deeper into our social media channel.

Facebook, IG, Google and the likes function very similarly in a way; they need to help businesses find the most suitable, relevant audiences for their ads. A platform with too many irrelevant ads will cause audiences to drop out. So with their algorithm they identify the most relevant viewers, and show them ads.

But as you increase your budget, you are forcing them to show the ad to more people. As a result the platforms now show your ad to semi-relevant people. Audience quality drops, the click-though-rate and interaction rate drops, then the platform concludes that your ad quality is dropping. Now that’s hurting them, so they raise your CPC (cost per click) or your CPM (Cost Per thousand (Mille) impressions). If each click/impression cost goes up, your CAC multiplies.

This column takes the most time to fill out, and is also the hardest to accurately estimate. I recommend leaving it empty, or check with your peers in similar industry to find a reasonable estimate for yourself. After you start your marketing initiatives rolling, update this column weekly.

Okay I’ve done the table. Now what?

When I’m working on EONIQ, this table takes up a good size of my mind share daily. Here’s why.

1. Saturation of the top 5 channels combined is basically the maximum top line I can achieve with my business.

2. CAC of all channels is basically my marketing expense

3. CLV/CAC is basically my ROI for each traction channels.

4. My job everyday is to lower the CAC of my main channels and to raise the CLV of my main channels

5. And when the top 5 channels are optimized, then I look for a new channel (company growth after optimizing on core channels)

Once you get used to thinking in this framework, you’ll be able to reverse engineer other businesses as well.

Need Analysis for Marketing Messages [Design Thinking, Marketing]

Start from what our customer wants

It is imperative that as a marketer we do not just speak to what our customers tell us they want. Humans are complicated beings, sometimes even we ourselves do not know what we want, or why we made certain decisions. A simple mind exercise you can do right now, is to ask yourself this question: “Why did I buy the phone I now use?”

You'll likely have an answer immediately. But then when you challenge your first answer, most of you will realize that your first answer is merely a justification. Most of you desired the phone first, and then followed up with your rational thinking to “decide” that such purchase decision is wise. Therefore, before we do anything marketing, we should first consider: what are the key desires/needs that our customers are looking to fulfill?

“If I had asked people what they wanted,
they would have said faster horses.
”

— Henry Ford

Organize the Needs/Desires for our persona

Careful, objective and thorough customer interviews should give you pretty good insights as to what your customers are looking for. Let’s take my brand EONIQ as an example, we make customized watches at around 200USD price point. 1st I’ll put into the table the top 5 needs for one of our persona, from the most important to the least.

Step 1: Put in the key 5 needs from your need finding customer interviews

Then I’ll try to give them %weight so they will add up to 100%. Try to avoid having equal percentages for 2 need items as most of the time we do have one need being more important than the other; it’s just that we might be too lazy to rank them during this exercise.

Step 2: Try to give the key needs % weight. At this stage if you realize that the ranking’s a bit off, it’s now time to re-arrange them.

Them it is time for us to fill in the key messages. These are the key messages that we want to bring to our customers. There are many channels through which we can portray such messages, such as our branding, our press coverage, our social media profiles, our websites, our ads, and much more. One way to get started without getting overwhelmed is to imagine a video Facebook post: What would be the title text? What about the description texts? What are the key points I want to include in the video?

Keep in mind that this step is highly iterative. As you run more ads and conduct more social media listening your messages WILL change.

Step 3: Fill in our marketing messages. What should be included in your sales pitch for your persona?

The item flagged [I] in red are messages that you cannot explicitly state. It’s very useful to include these items, and be reminded that we will have to use implicit means (background music, video shooting artistic directions, casting, etc) to bring such message forward. Saying that a watch is cheap doesn’t make your customers proud, so we will have to imply that the watch is affordable. Another example is that if you run workshops for your company, you should probably prevent stating that the whole workshop process is very simple and easily enjoyable, as that will make your workshop feels cheap and unprofessional.

After completing this table, you’ll realize that some of your messages can address more than 1 user needs/desires. Feel free to highlight and mark those items down. We’ll be able to group them in the whole product analysis tool.

Repeat the exercise for Barriers

A lot of marketers focus on selling points and forget to counter the negative biases of the viewers in our marketing channels. Case in point: EONIQ sells customized mechanical watches, and one of our key channels is Facebook marketing. Whenever one of our target viewers scroll across a watch sponsored post, there’s a very high chance that the post is about another watch that retails at similar market price (Facebook algorithm), which is usually a quartz driven fashion watch that is made to last a little more than a few months on a wrist. Over time whenever they see a watch related post, they assume nothing more. Barrier 1: assumption - we are just fashion watches. This bias creates a major barrier for our customers, so most of our initial ads ended up screaming “we are not one of them!” with our visuals.

But then viewers begin to assume that we have a very high selling price so they stop clicking on our ads altogether. Barrier 2: assumption - we are very expensive.

Both assumptions became significant barriers to our conversion. As marketers, if we can anticipate the viewer’s negative biases and counter them, our marketing efforts will become more efficient.

Barrier and counter messages for our persona

You’ll realize that most of the counter messages are implicit (marked with [I]). This is because direct counter messages to false assumptions generally make you look like you are explaining yourself and is rarely desirable in marketing’s context.

Review, role play/mental exercise, iterate

Now that the table is completed, some of you may feel accomplished that you’ve completed a framework. This is not the point though, as the main reason why we create this table, is to help us prioritize our marketing messages with our logical mind so that we can then use our hearts to empathize with our personas.

The final most important part of this framework is then to highlight the more important messages addressing our more important key barriers and key needs/desires. Connect those selling points into a short sales pitch, and then put yourself in your persona’s shoes.

Will your persona like what they hear?

If yes, you can start creating your online presence, decide on your social media profile, your website contents, your brand videos and more. Don’t forget to come back to this exercise; after 4+ years of selling to thousands of customers, I still need to refresh my understanding of my customers from time to time.

P.S. I can run my role play mental exercises a lot easier with a pie chart format than a table format with numbers. If that’s you as well, consider conducting the whole product analysis.