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When the meal-delivery service Munchery filed for bankruptcy in February of this year, it owed $3 million in unfulfilled customer gift cards. In essence, the company’s marketing had outlived the company itself. And therein lies a critical lesson for entrepreneurs: aggressively marketing a product or service before you know if customers truly value it can be a kiss of death.
An analysis of more than 100 defunct startups by market intelligence company CB Insights identified the top 20 reasons fledgling companies fail. Number one: “no market need.” Number two: “run out of cash. Marketing in the face of number one usually leads to number two.
Munchery’s original strategy, according to its bankruptcy filing, was “to create a platform that enabled local professional chefs to make fresh meals at Munchery kitchens and to sell their products directly to customers through the Munchery website and mobile apps.” Munchery apparently believed that the meal delivery business was going to be a winner-take-all market that would go to the first company to go big. So after beta testing in San Francisco in early 2011, it launched to the public a few months later. In 2014 it expanded to Seattle and in 2015 to New York and Los Angeles.
Despite $120 million in equity financing and more than $11 million in venture debt financing, the company struggled and in 2017 put itself up for sale. When more than 100 potential buyers turned them down, the board decided in June 2018 to close down all operations outside San Francisco. The goal, says the court filing, was to reduce operating expenses and extend “the cash runway of the company.” A second attempt to sell the company was met with 50 more rejections—the cash runway had run out. So on January 22 of this year the board decided to cease operations and lay off the entire workforce of 257 employees.
What went wrong? The company went to market in a big way before they had a fully tested and fine-tuned value proposition. As a result, they were having to constantly adjust their value proposition and redesign their business model after they had scaled up, when such changes are difficult and costly. After launching as a ready-to-eat meal delivery service, they switched to delivering meal-kits. Then they created an $8.95 a month subscription plan for repeat customers. They tried to sell food through Costco and Amazon Go. They even opened up a location in a San Francisco BART station aimed at commuters. And, as the company conceded in the bankruptcy filing, they eventually even got out-marketed by competitors “like Blue Apron, Plated, Home Chef and Hello Fresh, who deployed significant budgets on search and social media platforms and leveraged aggressive promotions in order to grow their customer base.”
What could they have done differently? They could have proceeded in a disciplined way through the three distinct stages that almost every successful startup must navigate: customer validation, operational validation and scale-up. Only in the scale-up stage does marketing come seriously into play. Here is how those three stages unfold and what you should focus on in each:
Customer validation. In this stage, you need to find out whether your idea can be turned into something that an actual customer will pay you money to provide. You can start by talking to as many potential customers as possible and seeking additional input from donors, employees and advisors. Marketing can’t help you here. Marketing tells customers what to expect, but you need them to tell you what they want.
You should focus on finding a real customer and iterating your product or service based on that customer’s feedback. That’s hard to swallow for many entrepreneurs, who go into business because they fervently believe in their initial idea. Unable to imagine that it could be improved, they prematurely market it in hopes of attracting as many customers as possible. It’s a waste of precious money that could be better spent on changing their prototype or their service description or their specifications or their website, over and over, as their idea morphs. Stage one ends when you can describe, with a high degree of certainty, who will buy your product or service and how you will deliver it.
Operational validation. In stage two, your principal task is to get up and running as a rudimentary business. You need to figure out how to deliver your product or service, satisfy existing customers while finding new customers and manage the enterprise through bookkeeping, payroll and the like. You must be able to deliver the product or service to more than one customer and continue to refine the value proposition as you accumulate feedback from more and more customers.
Making changes to products once they have been designed and delivered to customers is extremely complicated and expensive. So is changing the processes that produce or deliver the product. And it’s even more expensive and complicated if you have prematurely engaged in marketing—you will need to alter the existing messages, which could confuse the market. The good news is that setbacks sometimes yield major insights into alternatives that will work better than the original concept, and they can generate significantly more value for you and your customers.
Scale-up. Now you must make the enterprise financially secure by making sure it can consistently produce value under changing market and competitive conditions. What you did to deliver your product crudely but reliably to your first wave of customers must be rethought, redesigned and rebuilt in order to meet the demands of new customers with higher expectations.It’s unlikely that your existing rudimentary processes are sufficient for growing your fledgling company into a financially self-sustaining enterprise. For example, you may be able to produce and sell your product or service, but not at the right cost, or in the right quantities or with the reliability, scalability and flexibility required.
As you scale up to become efficient and profitable, marketing goes from unnecessary to critically important—almost instantly. For many businesses, digital marketing channels and astute use of social media can help provide some of the requisite scale and speed.Further, if you have approached the first two stages correctly, you should be well prepared to take the marketing plunge. The small-scale sales effort required to find and secure those initial customers and the incorporation of their feedback into your offering provides a solid foundation for your marketing effort. You know what to market, to whom and with what value proposition.
And, most important, you still have the cash to do it.
May 6, 2019 at 05:06AM
Forbes – Entrepreneurs