Today’s Customer Acquisition Mechanisms Are Flawed

Note: Take this article with a grain of salt as this is going against everything today’s well-funded startups are doing. I am no Product Manager, but it doesn’t take too much digging to understand something is wrong in today’s Customer Acquisition game and the constant uphill battle to acquire new users at all costs.

A new startup comes into the landscape, raises funds, and then goes on a burning spree to acquire customers, giving huge discounts, cashback, coupons and incentives for users to start using their product. Sounds familiar right?

Let’s assess in this post why that approach is flawed and why these approaches of incentivising users to use the platform don’t work.

You can get users with discounts, but you can’t retain them

Let’s address this head-on, many platforms will offer potential users huge discounts and incentives to start using their products. Case in point, Paytm or Google Pay or any other startup/unicorn that’s sprung up in the past 3-4 years.

Users flock to these apps the moment they hear “discounts” and “cashback” for all purchases or payments made through their apps, and these products are advertised at such large scales that no YouTube video is ever complete without an ad at the beginning for these products. Sometimes due to this cashback and discounts, the products go viral and the products start seeing hockey stick graphs of user acquisition that they and their investors want to see.

What these products often ignore is customer acquisition is not equal to customer retention, the customer might use your products just for the cashback, discounts and leave the moment they dry up. Case in point: Paytm mall, saw a huge decrease in usage the moment they decided to roll back the big offers they had running. Heck, I don’t use Google Pay anymore and often use any payments app that’s faster if there is no specific benefit I’m getting from it.

Unless Your Product has a true edge, the retention is going to be bad

Let’s come back to the example of products like Google Pay and Paytm, they’re mainly UPI payments apps today with a suite of secondary products like mobile recharges and services that they offer. Now UPI is a cross-app platform that anyone can use or create apps around with an SDK, there are only two factors that users care about when using a UPI app:

• How fast the app and transactions on it
• Is there anything good in it for me? Cashbacks and Discounts, coupon codes etc.

Now, UPI is a free platform, the app does not earn any commission from the payments made from it, so there is no way for the app to make any money off of its core offering, it has to offer secondary services to earn commissions.

If the core offering is not good, users end up leaving unless the second factor of cashback and discounts roll in. In which case, it’s more “I can milk this product for my benefit” than “Oh this app is great, let me use it!”

The non-profitable core offering with revenue-driving secondary offerings is a dangerous play because product teams in the company will refuse to put a lot of focus on making the core offerings better, given it’s not driving any revenue, and the secondary offerings are something that any other product can offer equally well.

The moment those secondary offerings become mediocre and the product isn’t sticky, customers will flock to whichever app has even a slight edge.

Products that truly succeed with customer acquisition and retention are ones that:

a. Are exceptional, or

b. have an ecosystem of products that the users need and value. (A lot of super apps are built with this in mind, but the kind of ecosystem users would like to be in is very difficult to know upfront)

Google is a great example of both of the above, it is exceptional as well as it has an ecosystem of products that lock you in and customers value, hence Google doesn’t even have that high a customer acquisition cost. Apple, might not have exceptional products (Let’s face it) but it has an amazing ecosystem that ties into every single product seamlessly and keeps customers hooked, plus customers are ready to pay a premium for these products, so Apple’s customer acquisition and retention costs can be seen as negative, i.e: People today want to be a part of their product ecosystem and are ready to pay to get in, instead of the other way around. Apple just has to create an image of exclusivity (Which is far from the truth, iPhones are sold more than any other phone in the world and the cheapest iPhone is cheaper than the original iPhone).

PhonePe, a super successful UPI Payments provider, does not have anything that other UPI Payment services don’t like Paytm or Google Pay, but it was able to leverage the existing group of Flipkart users and build a customer base from there, something Google Pay didn’t have but was able to capture users using insane amounts of cash back at the launch of the product.

An example of a business where this customer acquisition mechanism did succeed was the classic example of Reliance Jio, you see, with Telecom providers, there’s a factor of “Habituation” that kicks in, so even if you’re getting a slightly better deal and a slightly better experience elsewhere, the users won’t switch due to the need to go to a store, fill in documents and provide proofs, and then going through a process to enable their new SIMs.

Jio came into the market and gave everyone free data and voice calls as well as messages for 3 months, this big bait was the reason everyone in India was enticed to switch to Jio and switch they did. Jio leveraged the new wave of easy sign-ups for SIMs based on a fingerprint database that the Indian government had been working on with Aadhar, so the old way of signing up was replaced by a “Tap your finger on this machine and we’ll verify and give you a SIM” method.

Jio saw its user base grow and since there was a “Habituation” of low prices and an excessive amount of cheap data, something no other telecom provider was doing till now, people preferred to stay back with Jio. Jio started raising prices after the 3 months of free usage was done (Make no mistake, the prices are still much lower than the ones asked for by other telecom companies before 2016) and today they’re sitting at profits of over 12000 crores rupees!

If the market is big, you’ll have big and better-funded companies take market share

Picture this, how many companies are in the ride-hailing business? At least in India, I can say at least 10 (Ola and Uber being the biggest shareholders in that market). Now all of those products are in a game of chicken where the established players have to give discounts and incentives to prevent users from going to the newer competitors, and the new players in the market have to give better incentives to the potential customers to poach them into using their product.

This is capitalism, where competition eats into the profits of every possible company when the market is big, yet generic enough that a lot of competitors can spring up.

That’s why in his book Zero To One, Peter Thiel emphasises that building a monopoly with big walls around to prevent competitors is the most profitable way of business.

The issue with established companies in the ride-hailing space is that they are big and hence have an established customer base, so the incentives they can offer are less because, after years of unprofitability, their investors finally want returns and actual revenues and profits. On the flip side, the newer companies are funded heavily and are at the start of the VC Funding lifecycle so they have much more resources to burn through and investors that have an appetite for risk and growth at all costs, hence they can poach customers away with their heavy discounts.

But get this, the user is not thinking about the company’s best interest, they are and will always be thinking about their own best interest, which is to get the cheapest fare from point A to point B. This incentivises them to compare different apps when they’re not in a hurry to check the app that has the lowest fare (Heck, I check 3 ride-hailing apps every time to ensure I’m not overpaying).

One argument against this is that the apps just need to set an “expectation” or “image” in the user’s mind that they have the cheapest prices always, that way the user doesn’t even go to other apps to notice. Case in point: Amazon. But the thing is, companies like Amazon have a lot to offer the customers, their selling point is not just the low prices but the plethora of services and benefits that come with those cheap prices, like quick shipping, the surety that the packages will be delivered without harm and issues. I.E: Companies like Amazon are thinking not in their best interest, but in the customer’s best interest by providing things that the customers want, hence, most people won’t even care about searching or comparing prices on other websites, because the experience that Amazon provides more than makeup for any price difference between it and another site which might have caused shipping issues, or delivery delays.

Let’s look at another example, 10-minute grocery deliveries, in India there are at least 5 10-minute grocery delivery startups I know. And every single person I have talked to, has at least 3 of them on their phone, just to compare and get the cheapest price given you’re getting the same grocery at the end of the day. These startups are funded one better than the other and are all competing in this heated space (God knows why? Just walk to your nearest grocery store lazy) right now, and there is no unique selling point to either one of them except for 10-minute delivery, groceries are the same and the time the services will take to deliver is also the same. As long as a business is dependent on delivering groceries and groceries alone, newer competitors fueled by VCs pouring in money seeing the numbers of groceries brought by consumers will keep coming in to steal market share from existing companies.

Customer retention has a hit the more competitors are there and the more common a product offering is. May it be ride-hailing, grocery delivery or UPI Payments.

There is also another factor determining the success of these strategies, demography, PayPal using these same techniques was very successful in the USA, but it struggles in India. There are numerous examples of products that fit well with one country’s audience and didn’t with another’s. One country’s population might be affluent and not care about a cent extra and hence staying with one product, whereas another country’s population might be keen to look for offers on different apps before making any purchase just to make sure they got the best deal.

What to do then?

Now one might ask, what separates the products that become successful and have millions of users, from the products that gain traction but never really make it there.

Well, to summarise, here’s a little list of things I can see with great retaining products, this list is not a must-have-all list, a product with just a :

• Elements To Keep A User Hooked and Coming Back: For example, Social Media Apps use network effects to their advantage, every single user they acquire becomes an advertiser for the app bringing in more users, and each user that comes in is now incentivised to keep coming due to the constant inflow of brain-satisfying information.
• A truly great product that’s better than every other competitor: There are several note-taking apps in the world, Notion is in my opinion, 5x or 10x better and easier to use than every other note-taking app I’ve ever used, and for that reason, I keep coming back to Notion. Despite its shortcomings, Notion can rest assured I’m not leaving for any other competitor. Same for search engines, Google is leagues better than every other search engine, heck, other search engines now use Google’s ads and search results on their pages because their algorithms and data sources just aren’t good enough. This also brings me to the next point:
• Products that get better quickly: Every search you make makes Google a little better, every photo you upload to Google Photos, makes it a little better in terms of facial recognition, suggesting photos in searches or making custom edited photos for you based on your preferences. There might be other services like Dropbox and dedicated Photo storage solutions, but I won’t go to those because the convenience of using Google Photos is just not there. A similar thing happens for users of iCloud, they can’t and they won’t suddenly shift to Google Photos because they are habituated to using iCloud and for a much stronger reason that I come to in the next point:

• Focused Ecosystems: Ecosystems are super powerful ways to ensure customers can never leave a product, whether we know it or not, there’s a change most of us are part of some ecosystem or the other. Every product in Google’s ecosystem of product improves on other existing products, getting a flight itinerary in Gmail ensures it’s auto-added to Google Calendar, adding meetings in Google Calendar create Google Meet Invites, adding photos with text to Google Photos makes Google’s internal search algorithm better, using Google Docs uses Google Drive in the background and sways you away from using a competitor like Microsoft Office.

  If you haven’t noticed, Apple has a similar ecosystem of products, but at an even grander scale, it encompasses your laptop, your phone, your watch and the software that runs on those devices, heck, now even devices that tag to those devices and tell you their location in case they get lost. Storing more and more of your life also makes you reluctant to switch products, Google Photos probably stores 100GBs of my photos and there’s no way I can switch to a different service. This is one of the reasons, why Dropbox is still around, it has a great product and the people already using it before Google Drive was a thing, just stuck with it, because they had a big chunk of their information already on Dropbox.

You obviously need marketing and advertising and discounts to get users in your early days since there is no discoverability but don’t forget to make a great product that makes them stay. Just giving discounts or incentives everyone else is also giving, doesn’t make for a good business plan.

There are many other ways a product or product ecosystem can be successful, I’m no expert, and the above are just my opinions. And as always, always open to disagreement.