The common refrain from critics of B2C travel startups is skepticism at their ability to acquire enough customers to achieve profitability and scale.
This chorus seems to be getting louder, and the response from startups is equally as consistent: pivot to B2B.
But the B2B pivot isn’t an attractive option either. After burning through cash to produce a product and experiment at marketing, startups often don’t have the staying power to outlast the travel company’s exhausting business development process, which can take 12 to 18 months when successful at all.
Also, B2B leaves a lot of money on the table as companies with customers are generally paying a modest technology licensing fee and most start-ups in that business will never achieve sizable returns.
So how do startups win in this hyper-competitive travel landscape? Should they listen to the naysayers who claim you need millions in order to even play the game?
There is a way, but probability of success is low.
Driving organic scale can sometimes feel like playing the lotto. No entrepreneur should have deluded notions of how hard it is but there are things to be done from the outset that can help.
- Ten Times Rule - at Y-Combinator, we learn a simple axiom for what it takes to win over customers (consumer or enterprises), your product has to be 10x better or 10x cheaper than current options.
Entrepreneurs gloss over this far too quickly as they look at their product through the eyes of an adoring parent and not a customer. 10x is an extreme threshold. It means business-model altering pricing or experience of a disruptive nature.
Note: A beautiful new UI for X, Y, or Z is almost never 10x better.
You have to do something different, not just do the same thing a little bit better. Think Kayak in a world where you had to search each OTA/supplier separately, or Airbnb where you previously had to stay at a hotel or find a traditional vacation rental property.
- Be a survivor - big bucks are surely needed to build a consumer brand in any speedy way. And to get this investment, you need a scalable product with traction. But, major venture funds are not the only way to build a consumer brand, they’re just the only way to build one quickly. By achieving profitability quickly or raising a smaller amount of money and spending it extremely slowly, you can grow your brand over time. The tortoise beat the hare, remember?
Time is money and there are two ways to achieve it: raising more or spending less. Building a funding model that allows for slow growth may mean eating ramen for three meals a day, or getting volunteers to add content, or having students work for equity, or paying for services with favors (legal ones, please).
Time has the added benefit of growing on the backs of repeat users, which have far better long-term economics (growing with venture capital is generally on the backs of new users).
- Enterprise from day one - try something new – sell to enterprise customers from day one. It is true that having adoring users will always help the enterprise sale, but not always in the way you think. First meetings with clients usually are more about customer discovery than selling, as you jointly work to articulate the pain points and demonstrate how your product can solve them. So while a consumer version might be a great way to show off your capabilities, it’s rarely the exact thing enterprises need.
But most importantly, every dollar not spent on building a consumer product (and marketing it) is a dollar spent on your enterprise product or extending your runway to drive first revenue.
Pivoting fast is a great way to find success when early results aren’t demonstrating the traction you require. But a pivot has a cost, including the sometimes-fatal cost of re-engineering your team to an unsexy B2B business. As a result, rarely have we seen this pivot work in a meaningful way.
- Marketing Know-How - “If you build it, they will come” is possibly the worst piece of start-up advice ever given. I can promise you, if you build it, they will not come. In fact, they will have no idea you built it. But surely you can just use Google AdWords and the revenue will roll, right?
What I really wanted to ask entrepreneurs on stage at PhoCusWright
is this: what is your average scalable cost of acquisition? How will that change over time? When will you start acquiring profitable customers?
The answer to that question is the thesis for investment in any start-up, but entrepreneurs often don’t have a good idea of this equation. They’re so focused on building a product, they assume you can market your way to profitability.
It is true that building something people want is the most important piece. But knowing the economics is pretty darn important too. And newsflash - it can take hundreds of dollars to acquire travel customers.
So it’s important to have a marketing strategy where your customer acquisition costs are known, and at some sort of advantage to the general market. That means special partnerships, access, or relationships. Be smarter or know something others don’t to exploit advantages in marketing.
The hard part of being small is that generally your acquisition costs are higher and your margins are smaller. You must answer for that. The good news is the volume you need to prove your model is far less and you are more nimble at exploiting inefficiencies.
At the very least, know the economics backwards and forwards. And don’t make AdWords your plan.
Naysayers will always try to undercut entrepreneurial enthusiasm for travel startups. Those who have done it want to close the door behind them. Those who haven’t don’t believe it can be done. But every successful startup got that feedback along the way. Listen to them all, consider their wisdom and biases, and plan accordingly.
But the Travel Innovation Summit at PhoCusWright would be a very short and sad affair if there were no path for travel companies to acquire customers. The correct dose of willful ignorance of skeptics can be valuable, but whatever you do, go in with your eyes open and economics on firm ground. And build something people want.
At the end of the day, just make sure they want it enough and you’ll find a way to win.
NB: Maze image via Shutterstock.