There are three lanes and you need to win one of these lanes. How do you pick, and win, a lane? Too often startups often pursue this choice in a haphazard way, ending up betting on the wrong lane, or trying to win too many at once. To help you through this process, we’ve developed a three-step framework:
1. Validate that a lane is right for you
2. Commit the necessary resources to give the lane a real shot
3. Scale the investment to become world-class
Below, we walk you through each of these steps and share three real examples of how world-class companies approached each step in their respective lanes (Thumbtack with content, Airbnb with virality, and Booking.com with performance marketing). Let’s dive in.
Jump to the end of the post to see the framework in full.
STEP 1: VALIDATE
The first step is to validate (as cheaply as possible) that a given lane is right for your business. There are two approaches to validating this, which when combined will help you build confidence that a lane is worth committing to.
Approach 1: Determine which lane is a natural fit for your business model
Each lane is naturally suited for different business models. And since each lane is so competitive at scale, you’ll need the built-in advantages that come with your business being a naturally good fit. Here are a few rules of thumb that we rely on:
Performance Marketing is a natural fit if:
You generate revenue directly from new users (e.g. purchasing a product, subscribing to a service), which you can then use to fund more marketing
Customers are not naturally going to be looking for your product, and thus you have to come to them (e.g. a new DTC brand)
Virality is a natural fit if:
Your product is better when your friends or colleagues are using it (e.g. Snapchat)
The product is innately fun to share (e.g. travel photos, homes for sale)
Content is a natural fit if:
Your users naturally generate public content (e.g. reviews or answers to questions) when using your product, which you can use to attract new users
You have a lot of unique data (e.g. restaurants in Seattle, plumbers in Phoenix), which you can turn into rich auto-generated pages
Casey Winters wrote the definitive post on this framework for the First Round Review which includes a handy guide:
One useful shortcut: Learn from analogous companies using a similar business model in a different market. If they’ve been highly successful using a particular lane, it may mean you can be as well. For example, Rich Barton founded three companies that all ultimately mastered the Content lane: Glassdoor, Expedia, and Zillow. While these companies compete in different industries, they share similarities in customer searching patterns and content generation, and he has been able to repeatedly capitalize on this approach.
Approach 2: Look at your data
In a perfect world you could validate a lane through a live test, but the time and effort involved in directly testing each lane is highly variable. Performance marketing could take as little as 2-4 weeks to test. Virality (such as launching a referral program) can often be tested in 1-2 months. SEO typically requires the most investment, and many companies see zero results for 3 or more months.
For this reason, you’ll see that validating paid marketing is most often done directly through testing, SEO often validated entirely through third-party data (e.g. Google Keyword Planner), and virality is somewhere in the middle. Here are our recommendations for the signal to look for to validate a lane through data:
Paid marketing: Your tests generate paying customers with a healthy payback period
Because it is relatively easy and cheap to launch paid marketing tests through channels such as Facebook or AdWords, simply getting tests off the ground should be the core of your validation strategy.
The most important metric to measure is payback period: the amount of time it takes you to earn back what you spent to acquire a customer. This is critical because it determines how quickly you can re-invest in more paid marketing. For most businesses, the payback period is only going to lengthen as you scale, so it needs to be pretty good from the start. Otherwise you need to have a clear line of sight to improving it, such as through conversion rate or monetization improvements.
For low frequency transactional businesses (e.g. buying car insurance), a common benchmark to target is payback on the first purchase. For high frequency transactional businesses or subscription businesses (ecommerce, media subscriptions), payback within 6-12 months would generally be considered healthy.
Virality: Over 50% of your new customer acquisition today is through word-of-mouth, customers are naturally telling their friends and family about your product, and you’ve run a handful of successful experiments that increase this behavior.
If your most satisfied customers aren’t already talking about your product or sharing it with their friends naturally, it’s going to be hard to make virality the cornerstone of your customer acquisition strategy.
Even if they are, you also want to understand if you have the ability to influence this behavior, such as through an experiment where you encourage customers to share.
Content: There is a high volume of keywords that are relevant to your product, and these keywords are not dominated by competitors that will be difficult to unseat.
Keyword research through a tool like Keyword Planner can help you understand search volume for queries that are relevant to your business. You’re looking for keywords that are directly relevant to your product. If you sell wedding dresses online, a keyword like “buy wedding dress online” is much more relevant than “cost of a wedding dress.” The former has 1-10K searches per month, according to Keyword Planner.
Similarly, you can search for these keywords to see who is currently ranking for them, to understand how stiff the competition will be. The #1 result for “buy wedding dresses online” is brides.com. By going to the Ahrefs website authority tool, we can see they have a domain authority of 84. That is pretty strong, and tough to compete with.
STEP 2: COMMIT
Once you’ve validated a channel, the next step is to commit to the lane. In our experience, most companies underestimate how large and disciplined the effort will need to be to turn any of these lanes into a superhighway.
Committing to a lane generally includes doing two things, both of which can be scary, particularly early in a company’s life:
Dedicating a significant amount of cross-functional resources to the effort, including product, design, marketing, and engineering
Influencing the core product roadmap and customer experience to optimize for the lane being pursued
Let’s look at how each of our example companies committed to their respective lanes.
STEP 3: SCALE
Once you have committed to a lane and start to see meaningful results, the next phase is to become world-class at the lane. The hallmark of this third stage is overcoming diminishing returns. Virtually every customer acquisition channel becomes harder over time because you are acquiring lower and lower intent customers. This is often referred to as the S-curve of growth.
For paid marketing, this typically means that your customer acquisition cost will increase over time. For SEO, you’ll have to start targeting less relevant keywords and lower intent customers, which will result in lower conversions rates. And for virality, the percent of potential customers that haven’t already heard of and want your product will reduce over time, so you’ll see a degradation in K-factor (or the number of additional customers each new customer refers) over time.