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Why and when do startups need to start investing in their brand?

Monzo
Growth. It is what every company seeks, but startups particularly live or die by their growth trajectory. Grow too slow and backers and future investors lose faith that they will get a good return. Grow too fast and there is the risk that the company may outrun demand or undermine quality trying to satisfy demand.

For those directly involved in a startup, every day brings new challenges and dilemmas which need to be solved fast, but a laser-focus on current challenges often distracts from the need to build for the future. As companies grow, they cross different thresholds that require building out new systems and capabilities, and – the subject of this post – building out their brand.

This post is a long one, so for those of you with short attention spans, here are some key takeaways.
  1. The inflow of new buyers to most categories is relatively constant, so converting enough new buyers to sustain growth rates becomes harder and more expensive as a brand grows.
  2. Alternative growth strategies like product or community-led growth often fail to expand the brand footprint fast enough to sustain growth rates.
  3. Adding brand building into the mix is necessary to predispose new entrants to think of and choose the brand before they start researching or buying.
  4. This means reaching and influencing people who might buy in the future and creating memorable brand impressions.
  5. It is better to start brand building early rather than wait for the return on direct response or performance advertising to wane.

Does Product-Led Growth live up to the hype?
This post was prompted by reading a couple of items on LinkedIn. The first, comes from Derek Yueh and the team at The B2B Institute at LinkedIn and addresses the strengths and weaknesses of the go-to-market strategy of "Product-Led Growth" (PLG). The key principle behind PLG is to make a product so good it will sell itself, then make it easy to experience and generate out-sized customer loyalty.

Popular among Software as a Service (SaaS) vendors PLG promises brands market-beating growth by leveraging the product itself to drive acquisition, retention, and expansion. More recently, however, the success of this strategy has come under scrutiny, as companies like Atlassian, and Twilio struggle to maintain growth rates or even make a profit. A PLG strategy may be successful initially, particularly if your company is a first mover and offering something truly unique, but it seems difficult to scale profitably over the long run.

Parallels to B2C Direct to Consumer
I see direct parallels between PLG for B2B SaaS companies and many Direct to Consumer (DTC) brands in B2C. I am sure you have been offered three-month free trials of Netflix, Spotify, or other streaming services. And then there is the freemium pitch, where you get to use the product for free but must pay to access supposedly "must-have" services. Brands that pursue this strategy, like Zoom or Dropbox, often span the divide between B2B and B2C. Zoom saw a massive increase in users during the pandemic, largely because it offered 40 minutes of free video conferencing, but I suspect many people are still using the free service. Do you really need more time or AI-generated recaps if you are chatting with friends and family? Zoom's revenue growth has slowed to a crawl, although many other companies might be envious of its financials. The big question is can it leverage its cash flow to build new capabilities and fight off the likes of Microsoft and Salesforce?

An over-reliance on direct response
Which brings me to the second item on LinkedIn that got me thinking about why growth is hard to sustain without brand building. This post from Chubbies Co-Founder, Preston Rutherford, documents his realization that his company was overly reliant on bottom-funnel, short-term revenue-maximizing strategies and needed to invest in a more balanced investment in brand building and direct response. Chubbies initial success after launching in 2011 came thanks to its signature casual shorts, which were sold out for over two years. That success was in part due to its rebellion against fashion-forward shorts that were no longer short or simple, and, as documented in Rutherford's post, success was powered by an addiction to Facebook ads. He states,

"The dopamine hit from putting a dollar in the Meta Machine and getting 6-10 out was ridiculously addictive."

Rutherford's post is a good take on what it takes to keep a brand growing over the longer term, although I would have to note that the only reason I had heard of Chubbies before was that it is now part of the Solo Brands family. And guess what, because I finally capitulated and bought a Solo Stove, I can now get 20% off a pair of Chubbies, or an Oru kayak, or Isle paddleboard, all of which are bundled under the Solo Brands umbrella. Direct response is not dead! And nor should it be, growth requires both brand building and direct response.

Not every start-up maintains its growth trajectory
Chubbies was acquired by Solo Brands for US $129 million, but not every company that binged on Facebook ads did so well. If you used to read my old Millward Brown blog, then you may remember me complaining about being stalked across the internet by Mahabis slippers. The Mahabis brand exploded onto the scene in 2014, selling over a million pairs of woolen slippers with detachable soles in four years thanks in large part to its performance marketing, but called in the administrators in 2018 as falling sales and rising advertising costs led to a loss of over $1.5 million. This Financial Times article suggests that Ankur Shah had been taking profit out of the business as it grew, leaving it vulnerable to a downturn, but suggests that the reason for that downturn was murky.

Bursting the bubble of unmet need
My suspicion is that what caused Mahabis to slip up was that the brand was too successful at converting people who recognized an unmet in the re-invented slipper. I had certainly not heard of anything like the Mahabis product until its advertising started and I suspect there were a lot of people in a similar situation, many of whom thought to themselves, that's a great idea, I will buy a pair. Like many products sold DTC online, physical availability was not a problem, Mahabis were bought by people in over 100 countries. However, I suspect that given its investment in Facebook and Instagram ads, the brand converted most of the people who recognized an immediate need. Once Mahabis had done that, the bubble burst and sales slowed to those people who needed to replace old slippers or found themselves in need of new indoor/outdoor footwear.

In researching this post, I discovered that Solo Brands is not doing so well either. According to Yahoo! Finance Solo Brands' net sales are slowing year-on-year, with the cause being ascribed to a lack of new products. To my mind, there is a marked similarity between products like the Solo Stove, the Oru Kayak, and Ooni pizza oven (another brand that caught my eye). They are all unique, offering benefits not easily available before, but, thanks to a barrage of advertising, could be running out of easily reached and converted buyers. After all, there are so many people in the market for a smokeless stove, an easy to transport folding kayak, or everyday pizza oven, and once you have bought one, it is going to be a while before you buy another.

The seven ways that companies fuel and sustain growth
The fundamental problem that fast-growing brands face is one of leverage. There are a limited number of ways in which a company can fuel and sustain its revenue growth. All are important, but when it comes to revenue growth, one dominates the others.

  1. Increasing customer acquisition
  2. Improving customer retention
  3. Supporting sales through greater pricing power
  4. Upselling existing customers
  5. Replicating success in different countries
  6. Unlocking growth by entering new product categories
  7. Cross-selling between categories

Most of the evidence out there – thank you Ehrenberg-Bass – points to the importance of growing penetration, adding incremental customers, to scale revenue and market share, and reap the benefits of Double Jeopardy. So, new customer acquisition is hugely important.
However, just for the record, I would like to point out the following,

  • Growing penetration relies on both acquiring new customers and keeping your existing ones, which is particularly important if you are selling a service. Every brand will lose some customers, but losing an undue number will undermine penetration growth as new customers replace old rather than being incremental.
  • All the evidence I see suggests that growth at the expense of profit is a risky game. Fine, Amazon did it for years, but Amazon sells everything to everybody. Most brands have a much smaller target market. Strong pricing power may not do that much to boost sales, but it does help ensure that people pay the price asked and do not get lured away by cheaper offers. Making a decent margin on revenue insulates a brand against unforeseen events – escalating advertising costs, higher interest rates, and inflation – and creates the ability to self-fund investment in future growth opportunities.
  • Upselling customers is a time-honored strategy, often has quick payback, and is not limited to existing customers. My experience of buying a Solo Stove is a classic example of upselling at an initial purchase. The stove itself seemed a reasonable price, particularly given positive word of mouth from other owners and a plethora of advertising to keep the brand salient, but by the time I had added on the fireguard, the cast iron grill, and so on, the price did not seem so reasonable any longer. Maybe that feeling will disappear when winter departs, and I get to grill some burgers on the deck, but as this research shows, upselling is a tradeoff between higher revenue and lower customer satisfaction. Now Solo is chasing me all over the internet to sell me pizza ovens and dough balls (which is a complete waste of money, given they now have my email address).
  • Geographic expansion might offer less potential for SaaS or DTC products that are easily shipped around the world. Physical availability is not a barrier to purchase in itself, although there are other barriers like language and customer support for software companies. So, for many companies, going global is just another form of customer acquisition, although as I described in The Global Brand, you do need to deal with the new challenges offered by differing needs and culture.
  • Entering new categories is a great way to build revenue, provided the brand has established a successful track record in its initial product category. Witness Chubbies, who went from selling shorts to selling everything else a guy might want in their casual clothing wardrobe. However, I do think many brands are too eager to pull the brand extension trigger before they have really established their brand reputation. (And I guess I should also mention licensing here as a relatively risk-free way of leveraging the power of a brand to new categories, but again, the brand needs an established reputation to really make this work).
  • Finally, there exists the opportunity for cross-selling. Witness the case of Solo Brands email to me highlighting the other brands in their portfolio. Again, I wonder at the scale required to make this strategy successful, but maybe the discount on offer will finally get me into an origami kayak.

My basic conclusion is that there is a time and a place for every one of these growth strategies, even if customer acquisition is the one most brands should focus on.

Running out of easy to reach customers
So why does growth become harder and more expensive if a company only relies on direct response? The answer is simple. There are only so many potential customers ready to make a purchase at any one time (see the LinkedIn report for why this is so and some other facts of marketing life).

Thanks to Facebook, Google, LinkedIn, Amazon, and the like, it is easy for a small company to reach people who have signaled interest in the relevant category or have a profile that suggests they might be interested. Small companies do not need a lot of new customers to generate impressive growth rates. However, as they scale, they need to generate more and more sales to maintain the same growth rate and they start running out of easy to reach new customers. Potential customers are likely to enter the category at a consistent rate, once you factor out seasonality, but the proportion that a company needs to convert grows bigger and bigger the more successful it becomes.

Community-led growth only gets a brand so far
Proponents of PLG often talk about the power of community-led word of mouth or virality, little realizing that true virality requires every recommendation to result in more than additional one sale. To grow, a brand must reach out to new customers and segments. Few products are so compelling that they achieve true viral success, so relying on word of mouth to spread awareness of your brand only works to a degree. A classic example of what happens when a brand deliberately reaches outside its existing footprint is provided by mobile-only Monzo Bank in the UK.

Why Monzo bank achieved insane advertising response
Monzo, easily recognized from its hot coral colored debit cards, had relied on its community and word of mouth to drive growth, a strategy that earned it upwards of 1 million users. However, in 2019 it launched its first major ad campaign with results that the Head of Marketing and Community at Monzo described as "pretty insane." The impact on sign-ups was immediate. Prompted brand awareness increased by over a third, brand name-based search grew, and the number of sign-ups increased by two thirds of what it had been before the campaign started.

At the time, many commentators put the success down to the use of traditional TV, but I believe that was missing a more fundamental point. By investing in a major ad campaign, Monzo reached beyond its existing customer base and made new people aware of how its offer might be relevant to them. Many new sign-ups were no doubt adding Monzo alongside their traditional banking institution because of its features such as money management, bill splitting, 24-hour availability (category entry points). Many more probably did not feel the need to sign up then and there but were now primed to remember Monzo should the need arise. Good brand marketing offers jam today and jam tomorrow, unlike Lewis Carroll's White Queen who offers jam on any other day but today, and there is no reason why digital marketing cannot achieve the same effect as a TV campaign with the right media delivery and content.

A falling proportion of organic sales drives up costs
Assuming that the brand is not expanding demand for the category or building predisposition among people entering the market, then organic growth is likely to fall as a proportion of what is needed to sustain growth. Reflecting on his own experience, Rutherford states,

"Therefore, the proportion of new customer revenue from owned and organic channels was decreasing as a percentage of the total, making it more and more expensive to hit growth goals."

The instinctive solution, as Rutherford points out, is to try different tactics to improve conversion rates. However, that is an expensive strategy. Instead, Rutherford points to the need to adopt a more balanced growth strategy combining brand and direct response,

"(Direct response tactics are) essential *and* accretive when they're driving growth on top of a stronger and stronger foundation of that resilient base of owned and organic new customer revenue."

Why? Because what you really want is for people to think of your brand first as soon as the need for your product or service occurs to them. Provided their impression is positive, they simply search for your brand name, before checking out alternatives.

Most B2B buyers already have vendors in mind
Something similar happens in B2B. As documented in the LinkedIn report, most buyers entering a B2B category have two or three brands in mind before they start their purchase process and nearly all end up buying from one of those brands. Why? Because they are following the line of least resistance. Even B2B buyers want life easy. Sure, they do their due diligence, but it is often done using the usual suspects. Which leaves the brands that did not come to mind initially fighting to interrupt the predisposed buyers' path to purchase or battling it out with every other competitor for the uncommitted.

A brief word about predisposition
When Jon Lombardo and I were talking about the power of brand marketing a while back he told me that many people found the word predisposition to be difficult or confusing in the context of branding. I am honestly not sure why; it is what it says on the tin. However, based on Jon's advice I tried to avoid using the word in my writing. But you know what? Predisposition is far too descriptive of the way in which brands influence behavior to be ignored. Predisposed means to be inclined to act in a certain way, or being susceptible to doing so, before action is taken. So, in the context of brand building, that means influencing potential market entrants to think of your brand and act on that awareness before they start seeking a solution to their needs.

Can advertising both trigger a direct response and build a brand?
Of course it can. The only person who gets to decide whether advertising is direct response or brand building is the potential buyer. If people see advertising and the brand offer is compelling enough for them to act in the moment, then it is direct response. But if others see the same execution but have no immediate need, then it is brand building, provided the brand impression is memorable. And remember, there are benefits to effective brand advertising beyond widening the sales funnel.

Most direct response activities are eminently forgettable
The problem with most direct response advertising is that it is eminently forgettable unless you hammer the message home. Solo Stove did so by saturating Facebook a couple of years ago, and as a result, when the time came, the brand had essentially created a market of one for me. No other brand came readily to mind when I decided it would be nice to have a firepit on the deck. That is an expensive strategy, but I suspect it worked with many people.

The other challenge for most brands is that the volume of digital advertising has created expectations that digital ads will be interruptive, irrelevant, and repetitive, so it is that much harder to get people's attention in the first place. People do attend to some ads, but the content better be compelling (or repeated enough times that it finally gains more than a passing glimpse). Add to that marketers' apparent inability to use digital advertising effectively and it is criminal that brands still dump so much money into the digital ecosystem without any real due diligence. Just making sure people recognize and remember the brand being advertised would be a step in the right direction for most.

B2B is different, but the same principles apply
In this respect, B2B advertising is different because many potential buyers keep an eye out for new and innovative developments in their field. They maintain a "watching brief," even if there is no immediate need for a CRM system, cloud computing, or an AI-enhanced workflow process. However, while the interest might be there, the impression still needs to be branded and memorable. And that impression can come from many different sources, not just advertising.

When I think back to the days when Millward Brown was growing fast, our biggest sales driver was presenting thought-provoking content on industry platforms which implicitly demonstrated our new approach to tracking, pretesting, and brand equity. This strategy opened new sales opportunities as clients asked us to tell them more about our services (I never once had to make a cold call, almost every new client was the result of them including Millward Brown in a RFI or RFP). Of course, that is not so easy today when many conferences see potential speakers as a lucrative source of income.

When is the right time for a startup to start building its brand?
Truthfully, everything your company does that comes to the attention of potential customers grows its brand – for good or ill. The question is, can you build predisposition among potential customers not ready to buy yet?

Rutherford gives some indicators for when brand building is necessary, e.g., if contribution revenue and margin are decreasing, if owned and organic share of revenue is falling, and the percentage of revenue on discount is going up. My answer would be a little more proactive. Get ahead of the curve and start brand building when your direct response activities are still firing on all cylinders. As the Monzo example demonstrates, wide-reach advertising does not necessarily mean a slow return, provided you have a relevant and appealing offer. However, identifying the right strategy and building memories does take time, plus the fact that many startups do not have the budget to reach everyone in their potential target audience from the start, they need to bootstrap growth. So, start brand building early before the cost of conversion starts to rise. 

One last point, how quickly your brand building pays back also depends on how fast people enter the market. Companies in product or service categories with long inter-purchase intervals – longer means fewer potential buyers are in-market right now – should invest to build memorable and motivating brand impressions to influence the people who might not enter the market for several years. This would apply to many tech companies, along with automotive, financial services, and for that matter, kayaks.

The key takeaways (again)
  1. The inflow of new buyers to most categories is relatively constant, so converting enough new buyers to sustain growth rates becomes harder and more expensive as a brand grows.
  2. Alternative growth strategies like product or community-led growth often fail to expand the brand footprint fast enough to sustain growth.
  3. Adding brand building into the mix is necessary to predispose new entrants to think of and choose the brand before they start researching or buying.
  4. This means reaching and influencing people who might buy at some point in the future and creating memorable brand impressions.
  5. It is better to add in brand building early rather than wait for the return on direct response or performance advertising to wane.

But what do you think? Please share your thoughts in the comments below. 

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Comments 2

Guest - Bill Pink

on Tuesday, 02 April 2024 09:58

Great content and advice! My add is to expand your core observation "... that there is a time and a place for every one of these growth strategies, even if customer acquisition is the one most brands should focus on." Yes, and the value of brand equity will vary over time and situation, even for the same brands in the same categories. We have seen this in work we ran on automotive brands, in which brand equity impacted business outcomes differently in different macro-economic conditions.

Great content and advice! My add is to expand your core observation "... that there is a time and a place for every one of these growth strategies, even if customer acquisition is the one most brands should focus on." Yes, and the value of brand equity will vary over time and situation, even for the same brands in the same categories. We have seen this in work we ran on automotive brands, in which brand equity impacted business outcomes differently in different macro-economic conditions.

Nigel Hollis

on Tuesday, 02 April 2024 12:27

Thanks, Bill, nice build.

Thanks, Bill, nice build.
May 25, 2024