July 13, 2010

58) Dropbox

危 wēi  danger

MIT-grad Drew Houston was frustrated with how often he forgot his USB drive.  He was sure that there was a better solution, probably a Web-based file hosting service but he couldn’t find one available so he founded Dropbox with a fellow MIT-Grad to build it.  Shortly after receiving seed financing from Y-Combinator in 2007 they released a short video explaining their plans on Hacker News – the video received 1200 Diggs and Houston realised that they must be onto something.  They built the product (which is worth checking out for its wonderfully simple UI here) and officially launched at 2008′s TechCrunch50, an annual technology conference.  Initial users loved the product so the next logical step seemed to be to advertise and they launched an Adwords affiliate programme.  The results were shockingly poor – customer acquisition cost proved to be $233-388 (for a $99 product).  Perhaps the company’s VC backed competitors were overspending and the company would never be able to compete?

机 jī opportunity

The team interpreted the situation differently – they didn’t see the cost of Adwords advertising as the problem, they concluded that their challenge was that consumers don’t search for problems that they don’t know they have.  In other words the team needed to find a way to create demand, not harvest it.  The team knew that users that were referred to the product invariably loved it so they developed a system to incentivise the referral process (gifting both the referrer and the new users free memory – a 2-sided incentive).  The approach worked: user numbers from Sept 2008 to Jan 2010 have increased from 100k to 4m, and 35% of these new users joined directly from the referral programme.

How About…

  • Questioning whether your aim is to create or harvest demand?
  • Using 2-sided incentives to drive sales?

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I like the low-fi introductory video (the only information on their homepage), it reflects the team’s humility and dives straight into the benefit using an analogous situation:

June 17, 2010

56) In-N-Out Burger

危 wēi  danger

In-N-Out burger is a chain of fast-food restaurants founded in 1948 in California.  The brand became famous for its limited menu and simple strategy that remains in use today: “Give customers the freshest, highest quality foods you can buy and provide them with friendly service in a sparkling clean environment.”  While scaling to 240 stores the company has stayed true to its vision – rejecting calls to franchise, leaving the simple menu unchanged and ensuring that it rewards its staff better than its competitors (it is one of the few fast food chains that pays more than state and federally-mandated minimum wage guidelines). And, to maintain freshness its locations are all within one day’s drive from its Baldwin Park distribution center. It’s great at what it does as evidenced by it consistently topping polls like this Zagat report. Given its rejection of growth through franchising and its inability to expand too far from its distribution center I have always thought its tiny menu might be its downfall. Surely its fans would become bored of the offer?

机 jī opportunity

My fears were allayed when traveling with a colleague recently.  On a road trip we visited In-N-Out, after choosing and ordering (very quickly given the lack of choice) I noticed that he ordered ‘off-menu’.  It turns out that In-N-Out has a ‘secret menu’ – this struck me as pretty smart because it allows its fans to make a wider choice and it drives word of mouth marketing.  I looked it up on the web and it turns out it’s not even that secret: when celebrity chef Gordon Ramsay appeared on The Hour, a Canadian TV talk show, he chose an animal style In-N-Out burger to be his “death-row” last meal.

How About…

  • Stripping your offer to its simplest version?
  • Developing a ‘secret’ offer for your best customers, making them feel privileged and deepening their affinity of your brand?

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and, just in case you’re interested (and out of the loop like me) here are some of the not-so-secret menu items:

June 2, 2010

54) Hotel Chocolat

危 wēi  danger

Hotel Chocolat, the upmarket confectioner, was founded by Angus Thirlwell and Peter Harris in 1993.  I’ve always been a fan – not least because the company has consistently turned its challenges to opportunity.  For example, when it struggled to maintain quality cocoa supply it bought an Estate (Rabot Estate in St Lucia) – this in turn became a phenomenal provenance story.  Or, when it couldn’t muscle its way into big retailers it direct sold through catalogue.  It also grew a Chocolate Tasting Club (a subscription service which currently has about 100,000 members) which has created a community of evangelists and made demand more predictable.

It’s a great business, since its launch 20 years ago it has been profitable every year bar one and has continued opening stores during the downturn.  The company has been self-financed to date but its recent successful US store launch has revealed the global potential.  It’s time to expand before competitors enter the local markets but surely the team will have to give up its 200% ownership to fund expansion?

机 jī opportunity

As always Hotel Chocolat has approached the problem creatively.  Instead of raising expensive equity or debt it announced a very different approach – the company plans to raise £5m by selling “chocolate bonds” to its most loyal customers, taking advantage of rock bottom interest rates.  The investment opportunity will be marketed to the members of Hotel Chocolat’s Tasting Club – ‘Investors’ can subscribe for a three-year, £2,000 bond, which will deliver a “tasting box” of chocolate worth about £18 every two months — equivalent to a 6.7% yield.   The money raised will help to expand the high street chain from 42 to 72 shops, enlarge the Huntingdon factory, develop a new cocoa plantation in St Lucia and expand the business overseas.  Angus Thirlwell, co-founder, said: “We would rather pay interest to our customers than a bank. Many who have money sitting in the bank getting a low interest rate may prefer to be paid in chocolate.” The company is on track to deliver a 20% rise in turnover to more than £50m this year.

How About…

  • Fundraising from less obvious sources, e.g. your most loyal customers?
  • Using the fundraising process to bring in a community of evangelists?

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