This post was originally published on Thoughts on Tech Startups and Venture Capital
I had a pleasure of interviewing Moisey Uretsky, co-founder of DigitalOcean (Boulder ’12), a close friend, and one of my all-time favorite founders. Moisey is incredibly smart, thoughtful, and had one of the best product guts and chops out there.
We talked about a lot of topics around engineering and startups, and one of the things that came up was the elevator pitch.
Moisey said that founders and investors often focus on the elevator pitch, and it’s fine, but it is not nearly as important as the customer’s elevator pitch.
I didn’t really know what the customer’s elevator pitch was. Moisey explained that it is the elevator pitch that a customer of a startup would give on behalf of a startup to a prospective customer.
The concept instantly made sense to me, and connected together two really important concepts – Product-Market-Fit and Virality or Word of Mouth.
The reason that Moisey’s articulation was particularly interesting to me is because it is a kind of litmus test for how well the company is doing, and it is also a kind of shortcut. That is, a concept of the customer elevator pitch embodies both – a successful product and the customers are so happy they talk about the product to prospective customers.
First, a Product-Market-Fit is achieved when most sales succeed and most customers don’t churn after a sale. We have written previously about the Magic Moment here. It is somewhat hard to understand, but an important concept.
The Magic Moment is a very special state—once a customer reaches that state, the probability of the customer churning in the future is dramatically lower. To put it differently:
An average customer that hits the Magic Moment will stay a customer for a long time, will have high LTV, and will be profitable for the business.
That is, the Magic Moment leads to a viable long-term business. When enough customers hit the Magic Moment, you get to Product-Market-Fit – customers buy and stay happy.
But Product-Market-Fit by itself isn’t always an indicator of a great business. If people keep buying the product or service, but don’t tell other potential customers, the cost of acquiring customers would still be high and margins of the business maybe hurting.
When the product is so great that customers tell other customers, then the cost of acquiring customers drops dramatically, and that typically leads to a great business. For the exact dynamic of how this growth happens, read this post, this post, and read up on K-factor.
Let’s now look at an example, and use DigitalOcean.
The company found Product-Market-Fit after they launched a simple, affordable hosting service using SSD drives and poured a ton of love and exceptional support on top. This offering strongly resonated with developers, and they flocked from other providers like Amazon and Rackspace to DigitalOcean.
The product was so great that developers started telling other developers – their elevator pitch was exactly this – simple, affordable and super cool hosting service. In turn, this elevator pitch resonated with new customers and more and more referrals started to roll in.
DigitalOcean took advantaged of this dynamic and put more gasoline on the fire by introducing a double referral program that gave credit to both existing and new customers. That strategy drastically lowered the cost of customer acquisition and lead to a great business and great margins.
DigitalOcean helped create a perfect customer elevator pitch.
The customer’s elevator pitch is a seemingly simple but really powerful way to look at your business. Don’t have a lot of customers? Business doesn’t work. Don’t have a lot of happy customers – business doesn’t work. Have a ton of customers but they aren’t talking about you – you are doing well, but it is expensive to acquire customers and margins suffer. But if you have a ton of customers that are talking about you, and that leads to other customers signing up, then you are doing great.
So what is your customer’s elevator pitch?