Latest posts by Thales Teixeira
The following is excerpted from “Unlocking the Customer Value Chain: How Decoupling Drives Consumer Disruption” Copyright © 2019 by Thales S. Teixeira. Published by Currency, an imprint of Penguin Random House LLC.
Let’s consider how Airbnb acquired its first one thousand customers. In 2008, three friends—Brian Chesky, Joe Gebbia, and Nathan Blecharczyk—were living in San Francisco and working as designers. There was a big design conference coming up in the city, and hotel space was limited. So, Chesky, Gebbia and Blecharczyk decided to try to make some extra money by renting out their loft. They set up a simple website featuring pictures of their loft, promising to provide a home-cooked breakfast to guests in the morning. That first weekend, three renters stayed with them, each paying $80 for the privilege. Shortly after that, Chesky, Gebbia and Blecharczyk began receiving emails from people around the world, and they knew they were on to something. Three months later, they launched their startup, timing it to coincide with the 2008 Democratic National Convention, held in San Francisco. That event allowed them to secure multiple hosts and guests for their website.
Initially, the Airbnb site had very few listings. The founders weren’t sure how to overcome the chicken-and-egg problem. They needed accommodations—initially rooms and then entire houses—in order to attract individuals to browse the site. However, to get owners to create a listing of their properties, they needed consumer traffic—people looking to rent. Nobody would go to the trouble of listing or searching for rentals on a sparsely trafficked site. As it turned out, the supply side was the harder side to grow: many people felt uncomfortable at first with the idea of opening their homes to strangers. Potential renters felt reluctant to take the first step and advertise their properties far and wide. So, the founders decided to do this work for them. Airbnb offered users who listed properties on Airbnb the opportunity to post them to Craigslist as well, even though Craigslist offered no sanctioned way to do this. Airbnb also automated a way to contact property owners on Craigslist to ask them to post their listings on Airbnb.
In mobilizing Craigslist, Airbnb worked hard to distinguish itself from the incumbent’s online classified listings. But Craigslist possessed an asset that Airbnb lacked: a massive user base. Airbnb knew that travelers who sought more than the standard hotel experience clicked on Craigslist. Craigslist represented an attractive “feeder” for Airbnb because Airbnb’s listings tended to be more personal than listings for other properties on Craigslist, with better descriptions and photos. Standing out to Craigslist users, Airbnb’s more detailed listings lured them over to the Airbnb site. Once there, they tended to book directly through Airbnb the next time around.
Airbnb’s founders experimented with many tactics for attracting renters to their website, recognizing that what worked in one city or country might flop in another. In France, one of Airbnb’s first non-U.S. destinations, Airbnb employees set up an A/B test in several localities.
In half of the French cities or towns, they physically visited and promoted Airbnb using low-tech, non-scalable tactics. Teams of two or three people talked to the few users already in that market to understand conditions there. They threw parties and held information sessions, set up booths around town, posted flyers and obtained contact information from everyone they met who showed interest in hosting. They then followed up with more information, an offer to create a listing for prospective renters to review, and the like.
In the other half of French localities in the selection set, Airbnb targeted prospective hosts using Facebook ads, a standard online mass marketing customer acquisition approach. In the first set of cities and towns, Airbnb kept meticulous track of what it cost to send prospective hosts to the Airbnb website (including the cost of throwing parties, setting up booths and other “on the ground” activities) and the listings that resulted. They compared those costs to those of the Facebook ads, tracking the listings that resulted from each. It turned out that the cost per acquisition was five times lower in the cities and towns where Airbnb had deployed the low-tech, non-scalable tactics.
By the summer of 2009, Airbnb was growing quickly in some local areas, but it hadn’t gained much traction in the important New York City market. To understand why, Gebbia and Chesky flew out and booked rooms and homes with 24 hosts (the two used their own service when traveling). The founders discovered that users weren’t presenting their listings on Airbnb very well.
As Gebbia noted, “The photos were really bad. People were using camera phones and taking Craigslist-quality pictures. Surprise! No one was booking because you couldn’t see what you were paying for.” Gebbia and Chesky generated a low-tech but effective solution to this problem. According to Chesky, “A web startup would say, ‘Let’s send emails, teach (users) professional photography, and test them.’ We said, ‘Screw that.’”
Chesky, Gebbia and Blecharczyk rented a $5,000 camera and went door to door, snapping professional pictures of as many New York listings as possible. This approach generated two to three times as many bookings on New York listings. By the end of the month, Airbnb’s revenue in the city had doubled. Better-quality pictures from hosts prompted a flurry of other local hosts to step up their game and take better pictures of their properties, or risk not renting them quickly. Importantly, it set the standard for quality photography that future property owners would have to match in order to compete.
By using such tactics to secure a minimal number of listings to their site early on, Airbnb founders bolstered their supply side. This allowed them to attract and sustain demand, which in turn slowly attracted an even greater supply of homes for rent. The flywheel of success started spinning—slowly at first, and then faster. The result, ultimately, was tremendous growth for Airbnb for years to come.
Airbnb’s story is especially interesting because the company didn’t generate demand solely on the basis of a new and innovative idea.
Many online businesses already offered short-term home accommodations, among them HomeAway, VRBO and Couchsurfing. Yet only Airbnb grew its user base rapidly from zero to thousands, and then to millions—a testament to its prowess at cultivating its first customers.
So what can entrepreneurs learn about early customer acquisition from Airbnb and, by extension, from other fast-growing marketplaces such as Etsy and Uber?
Analyzing Airbnb’s story, we can discern the following seven principles at work:
“Buy” customers in bulk
Acquiring users one by one takes too much time. A small startup needs to acquire customers in bulk, as Airbnb did during oversubscribed conferences and by tapping into Craigslist’s user base. Uber and Etsy pursued this strategy as well early on. Uber made itself available to customers at the conclusion of sports events and concerts, when masses of people sought rides. The founders of Etsy visited large crafts fairs to promote their site, signing up entire groups of artisans at each fair.
Don’t confront competitors directly
A startup must avoid putting itself in the crosshairs of established incumbents. Don’t target their customers. Instead seek out customers they can’t or won’t serve. After concerts, more people need cabs than cab companies can handle. Likewise, when major events such as the Democratic National Convention come to town, hotels reach full capacity. Snatching up the excess demand in these instances allowed startups such as Uber and Airbnb to remain “under the radar” of the giants. By the time they had a foothold in the market, the giants had a hard time catching up.
Adopt non-scalable tactics
Large tech companies tend to obsess over pursuing scalable tactics. If a tactic doesn’t work for thousands or millions of customers, these companies perceive it as a poor investment. Experts often recommend that startups behave similarly. Yet startups and large tech companies have different needs. Startups desperately need those first 10 customers, while large companies don’t care about adding just 10 more customers to their already enormous base.
By venturing out to people’s homes and hiring photographers to take professional pictures for hosts, as Airbnb did, or by sending people to fairs, as Etsy did, startup marketplaces facilitated the onboarding process. To launch a disruptive business, focus on tactics that seem to work and that yield insight into customers and their needs, no matter how small the impact might be at first. Scale becomes a concern later in a company’s lifecycle. If you lack customers early on, you have nothing to scale.
Incubate your early customers (and start with the suppliers)
A startup’s initial customers help it enormously, and their relationship with the company is extremely fragile. One slip, and customers vanish. If they stay, as happened with Uber, Airbnb and Etsy, they will help you attract more users, creating a powerful and indirect network effect as an engine for growth. If you are launching a two-sided marketplace, focus on acquiring supply-side customers before going after the demand side. Provide all customers with the best experience, regardless of whether you can do so profitably or in a scalable way. This early investment will yield dividends; as we’ll see, your first customers do more than just pay for your business to operate.
Use low-tech, offline tools
Tech startups tend to dismiss offline customer acquisition tools, such as organizing events, creating on-the-ground operations, or incentivizing users to talk to acquaintances about their services. Yet Airbnb’s deployment of such tools fueled its early growth. Only over time, as the company’s growth rate stabilized, did it switch to online customer acquisition channels.
Favor operations over technology at first
Technology can help business processes to scale, but it usually doesn’t allow them to get off the ground. For a disruptive business to succeed, it needs to work, plain and simple. Online marketplaces must match supply and demand. Early on, you cannot expect technology alone to accomplish this difficult task. Uber went door-to-door to get its first drivers to sign up. Airbnb did the same for its renters, and when it convinced people to list their homes, its employees went out of their way to find a person to rent each home.
A platform manager must take the hand of a buyer and find a supplier so that a transaction can occur. Otherwise, buyers and suppliers might not match up, and they will never return to the platform. Any disruptive business seeking to attract customers must appeal to them one at a time. Only afterward can technology accelerate the process.
See your business through your customer’s eyes
I’ve emphasized the importance of viewing disruption through your customer’s eyes. This holds doubly true for online marketplaces, with their disparate customer groups. The CEOs of Uber and Airbnb routinely used their services in order to see and experience what their buyers were experiencing. They also made sure they understood the challenges suppliers faced by driving a car or renting out a house. Any new business seeking to attract customers has to inhabit the customer’s point of view deeply, making operational adjustments so as to lower the effort, time and monetary costs that both types of customers pay.
“Unlocking the Customer Value Chain” is available tomorrow at fine booksellers and can be purchased via StartupNation.com.