Reeling in your first customers – what comes first, the chicken or the egg?

Getting Your Flywheel Going 

As experienced entrepreneurs and operators, we know there are many facets and challenges to starting a company, ranging from problem identification and customer discovery and validation at one end of the spectrum to product design and fundraising at the other end. One of the last initial frontiers to getting a company off the ground is go-to-market (GTM) strategy and execution. It turns out that getting your product development and sales flywheel going can be hard. You may find yourself with some chicken-or-egg problems that are difficult to solve. Let us explain.  

When you are starting off, your product is, of course, nascent, possibly just a concept or an MVP (minimum viable product). Suffice it to say your company and product have no reputation or proven ROI to leverage in sales calls or to advertise on your website. As you start hitting the pavement and knocking on prospective customer doors, you may find that interested potential customers (or channel partners) are asking you for some evidence or proof of ROI from your product, perhaps in the form of case studies, testimonials, or references. The problem is you have no case studies, testimonials, or references – you are just getting started, and you were hoping a few of your pilot customers would help you generate some!

So what comes first, the pilot customer (the chicken) or the case study (the egg)?  Well, obviously, the pilot customer has to come first. But how do you get a potential customer to engage with you when you don’t have a track record yet? 

Frustratingly, interested would-be pilot customers are sending you away, telling you to come back when you have some proof of value. You’re starting to get this feeling that you and your startup might be too early for many customers you identified in your market analysis. They’d prefer to engage with you when you cut your chops and perfect your offering on some other customers’ time and dime. 

We have seen this movie before. In the business world, when you’re new and novel, it can be challenging to get a customer to be the first to take a bet on you. Of course, once you have a handful of paying customers and can quantitatively prove the value of your product, momentum will naturally start to build.  But how do you get to that point? How do you get your flywheel turning?  How do you convince those first customers to engage?

Although it can be hard at first to empathize with a customer unwilling to bet on you and your fantastic yet unproven company and solution, if you squint, it isn’t too hard to see their viewpoint. People and teams within enterprises have lots on their plates, and they must carefully choose how they spend their time and resources. What if they buy (or even just spend time trying) your product, and it is a big flop and a waste of their time? If the value to them is not what you said it would be, they may feel scorned because you wasted their or their colleague’s scarce time and resources and made them look foolish within their org.  

Trialability

In order to delve deeper into this critical topic, let’s take a moment to talk about the concept of product trialability (trial-a-bility). Trialability is a qualitative metric that characterizes how easily and effortlessly customers can try your product to understand its potential value. Let’s talk about the spectrum of trialability. Suppose your product is SaaS, is purchasable by credit card and offers functionality, and displays value transparently that requires very little work on the part of the customer. In that case, the risk of trying is relatively small – so we’d say trialability is high. 

But if your product is, say, an enterprise product, which typically requires your software to be installed (with purchased licenses and contracts) within your customer’s network perimeter, it is going to take a lot longer for a would-be customer to take your product for a test drive.  Here we’d say trialability is low. Other low-trialability friction might involve the transfer or integration of internal sensitive data, require the customer to perform lengthy manual data entry or configuration, or face a product learning curve.

With low trialability, the risk to the customer investing time in your unproven product is much higher. Trying your product may also involve multiple parties within your customer’s org weighing in and doing work (e.g., IT, SecOps, etc.). Even if they are not paying for the product yet (say if you offered them a free trial - more on that below), there is a cost to the org and an inherent risk to giving you the benefit of the doubt and spending their scarce time and resources on your nascent product – even if they acknowledge you are addressing a problem they need to solved.

Note that low trialability is not inherently a bad thing. Many products (especially in the enterprise space) have low trialability but also have very large ACVs (average contract value). So there can be big money in low trialability products. But if you’re building a product that you know will have lower trialability, there can be obstacles you should be aware of that will require you to adjust your initial product development and GTM calculus. One friction point will be longer sales cycles (perhaps 9-12 months or even longer, given you are still an unproven startup). Longer sales cycles may affect your burn rate and runway, so you’ll want to ensure you have enough seed capital to give you enough time to get half a dozen or so paid (and thus happy) pilots you can take to your A-round. Be conservative in your estimates. In the early stages of your startup, expect customer traction to take longer than you would like.

Who can argue with free? 

If the trialability of your product is on the lower end of the spectrum, you’ll naturally want to do what you can to remove friction. In the beginning, call in favors with industry friends and colleagues to do a pilot with you. This is why founder-market-fit (FMF) is so important. Ideally, you know lots of people in your target industry to tap into. Hopefully, some favors will get a few pilots going.

Giving away the product for free (i.e., a free trial) can be tempting and is a common page out of almost any sales playbook. As an entrepreneur, you are inherently optimistic and confident that if you can just get a few free pilots going, conversion to paid will naturally happen, and your momentum will start building. And after all, you will be getting your own value from your early pilots in the form of product feedback. You’re still learning, too, as you search for product market fit.

But there can be pitfalls to free that you need to be aware of. The tough thing about free is that because it is free, it is likely inherently devalued in your pilot customer's mind. Remember that the whole point of a pilot at this stage is to have the customer engage with you and give you feedback. If they don’t have any skin in the game, they will likely feel less compelled to spend time with you and your product. Stumbling upon someone within an org (whose structure is likely opaque to you) who can approve a free product trial is oftentimes easier, resulting in a false positive. Someone you thought was a convert and champion for you and has a vested interest in helping you solve their pain may just be a tire-kicker. Even if they are engaged, there is the danger of getting to the end of a pilot only to discover that your champion doesn’t actually have the authority to approve large purchases. 

Importantly, you must understand the hierarchy of the customer’s org, the purchasing process, and purchasing authority before you enter into a pilot engagement. Don’t assume you can cross this bridge later. Identifying and connecting with the purchasing authority can be hard to figure out and may vary within your customer base. Another tricky factor is if procuring your product is a multi-stakeholder or cross-department decision. Get this figured out ASAP, as it will be the foundation of your sales motion. If you think you know there will be a predictable path to the purchasing authority (e.g., the CFO will always be your decision-maker and buyer), and it will be relatively consistent across your larger customer base, you’re already ahead of the game.

One alternative you might consider is a big, time-bound discount instead of free. A big discount has many of the benefits of free, but importantly, it scopes the value and cost of your product with your pilot customer. If the customer really doesn't want to pay anything, the problem you’re solving may not be big enough for them, or they just may not be a good pilot partner for you. By putting out a pricing structure (albeit highly discounted at first), you’re putting a stake in the ground and testing the price elasticity of the customer, which is another important learning of the pilot phase. If you’re really delivering the value you said you will, will the customer pay five, six, or seven figures? Or are you off by an order of magnitude?  Have this conversation with the real decision-makers as early as possible in your relationship.

And speaking of value, while identifying the right authority in the org, you should also clearly agree with them upfront on some metrics of ROI, value, or utility that will trigger a conversion to a full-paying customer. This means you need some mutually agreeable way to measure the ROI your product has provided. Depending on your product, this can be non-trivial. Particularly in challenging economic times, the person with the actual purchasing power may have very different priorities and value requirements than you assumed. Start thinking early about this as you conceive your product – you’ll need these metrics to get paid and get future customers. Don’t leave establishing this clarity to the future and assume it will happen after the customer has been blown away by your pilot engagement. Be sure to get clarity so that both parties are on the same page from the start.

Parting thoughts

Other pitfalls in these early stages of GTM execution can be easy to fall into, and we’ll mention a few here so you are forewarned and forearmed. 

Starting with a narrow focus followed by a “land-and-expand” strategy is an early page from the startup bible. Given your limited resources, you’ll want to target and provide value in a narrow sliver of the market. This is where you’ll look to establish PMF.  Nailing this first sliver will be key to convincing investors to give you the capital to start scaling horizontally. But if you’re desperate for pilots, you may be tempted to stray from your predefined focus and boundaries, perhaps under the reasoning that “any pilot is a good pilot.”  But you may find straying from your initial GTM target sector complicates the requirements of your product and articulation of your value proposition, diluting your messaging and positioning and the marketing and sales case you are building.

Similarly, watch out for professional services traps. Your desperation for a pilot customer (esp with a well-known logo) may require you to build special “one-off” functionality that is not part of your vision and product roadmap. Product feedback is great – that’s what this stage is all about.  Being forced into “pro services” if that is not an intentional part of your GTM strategy can be a trap that some startups have difficulty digging out of.  

Jay and the MVL team have decades of experience in the trenches building B2B enterprise AI startups. Our hard-earned education goes a long way towards arming our entrepreneurs with the knowledge they need to avoid  the mistakes and pitfalls that can mean the difference between success or failure. Come partner and build with us!