Searching For Engagement Rather Than Profitability?

by Brad Bonnett

While studying here at HBS I have heard many students and startups talk about the value of engagement, engagement, engagement with no regard to customer value propositions or revenue generating ability.  Although this is becoming more of the exception rather than the norm I question it’s validity in case discussions on lean startups.  In the case of a lean startup does this engagement really constitute Product Market Fit (PMF)?  As Marc Andreessen describes it, PMF is “being in a good market with a product that can satisfy that market.”  Breaking this down there is two main questions that I have been pondering.  If you are giving your product away what market are you in, and if you think that market is advertising does having engaged customers truly satisfy that market?

What market are you in?

I believe that the market you are in is defined by who the customer is and the product or service that is provided to them.  For example if you create a social community but do not want to charge to use it then the users are not the customers.  As was the case with many startups that gave away their service the users are the product and advertisers are the customer.  (See diagram below)

If this is true then the startup is not competing in the social space, financial services or travel but rather is instead competing in the advertising market.  Although a startup could have a unique offering to its users the product to customers will have to compete with juggernauts like Google and Facebook on the digital side as well as traditional players like NBC and CBS.  While the startup’s initial idea could have been in a “good market” in terms of growth and competition, is the digital advertising space, where money is actually going to change hands, a good market?  

Does your product satisfy that market?

If digital advertising is the market that you chose then according to lean start up principles before you scale you should first ensure that your product can satisfy that market.   While digital advertising is a $25 billion dollar market that grew by 10.8%[1] last year, 60% of this revenue was captured by Yahoo, AOL, Microsoft and Google[2].  With so many large players competing in the digital marketing space how much demand is there for your specific product.  These big players have tight connections with advertising agencies and their scale allows for easy one stop shopping for buyers of ad space.  Additionally traditional internet advertising is losing its click through efficiency because internet users are clicking less and less on online advertisements (see chart below). 

Looking at the chart above shows that although users are spending more time online they are clicking less on advertisements.

To supply digital advertisers with a product that they want it is becoming increasingly important to have a business model that supplies more than just eyes on a page.  As a lean start up how is it that your users are more valuable to an advertiser than that of a Facebook user or someone searching on Google?  This is a question that can be answered without having scale.


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