The satisfaction trap

With the end of free money being upon us, we will undoubtedly start to wonder more about how we spend our money. That will also manifest itself to the digital products and services we use, where we will be more keen to ensure that we feel, we get real value for our money.

But not only will we do that. We will also insist more on trying things out for free to get a sense of the value at hand, before we decide to commit our money towards a given service.

This poses both an opportunity and a threat to startups.

While the idea of offering something for free and then convert to a paying customer is by no means foreign to startups – it’s called the ‘freemium model’ for a reason – startups need to be very aware that they are not being lured into the trap of having to offer too much for free with slim prospects of ever making the conversion happen.

The nightmare scenario to avoid is one where the startup will need to deliver the full experience and go above and beyond to prove it’s worth to a potential customer only for that customer to choose something different or just stay with their current solution. That scenario will incur excessive cost on the startup with no prospect of recouping that cost, and it goes without saying that that will not be a viable model going forward.

Getting this right is a delicate balance to be sure. Because while a startup won’t want to be caught in the trap, the broad expectation on the customer side is to be delighted every step of the way when trying out a new product or service to see if it fits the customers business needs.

The most successful startups at striking this balance will be the ones who understand precisely what’s needed in order to delight customers – no more, no less – in order to turn them into paying customers. Furthermore, the best startups will understand the need to develop models of payment for their services that grows with the customers needs, keep them engaged while at the same time ensuring that the underlying business model is viable not only in the long term but also in the shorter term.

This is a delicate balancing act, and in order to get it right it will most probably require deep insights into the customers domain area to understand what’s important drivers of customer delight and what aren’t. This again will force startups to reconsider their hiring practices within customer success in order to make it less about generic skills and more about understanding the customers and what they’re actually looking to achieve within their line of work.

Ultimately the point is that not only is the era of free money and uncaring customers over. The era of ‘one size fits all’ customer success and growth strategies is also over. It will take focus, dedication, experience and insight to delight the right kind of customers going forward;

Those that actually end up paying their bills.

(Photo by bruce mars on Unsplash)

The end of free money

Few things have been such an important catalyst for entrepreneurs and startups over the last 15 years as the availability of basically free money. Not only has it been associated with low costs of borrowing. It has also provided investors with a higher appetite for risk as they have lacked other more ‘safe’ alternatives for placing their abundance of cheap capital. 

But now all of that is changing. Central banks led by the US Federal Reserve are looking to increase interest rates in order to curb rising inflation, and with that entire generations of primarily young people will need to learn and come to terms with what interest rates actually mean and how they impact the financial choices they can make for both themselves and for their businesses.

One of the more interesting parts of this major shift of fortunes (pardon me) is to get a sense of just how much of the economy is essentially built on the premise of access to cheap capital. How many startups and service companies do we have that would struggle or perhaps not even exist, if they didn’t have access to cheap financing? I don’t think anyone really has a clue. 

The rising interest rates create two major challenges and one major opportunity, as I see it:

The first challenge is the viability of various businesses and startups, which is likely going to be put to the test. If free money is no longer an option, does it make sense to keep the same burn to grow user/customer base? That’s just one question. And what will happen once you come to the conclusion that it doesn’t, and you start raising prices, and customers start walking away? Continue ad nauseam. It is a whole new both strategic and operational reality, many of these companies are looking into to. 

Following on as a close second is what the added cost of debt is going to do to founders and executive teams. Especially for the ones who have never experienced higher interest rates before, getting to know them and their impact will likely take some time and require a great deal of painful acceptance. Can that be gained without running the risk of making less thought-through decisions out of sheer panic? We humans seldom make the best decisions, when we feel we have our backs against the wall. 

Overall the declining access to cheap funding is going to be a ‘tour de force’ in the ability to adapt, which my gutfeel is many will struggle with – simply because they don’t have the tools or the experience to deal with it. 

From an investor point of view, it will also be a reckoning but at the same time also an opportunity to once again be less persuaded by the narrative and look more at the business fundamentals when making decisions on where to make investments; i.e. is there any indication of a viable business model in its own right or not? Maybe, in all fairness, it is as much a hope as its a gutfeel, as I have always been an advocate for businesses proving their fundamental viability without it requiring a 5 year plan. But we will see. 

Finally, there is also opportunity in the not so great news. Opportunities to innovate. Because God knows there are going to be a lot of people who will require help and various sorts of tools to navigate safely in the new reality. Those who can solve that and make people and businesses feel better of or safer despite the new realities on the ground, will be able to make it big. 

As the old saying goes, it is a terrible shame to let a good crisis go to waste. So let’s focus our efforts on how we learn to navigate and prosper in a world, where interest rates are once again a thing to be reckoned with. 

(Photo by Jason Leung on Unsplash)