In last few months, I have seen a strange trend in the startup world focusing on Consumer Services. Startups work hard, create a great business model, get funding and then fail. This trend is increasing, and interestingly startups even with hundreds of millions of dollars in VC funding are failing. What are the possible reasons?
No matter how great your unit economics are or how great you performed when you were bootstrapping, after raising VC Money, startups have enormous pressure to scale things up. To increase the customer base, VCs don’t mind startups discounting their service in the customer acquisition process. That’s where the problem starts.
Running a funded startup is like driving a Lamborghini at 100 mph on a busy road with a speed limit of 10 mph. You have the best sports car at your fingertips, but at that speed, you are driving like crazy and can crash anytime!
Promotional pricing eats up a large chunk of money, and the customer never returns after consuming the service. Homejoy, a Silicon Valley startup in the home cleaning sector, focused heavily on promotional pricing and offered services at just $19. Even with $38 million in funding, it failed! The reason? It was spending too much on the customer acquisition and not paying enough attention to customer retention. Retention is extremely important because it is ten times easier to retain an existing customer than to find a new one.
All great companies that exist today are still around because they provide value to their customers. They have focused exclusively on delivering value. People buy what they want, not what they need. Companies must deliver something that appeals to what people want. The “want” to buy anything is only created when the customer has perceived value for the product or service.
So, focus on building a great product and delivering value to your customers’ lives. Customers don’t care about getting a discount if you have a premium product!