Seattle-based Coffee achieved something every entrepreneur dreams of — establishing a new culture and becoming the leading provider in their own industry. According to CSIMarket Starbucks market share is whopping 10.5% in Restaurant category.
Starbucks boasts impressive stats:
- Owns 39.8% share of US Coffee Market
- Earns $24,72 billion worldwide
- Has 29,324 stores worldwide in 72 countries
- Over 14,000 cafes in United States / over 27,000 worldwide
- Conducts over 90 million transactions per week
- So popular in China, a new store opens every 15 hours
- Following McDonald’s as the most valuable fast food brands worldwide (valued at $44.5 billion)
Table of Contents
It will be very hard to achieve something Starbucks did since 1971 when the company started. There’s a lot of firsts when it comes to the company. First to introduce the new coffee culture, the first privately owned company which offered all their employees health insurance AND the share of the company.
The CEO, Howard Schultz, who might even run for president at some point, achieved something that is almost impossible — appeal to shareholders, employees, and customers at the same time.
THE BACKSTORY: Prologue
The coffee culture in the United States before the 80s was nonexistent. Americans were used to huge cans of pre-grinded coffee and they couldn’t care less about the flavor. Even if you’d go outside your household to a dinner you would be met with a generic drip coffee or styrofoam cups of foul tasting joe at the workplace. No-one even thought about the flavor, the origin or anything more sophisticated tied to the drink.
The 70s coffee culture didn’t exist at all.
Coffee Brands in the 1960s | Source
In 1970 three college friends: Gordon Bowker, Jerry Baldwin, Zev Siegl went into the coffee business together. They set up a shop and sold roasted bean. They received the knowledge from a man named Alfred Peet (if that rings a bell, yes he is the owner of Peet’s Coffee). Alfred was one of the most knowledgeable people in the country about coffee. He knew where to source it, how to roast it. He was the first to introduce dark roasted and french roasted beans.
“He knew the coffee industry inside-out, especially the gourmet end. He was the most educated guy in the country at that time.” — Zev Siegl Click To Tweet
The name Starbucks stuck because it’s easy to say, impossible to misspell, and has a vaguely British overtone to it. Really, we picked it because our lawyer called and told us we had to submit papers and needed a name. We didn’t know at the time, but Starbuck is the name of the first mate on the Pequod in Moby Dick. That might explain the siren logo. Some might even say it comes from Mount Rainier’s Mining company Starbo. According to Gordon Bowker, they were initially going for the name Cargo House Coffee.
In 1971, the three friends opened the roastery and bean shop in Pike’s Place, Seattle’s famous tourist destination known for the Pike’s Public Market Center. Peet helped the young entrepreneurs by providing them with beans and connecting them with reliable bean providers.
The business was successful enough for the trio so they opened 4 more shops in Seattle. However, no coffee drinks were being served. This was still a roasted bean retail shop intended for home use.
At that time Starbucks was competing against instant coffee cans. The quality was stark and thus the business went well. Things were about to change when the founders hired the head of marketing and sales, Howard Schultz in 1982.
CHAPTER 1: The Inclination for Grit and Determination Fix Social Injustice
Howard Schultz was a child raised in poverty. After seeing his father injuring himself doing grueling manual labor, he decided he wanted to get rid of the injustice of the working class. An idea of creating and striving for an environment where employees are fairly compensated and taken care of has been set in.
In Masters of Scale interview with Reid Hoffman, Schultz described seeing his father stretched out on the sofa after suffering an injury. Howard Schultz swore to himself to make a company his father had never worked for.
“I saw my father losing his sense of dignity and self-respect. I am sure that this was caused mostly by the fact that he has been treated as an ordinary working man.” – Howard Schultz, AstrumPeople article
Schultz started working at the age of 12 selling newspapers. Since he was being athletic, Howard earned an athletic scholarship at Northern Michigan University where he received his Bachelor’s degree in Communications in 1975.
After his graduation, Howard Schultz spent three years as a sales manager at Xerox, and then he started working at a Swedish company Hammarplast, where he was selling home appliances, including coffee grinders to businesses like Starbucks.
The Starbucks founder trio took him amidst to grow the company.
In 1983, Howard Schultz gets an epiphany. He travels to Milan, Italy for some sort of conference and what he sees there changes his perception of coffee forever. In certain European countries, especially Italy, coffee was one of the more important things in life. It served as a social lubricant and the third place of dwelling between home and work. Schultz discovered what it means to have a high-quality espresso served in a proper way in a relaxed environment.
Howard Schultz in Sweden, 1984 | Source
He was determined to bring this piece of coffee culture back to the United States. The founders gave in after continuous pressure from Schultz to open an espresso bar. Eventually, they gave him an opportunity to open up a coffee bar inside a store. It was incredibly popular. But the owners didn’t want to turn the coffee retail business into a cafe.
From the archives of Fortune Magazine | Source
“After Milan I flew back to the United States, excited to share what I experienced. But my bosses, the first founders of Starbucks, for whom I had tremendous respect, did not share my dream of re-creating the coffee bar experience in Seattle. I was crushed, but my belief was so powerful that, in April 1986, I left Starbucks and raised money from local investors to found my own retail coffee company. I named it Il Giornale after Milan’s daily newspaper.
In 1985 Howard Schultz opened his own cafe chain – Il Giornale. He wanted to pursue the dream and went back to Starbucks owners and offered to buy all 6 stores that were operational at that time. With the help of raised venture capital he succeeded and became the CEO after the successful acquisition with $3.6M.
The hyper growth began.
Key Takeaway #1 The determination and unrelenting belief to change the current situation is not just a helpful attribute but a prerequisite for cultural change. Staying true to the “one thing” without flinching will be the cause and the driver of change.
CHAPTER 2: “An Old Product in the New Market”
I’ll go a little on a limb here, but you can see examples of this everywhere. Whenever something works out in incredible scale in one market, there’s a potential of seeing it succeed in a new one. This is called introducing an old product to a new market.
For example, Uber and Lyft built an incredible business about ride-sharing. Because they have to contain the growth before they are spread too thin, that gives the opportunity to copy-cats in different markets. In the United Arab Emirates, you have Careem (just recently acquired by Uber), in Slovenia and Croatia you’ve got have Cammeo and in India, you’ve got sRide.
After something experiences great success, there is only a matter of time before someone else sees the potential and brings it back to the new market and starts eating out the market share
Coffee was a big opportunity in the United States at that time. Howard Schultz saw it with his own eyes how effective and important it is in Italy and he knew he could do something similar in the United States. To perform a similar innovative (for the new market) service you would need to take the entire concept and localize it to the new market.
Even the trends from 2004 to this day shows an upward trend of coffee:
This go-to-market product strategy was first introduced In 1957 by Russian American mathematician and business manager Igor Ansoff. The Ansoff Matrix was published in Harvard Business Review in the article “Strategies for Diversification”. In his opinion, there are only two ways to develop a growth strategy — varying what is sold (product growth) and to whom it is sold to (market growth).
The Ansoff Matrix | Source
Market Development — New Market, Existing Product
The Starbucks go-to strategy was to bring the already established product in different cultural and geographical space into the new market — the coffee-culture deprived United States.
Howard Schultz’s task was to closely observe how Italians treat the product and figure out a way to bring it home with minor changes. It was impossible to expect that the new market is going to slurp macchiatos from tiny espresso cups but everyone could understand comfort and better quality. That was going to be Starbucks’s trump card.
Market Penetration — Old Market, Old Product
The most obvious strategy is to sell the existing product to the existing market. With this concept there’s a little risk since the companies don’t have to educate the market with the new product, however, the growth is inhibited by competition or the decreasing trends.
Diversification – New Market, New Product
By far the riskiest approach is introducing a new product in new markets. Not only the product needs to provide clear values, but it also has to educate its use in the new market.
Imagine bringing augmented reality technology in a country where there’s no practical use for it yet. Since there’s a great risk, it can also result in amazing success where you’re the only provider in the blue ocean market.
Most of the startups are banking on this strategy.
Product Development – Old Market, New Product
This strategy is most often used by established brands who are already known as leaders in their field. If a washing machine company introduces a new technology that also folds your clothes after washing and drying, that would be much easier to understand and adapt to their existing users.
Key Takeaway #2: When developing the new market, learn as much as possible about the product itself in the location where it’s mostly used and established. Identify all the major benefits and think of the most significant values that would succeed in the new market.
CHAPTER 3: Eco-Conscious, People Friendly, and Bringing In the Money — Starbucks’ Triple balancing act
Howard Schultz had an idea to build something that is almost impossible to imagine and can exist only in Utopia. From the start, he wanted to serve with equal importance towards customers and employees.
This is almost impossible to achieve since on one end the business investors want to see money coming in, which in most cases means lean running staff with lower wages and higher priced products. The staff, or “partners” as Howard Schultz calls its employees, are not only compensated a fair wage (between $10 to $15/hour according to Glassdoor) but also have healthcare insurance and discounted stock options for company shares.
Howard went even further, offering full tuition coverage through Arizona State University’s online degree program.
This idea was most likely outrages to shareholders. Everyone will get a piece of the company’s pie?
“The management isn’t about being more efficient all the time, but it’s also being more humane at the same time” — Peter Drucker
Striving for workplace quality for the employees was thus one of the main values the CEO implemented in the company.
The interesting analogy is the Jordan Peterson’s theory of order and chaos (yin and yang) where one side represents the profit that company must achieve by ruthlessly cutting back the cost in the workforce and the other side where the conscience of doing the right thing for your people brings satisfaction and peace to the workplace which is a proven necessity for customer-facing businesses.
Key Takeaway #3: Treat your people well. When you’re in the service industry the customer satisfaction and treatment is at times more important than the actual product. And happy employees make happy clients.
CHAPTER 4: The Product
To coffee drinkers, there are not a lot of things more important than a good coffee in the morning or during the day. While in today’s standards Starbucks drinks aren’t at the level of barista artisans and coffee aficionados. On the contrary, many smug noses scrape the ceiling even when someone mentions Starbucks. But when the shops started opening in the early 70s, 80s and 90s, the espressos and lattes were vastly different than all the other stuff people were drinking.
Coffee is generally roasted in three ways: light, medium or dark, depending on the time dedicated to the coffee beans’ roasting.
In a light roast, you would notice a fruity and acidic taste. Coffee beans are actually considered fruit and are sometimes called cherries. That is the reason you taste light roast as acidic with fruit notes.
In Medium roast, the coffee tastes the sweetest. The glucose levels reach the point where the glucose starts to break. Coffee roasters would say the medium roast is the most balanced since it’s not bitter nor acidic but something in between.
In dark roast, you can taste the bitterness due to burned beans.
Coffee Quality Comparison
Starbucks predominantly uses dark roast coffee which also represents the majority of the coffee that is being consumed in North America. As mentioned, the coffee quality was much better than instant abominations in the early 80s; however, it definitely cannot measure up to artisan roasters.
There are two main reasons:
1— Dark roast is cheaper and can be produced in mass quantities. Similarly to green tea, the light roast-worthy beans are grown in shady, high-altitudes where it produces the most sweetness. High-quality matcha (powdered green tea leaves) is intentionally kept in the shade so it produces more photosynthesis and better taste. Since Starbucks has to supply tens of thousands of shops, they have to bring the mass supply to the cafes. Brian Stoffel from El Toledo roastery in Costa Rica says: “It would be financially stupid for a large chain to buy high-quality coffee beans and use them for dark roast coffee.”
Which brings us to…
2— The coffee has to taste the same across the cafes to guarantee uniformity. With dark roast, the flavors of the beans are getting covered up in the same way as overseasoning a dish or overcooking a steak.
But it wasn’t just about the coffee alone. The branding kicks in and people pay for something they want to eventually become. Drinking Starbucks drinks meant they are sophisticated, culturally progressive individuals who enjoyed the premium experience of coffee-drinking culture from fashionable Milano streets.
The slim and elegant takeaway cups proudly wore the green siren logo so the passers-by noticed the person drinking that exact coffee. These cups were different than styrofoam cups in the office or fast food joints.
The similar tactic was used by Apple with the launch of iPods and white earbuds. The iPod was a cool new gadget you had to wear to be relevant in modern society. Apple made it in such a way that people noticed which users had iPods — because they plugged white earbuds into them.
This was a genius idea because the users were immediately differentiated from other less-cool mp3 gadget-using people. Secondly, this was a perfect silent word-of-mouth strategy. If local influencers were seen using white earbuds, everyone else wanted to get on that trend. This strategy is viral in concept and is used by many companies; however, it’s harder to implement it on a distinctive level.
Later on, Starbucks adapted to the marketing with something called “horizontal offer”. It wasn’t just about the dark roast and espresso shots. Young budding students wanted something sweet and mocha just hit the note between coffee and rich chocolate fudge. Why not having both in one product?
Later on, Starbucks started offering teas and snacks. Snack is bringing in a substantial amount of revenue. The shops are using the display of sweet pastry or savory egg sandwiches like any expert pastry shop in Europe. And there are not many people who can resist a croissant or a blueberry muffin with their americano or latte.
Blueberry muffin (life hack – offer to split the muffin with your date) | Source
The food is bringing in more than 20% of all revenue. The pasty was the start, but the company followed up with offering breakfast sandwiches. By 2021, they want to introduce whole meals which will be available “to go”. The adaptation to the market goes even further.
With the recent diet trends in health and fitness, Starbucks has you covered with gluten-free, protein-rich snacks so even your most obnoxious Californian friend has something to show down the throat without having a smirk reaction.
With all the addition and expansions to serve a larger audience, it’s inevitable to create resistance groups who blame Starbucks as a commodity coffee provider. And they would be right, it has become that because their system of sourcing beans has to ensure the stock supplies for thousands of shops. But by becoming the main coffee dealer to the masses all the micro-roasters and man-bun wearing, tattoo-sleeved barista artists can fall on their knees and thank the mighty green Siren for creating a market for them.
The need for coffee has increased substantially with the introduction of better coffee, so it created another pocket of niche providers of premium roasted bean roasters.
The Price of a Cup
Most of the coffee shops live well because they can afford hefty margins. An 80% markup is a standard in the coffee business, especially on the higher-end brews. According to the Small Business Development Center’s 2012 report, food costs take up about 15 percent of revenues on average. The average coffee shop then has a gross margin of 85 percent.
Starbucks margins must be pretty loaded then since they buy tons of coffee from a few sources. According to Coffee Makers USA, the actual coffee in a grande Starbucks cappuccino costs about 31 cents.
Breakdown of the profit per latte sold. | Source
For a commodity product such as coffee, Starbucks drinks are quite up there on the more expensive tier ranging from $2.15 for a tall drip to $5.95 for a seasonal frappuccino concoction. But taking into consideration the physical positioning (Chapter 5 — Coffee Locations), paying off employees and staff the actual margin per coffee sold are 7%.
Historically, Starbucks has been raising the prices per cup over the years. Since it has poured a lot of equity into maintaining the brand image, they can afford to have a steeper price than their competitors (McDonald’s and Dunkin Donuts). Instead of losing the price-sensitive customers, Starbucks differentiates itself from before-mentioned companies and thus keeping the brand image of a premium java provider.
However, as Tucker Dawson from PriceIntelligently mentions, the prices aren’t increased across the whole product offering. The high-margin items have stayed the same.
Diversification of Revenue
By having a strong and recognizable brand, the company can afford to put out merchandise. Starbucks holiday-themed mugs and localized artwork on them are a big part of the exposure. The merch cabinets and tables are usually near the counters or areas where there’s a longer dwelling time.
The revenue isn’t coming just from the beverages alone. Starbucks did an amazing job of offering non-caffeinated beverages including kids drinks and teas which were introduced after partnerships or acquisitions of Tazo and Teavana.
Once the market is established you switch from market development to market innovation role. Starbucks started to diversify its products and pushed them in retail space and also added teas. | Source
The big drivers are also snack, wholesale beans, before-mentioned merch, and coffee equipment.
Key Takeaway #4: While the product is one of the key components of a successful business think about the potential upgrades of it. Keeping the core you can diversify the offering (and acquire new revenue channels) by expanding into different verticals but staying inside your core company values.
CHAPTER 5 – Experience is More Important That The Product Itself
With a distinctive brand identity, Starbucks shops are easily recognizable anywhere in the World. For a global brand, this is one of the mandatory element. As seen by Trader Joe’s, each franchise is slightly different than the other — Starbucks in the posh downtown area will have a different feel than the one on Student campus or at an airport.
The typical Starbucks Experience | Source
But each store follows certain guidelines which are prescribed. In tech and startups, product development follows a concept called minimal acceptance criteria. In other words, what are the lowest common denominators the dev team need to do before it can be rolled out as a published version.
For Starbucks Cafes, even though the store managers have a certain freedom to run and maintain the facility, they have to ensure to deliver the core Starbucks qualities.
- Indie playing music
- Comfortable (community) tables for remote work
- Reliable wireless connection
- Charging Outlets
These shouldn’t just be taken for granted. People love some sense of predictability in their lives. How many times have you been on a lookout for Starbucks when visiting a new country just to take advantage of their wi-fi connection and use of restroom? From that perspective, Starbucks serves as a transactional facility offering other services which don’t have much to do with coffee (besides the fact that coffee gets your bowels moving).
The main idea is, coffee is not the product that is being sold at Starbucks cafes — the whole thing is a social experiment of creating a meeting place between people. It serves as some sort of oasis for meeting up with friends, having a snack and a cup of coffee in a comfy chair while listening to the latest Indie playlists. These little sensory rewards coupled with personalized customer service re-confirm the Trader’s Joe mantra: “we’re in the people’s business.” Starbucks is less in the coffee business as is in people’s business as well.
“It’s not Starbucks coffee you are getting, it’s the Starbucks experience. “
By calling your name and writing it on the cup, it doesn’t just inform the customer that their drink is ready. It allows a more personalized service since we love hearing and seeing our name (even though it’s never spelled correctly).
SMELLS AND SOUNDS
Chances are when you go to Starbucks you don’t ever hear the music. But it plays an important role nevertheless. Starbucks playlists are carefully curated to help create that ambiance of a neighborhood coffee shop.
It has been a piece of the Starbucks experience for over 40 years already. The songs and tracks are carefully curated way ahead of the time. These handcrafted playlists usually consist of indie, feel-good songs, pop, alt-country to season-themed or even classical playlists during holidays.
In 1999, Starbucks even acquired a Bay Area music store to launch its own branded coffeehouse and later on, even a record label. In the early 2000s, Starbucks sold CDs in the store until the format decline. In 2016, Starbucks partnered with Spotify. Through the mobile app integration, Spotify plays music as part of the app. In-store listeners can take a look inside to identify the artists and save the tracks to their playlists.
Holly Hinton and David Legry, the in-house music curators, are responsible for what gets played. What sounds like the best job in the world, it actually is. Their sole work is searching for the right tracks and artists that they can see are fit to be played in the coffee shop.
In an interview with Fast Company, Holy Hinton said:
“We want our customers to walk in and have a ‘What’s that song?’ moment. We want them to hear interesting, cool music that they might not hear when they turn the radio on. It’s music that we think is cool and would sound beautiful in the coffee shop. It’s the music that we’d want to hear on Sunday morning when we’re reading the paper and drinking coffee. It’s a friend-to-friend personal. And we’re lucky to be able to be a part of that.”
To localize the experience, every region is slightly customized regarding the music, while still carrying the same vibe Starbucks customers are used to. This way, whenever a customer comes to the cafe, within the first few seconds, they feel accustomed based on the music alone.
The Interior Design
The design of the shop confirms the neighborhood areas. Similarly, as Trader Joe’s, the Starbucks cafe’s become neighborhood go to places.
But it goes beyond that. Every piece of furniture and interior is carefully planned to conform to the standards of the homey coffee place.
To get their store right, Starbucks interviewed hundreds of coffee drinkers to get as much information which they could use to build a perfect coffee shop. The overwhelming consensus actually had nothing to do with coffee; what consumers sought was a place of relaxation, a place of belonging.
If we go back to Howard Schultz’s deciding moment from the Milanese coffee shops, it shows he managed to do just that. Create a community space as a second home. It’s somewhere where people meet, it’s where you can take someone for a first date or even get some work done at the large community table.
In the book Starbucked, freelance journalist Taylor Clark claims, that “The round tables in a Starbucks store were strategically created in an effort to protect self-esteem for those coffee-drinkers flying solo. After all, there are no “empty” seats at a round table.”
If we looked at the interior, the counters, chairs, and wardrobes are built out of natural materials like warm woods and stone. In some stores, you would find cozy armchairs as well. With Shared Planet initiative they doubled down with environmental sustainability in mind and employing local craftsmen to do the job. The stores are built from reused and recycled materials wherever possible.
Most of the new stores that are being built are a part of the LEED Certification program (Leadership in Energy and Environmental Design).
Starbucks differentiates from three general looks with the addition of concept designs:
- Heritage coffee houses reflect the history of the place where the store is located. At the Pike Place, the coffee shop reflects the merchant trading roots with worn wood, stained concrete or tiled floors, metal stools and factory-inspired lighting. Even more sophisticated is the New Orleans inspired coffeehouse showing the rich music history.
- A “Louisian merchant in the early 1900s” inspired heritage coffeehouse with vintage trombones light fixtures. Located in French Quarter, New Orleans. | Source
- Artisan stores echo the industrial past of urban markets, taking inspiration from the Modernism of the 1930s. This motif celebrates simple materials like exposed steel beams, masonry walls, factory casement glass, and hand-polished woodwork in a creative gathering place for culture and the arts.
Starbucks Artisan store in University Village, Seattle | Source
- Regional Modern are localized stylized coffee shops. The interior is spacious. comfortable and welcoming. The bright, loft-like, light-filled spaces punctuated with regionally inspired furniture and culturally relevant fabrics to create a calm and contemporary respite from the clamor of the fast-paced world.
Regional-inspired Starbucks store in Copenhagen, Denmark | Source
- Experimental — with growth and a plethora of locations comes more daring and innovative designs. Unique designs such as the reimagined drive-thru in Colorado, the Swiss Train contemporary mobile coffee space from Geneva Airport to St. Gallen or one of the beautiful Shinto shrine-inspired coffee shops in Japan
To combat the upscale coffee market which ironically has to thank Starbucks for creating a fertile grounds of demand for premium coffee, Starbucks started opening up so-called Starbucks Reserve stores. These are luxurious, beautiful and magnificent stores where they roast premium, rare beans and experiment with different brewing techniques.
Source: unsplash.com by RR Abrot
CNN Money described the store concept as “an open, marketplace-style” with a Princi bakery counter, a full liquor bar, and a Reserve coffee bar, with tables, lounge areas and two fireplaces.
“Our Reserve store takes the best of coffee craft as well as artisan baking and layers in a marketplace-style customer experience creating a space that has both energy and moments of intimacy,” — Liz Muller, VP of Creative, Global Design & Innovation at Starbucks
Coffee Shop Locations
In any high-traffic area in the city where Starbucks is located, you almost have a feeling their shops are everywhere. You would be partially right — Starbucks are strategically located in areas with high appeal. In big cities, you almost have a feeling someone carpet-bombed the stores in the downtown area. Similarly, as Walgreens chose the concept of the convenience store, always located in an area of larger foot-traffic
Source | A snapshot of Starbucks shops in Seattle, 3/2019
Arthur Rubinfeld who is responsible for Starbucks’ location selection, explained there are about 20 or so analytic experts around the world who are assessing different factors of the appropriate area for the new Starbucks shop.
KEY Takeaway #5 Think beyond the product and identify what else can you do for the customer to add you in their daily, weekly routine. Customer support excellence is mandatory, so think further and in the direction of the place’s ambiance including smells and sounds.
CHAPTER 6: Breaking down the Brand and Messaging
Bill Macaitis, former CMO of Slack said it best – “The brand is the sum of all customer touchpoints your customers have with you at any point”. With the food and beverage category, this is even more important.
By introducing and creating a culture of coffee drinking, Starbucks had a major opportunity to create intimacy with the customer. In Italy, coffee culture is a part of every day and the same culture was slowly getting familiar to the new audience (just like Borgs slowly assimilate Captain Kirk).
Because of the personal nature of coffee and frequency of visits, this relationship-bonding happened much faster than in other fast-food joints, especially since in the early years of Starbucks there was no competition.
Brand and Product
The bright white cups with the green siren is the first noticeable brand. But it goes beyond that. You will notice that Starbucks never offers any sort of discounts or actions like buy-one-get-one-free. That’s sort of action dilutes the premium feel of the brand. You can get a free coffee drink for your birthday, but the underlying reason for that is for a customer to develop a positive connection with the brand and company.
The MVP of the regular Starbucks coffee shop can be broken down:
☕Free reliable Wifi – besides oxygen, water, and sleep, the online connection has become a necessity in modern civilization. If you think about it, the coffee shop without wifi is like a local watering hole without beer. Whenever you’re in a new place and you need to connect, one of the first options would be a Starbucks shop.
☕Comfortable seats and community tables – whether you’re there to take a breather or putting some hours of online work or organizing an impromptu study group, there’s a Starbucks location that can provide those demands. Most of the Starbucks are generously equipped with charging outlets as well, so you can get another drink after your focus is starting to drop… and then another… And another…
☕Friendly baristas – customer service is ingrained in the retail work description yet rarely done the right way. With L.A.T.T.E. method (Chapter 8 – Discipline Action) and general training of Starbucks partners, each interaction with the customer is there to provide a positive experience. Calling people by their name, timely service and the patience of crafting ridiculously complex/obnoxious drink orders (“half caramel, half vanilla latte, decaf espresso heated only to 100° with nonfat milk and caramel drizzle on top” anyone?)
☕Brand colors and materials — the nature-influenced interior with dark colors and wood finishes are giving a feel of hominess. Sometimes a Starbuck visit is just a pause you take in a day to relax your eyes.
☕Music and smells — coffee and snacks just smell amazing. Let’s take that for granted. The music serves a purpose as well as bringing an ambiance that is great for having a conversation or focusing on work (or your date).
Key Takeaway #6 The brand is the sum of all touchpoints the customer has with the company. This goes beyond the product and customer service. Think about every single interaction customers have with you and make them positive.
CHAPTER 7: Starbucks Master Example of Mobile Retention and App Rewards
Starbucks mastered the mobile game at the right time. Dabbling with mobile technology since 2007, Adam Brotman spearheaded the platform to maximize the effect. The big challenge was to align it with the brand.
“We don’t look at mobile in a vacuum. We have an overall digital strategy that’s all about building relationships with our customers, and that strategy runs across a number of digital touch points. We’re looking at mobile, Web and social to think more holistically about how we engage with our customers and tell our story.” — Adam Brotman, Chief Digital Officer
In the Manifest survey in 2018, 500 smartphone owners rated their satisfaction using food apps. Starbucks had the most popular and regularly used loyalty rewards app — 48% of users used it on a daily basis.
The mobile switch paid dividends with time. Instead of support and enhancing physical visits to the store, the channel began bringing in 23% of all the revenue.
Ordering ahead of time and User Experience
For a food mobile app to be successful, it must bring value to the user, be easy or even fun to use and it should have an entertaining, dynamic content.
User-friendly – This is the most minimal and easiest thing to leverage on. With a strong brand, it should not be hard to create an appealing visual interface and create logic flow and transitions or continuation to the desired action.
When it comes to designing for a major brand who literally sees millions of eyes every day, there’s no room for mistakes. The design has to adhere to rules of the brand, achieve a consistent visual look and continuity across all touchpoints.
The mobile app design is no different than the rest of the materials Starbucks uses.
Chase Bratton, the product designer at Starbucks, explained the Android redesign functionality.
Out of this world Personalized experience
When the Starbucks app is down so I gotta order at the counter like it’s the dark ages 🙄
— Braedi Zielinski (@braedi) February 28, 2019
Ordering and paying ahead of time
User experience (This is a must, it must be easy to use and appealing to look at)
Digital Engagement paid tremendous dividends for the company
Starbucks CFO Scott Maw said almost all of the company’s same-store sales growth has come from customers that have digital relationships with the company and those that are in the Starbucks Rewards program.
This is the minimal and easiest thing to leverage on. With a strong brand, it should not be hard to create an appealing visual interface and create logic flow and transitions or continuation to the desired action.
Engaging Loyalty Program
Retention is the name of the game. If a customer trusts you well enough to download your app, you have a unique opportunity to convert him or her to be a regular user.
Starbucks has a similar strategy with the reward system. Every day there’s a slight reward, whether it’s collecting points or showing the current mouth-watering warm drink inside the app. It’s sticky and you can’t help but wish for a warm beverage.
Mobile pay and ordering
North American market is known for heavy mobile use. By prepaying and using the device to quickly go through the ordering process, the customers feel more efficient and slightly more an advantage than the other poor souls who still buy their coffee with credit cards or cash (losers!!!!).
Integration with other platforms and services
Partnerships are ways to get tons of new users with one big swoop. Spotify acquired one million users a few days after partnering with Facebook (Source) and Facebook had one sexy product update from it as well. For similar reasons, Starbucks used Spotify to enrich the experience of the mobile app.
Now playing highlight in Starbucks stores (Music is a big part of the brand and having perennial “Shazam” embedded brings seemingly insignificant, yet positive experience.
UX/UI — Breaking Down the Mobile App Design
Out of this world Personalized experience
The app remembers your favorite order (This is ingenious. We’ve mentioned how coffee for Java bean drinkers represent a daily habit – if Starbucks manages to infiltrate itself into your habit loop, they’ve won. They have become a part of your daily routine. Stacy always stops at the same drive-through Starbucks, orders her Grande Latte with Soy Milk at 6:15 am before she checks-in at her job. When that’s her daily or even only a few time per week routine, the LTV for that kind of customer is absolutely amazing!)
Every little detail counts. For instance, here’s the customized greeting each time a user opens the app’s Home tab.
Now playing highlight in Starbucks stores (Music is a big part of the brand and having perennial “Shazam” embedded
Most addictive phone games always give you something to do if you’re not using it for a while. From Candy Crush Saga to Supercell’s engineered mobile drugs like Clash of Clans and Boom Beach, the mechanics of engagement are carefully predicted for maximum time and cash spend. These games start with low difficulty. They are fun, colorful and offer an entertaining introduction to its mechanics. But you can play all day, and after a while (on a free tier) you’re locked out of the game.
To continue playing, you can either (literally) buy your time or increase your chances of success with extra loot, power levels or something similar.
Starbucks uses a similar principle of gamifying their mobile apps. There’s a lot of value up front (pay with a card, skip the line, earn credits for free drinks) but it serves the company’s profit. You get hooked to those stars (credits) which are stacking in your beautifully designed mobile app.
Yes, there are levels on Starbucks app. | Source
There are also challenges for extra Starbucks points (who can say no to double credit days?)
Through the app, Starbucks gets you to try new products (and thus incentivize a range of products you are consuming AND it gives the company an opportunity to increase the average order revenue per customer.
There’s a thin line between being overbearing and being just enough engaging. And at the same time, they have to be very strategic on the number of features offered. Sean Ellis, the OG Growth hacker said the product is ready to ship once all the unnecessary features are taken away (kind of the same mentality as per good design). Luckily with MILLIONS of users, Starbucks can apply some Data Science magic and figure those timings for every type of person.
Personalization goes even further – it tries to give a similar experience as to visiting the store (source)
STARBUCKS LOYALTY PROGRAM on triple-caffeine nitro power
The Starbucks Rewards are dead simple – the more you spend the more stars you get. The mo’ money, mo’ honey approach quickly identifies a segment of customers that are willing to spend more for their coffee/Starbucks addiction.
The Rewards program besides the stars, offers birthday rewards, phone payments, paying ahead, free in-store refills (I WANT MOAR KOFFEE) and special offers and events for members. As expected the experience is personalized for each user.
The Rewards work like gangbusters! More than 14.2 million active members in the U.S. are invested in the loyalty program and the mobile strategy has seen an 11% growth in users in Q2 2018. The gamification of the program and “spend more, earn more” in some cases represent 39% sales of the entire chain.
Here’s what’s ingenious about the mobile program. Even though there are people (like myself) who prefer to have the minimum number of apps on their phone and think thrice before opening the doors for the elite club on their smartphone storage, the Starbucks app is a trojan horse of benefits – even if you don’t care about collecting stars, it’s tough to say no to the free birthday drink or the convenient mobile pay.
Online Ordering and easy payments flatten the friction of getting the product. Just like the Amazon 1-click purchase or Slacks dope-sauce onboarding sequence, the same goes for picking up your mocha and Petite Vanilla Bean Scone. At first, Starbucks had some issues, since the mobile members had to wait in line just like regular chumps, but Starbucks responded by adding dedicated stations for mobile order-ahead customers.
Members can skip the waiting line and enjoy the jealous looks from the regular mortals while feeling elite of themselves.
The beauty of the app isn’t giving one big benefit of quicker caffeine shot to the member, but it serves as an ingenious upsell marketing tool. Just like Trader Joe’s introduces new products in their email newsletter and unique brochures (Fearless Flyers), Starbucks app is a delivery method for presenting new items ahead of time. These generate interest ahead of time and coupled with email notifications, it gives their customers something to look forward to.
Taking advantage of location-based triggers | Source
To keep the retention flat, the Rewards program has a “punishment” traits tied into it. If you’re not using the stars for visiting the cafes (and thus building your own routine) you start losing them. This psychological trick, known as The Endowment Effect, helps to nudge those people who are affected more about losing something they already have (uhmmm like all of us :)).
The Mobile part is one of the main drivers of customer retention and has proven to raise the average order size per customer. Since the frequency of orders and visits is so high, the LTV per customer contributes to that impressive double-digit growth in the first years.
Key Takeaway #7 Mobile app for a product that is being used on a daily basis and is in the lifestyle category is not a nice to have, but almost mandatory. If you want to stay a part of your customer’s daily lives, bring the entertainment, rewards, and gamification to keep the retention and customer satisfaction high. You will be rewarded with increased LTV.
Chapter 8: The Success Flywheel of Starbucks
The easiest way to figure out and identify the success of a company is to apply the try-and-true framework. Jim Collins, the author of Good to Great, Built to Last claims all mega-successful companies have to figure out the Flywheel principle.
To become an unstoppable juggernaut in its own field, Starbucks had to align 5-6 different elements in three categories:
- Disciplined People
- Level 5 Leadership
- First Who… Then What
- Disciplined Thought
- Face the Reality
- Hedgehog Concept
- Disciplined Action
- Culture of Discipline
- Leveraging the Technology
Imagine the concepts as drivers of one giant flywheel. Let’s say you’d want to move a giant stone wheel that sits on an axle. It would take a lot of effort to get it moving at first. After gaining speed it would need less and less power to keep it going. After gaining momentum, the same wheel would run on its own with little interaction. Just like the extremely simplified quote says; “If it ain’t broke, don’t fix it.”
The Buildup phase
Disciplined People – Starbucks Level 5 Leadership
Excerpt from Good to Great -> “Level 5 leaders display a powerful mixture of personal humility and indomitable will. They’re incredibly ambitious, but their ambition is first and foremost for the cause, for the organization and its purpose, not themselves. While Level 5 leaders can come in many personality packages, they are often self-effacing, quiet, reserved, and even shy. Every good-to-great transition in our research began with a Level 5 leader who motivated the enterprise more with inspired standards than inspiring personality.”
There’s no doubt, Starbucks CEO Howard Schultz possesses the characteristics and personality traits of a Level 5 leader. The ambition alone to introduce a new cultural concept in a new market sounds incredibly daunting, but to play it right with the shareholders, customers and their own people sounds impossible.
But that was the initial idea, a moral standard. The mission statement of Starbucks is:
“to inspire and nurture the human spirit – one person, one cup and one neighborhood at a time.”
Let’s break this down into two pieces.
Inspire and nurture the human spirit.
The people, customers and the partners (staff) are the most important assets of any company. The first part of the mission statement explains that in a split-second. The relationships within the company have to be nurtured and supported while exuding warmth and friendliness.
Howard Schultz has shown respect for the mission by developing programs for their own people, which include free education, health insurance and even a share in the Starbucks company.
“One person, one cup and one neighborhood at a time.”
The second part stresses the importance of gradual improvement. Each interaction with a customer, each cup of coffee made hold a large amount of responsibility to deliver the right experience. The neighborhood part reminds the staff and the customers that the stores pay special respect and attention to the place where they are located.
Face the Reality — When stuff gets hard, leaders don’t turn away from the problem or worse, get busy with mundane tasks, deceiving themselves they are working. Closing your eyes to the reality means you’re on a great way to a downward spiral.
In 2008, Howard Schultz got reinstated by the board as CEO. The sales and shares were dropping. The brand and the culture of Starbucks were deteriorating rapidly. The magical experience was a shadow of its former self.
Schultz decided on a radical idea to close all the stores and retrain in order to inflict the importance of the Starbucks vision and mission. Tied into this transition was closing numerous shops and letting go of hundreds of employees. The ordeal cost the company 6 to 7 millions dollars.
In 2018, Starbucks closed the doors again in order to put the staff through racial anti-bias training. The temporary closure cost the company between $15 – $20 million dollars
But it was necessary and long needed. The company picked up from the bottom just like in Drake’s song and has been rapidly growing in the world’s map as well as on index stock charts.
The Hedgehog Concept
The term Hedgehog concept introduced by Collins is some sort of a marriage consisting of a Venn diagram and three major ideas. Jim Collins thinks that in order to have a chance to be the best in the world you have to possess all three:
- The Elite Skill – You will have to be the best in your area of expertise. Constant learning, innovating and moving the boundaries are expected from the movers and shakers of the world.
- Deep Passion – Someone who grows a business will eventually (and continuously) encounter major obstacles where the skill isn’t going to be enough. The grit, powered with a deep passion and a reason why is arguably even more important than the knowledge alone.
- Ability to generate revenue – Understanding of what drives the economic engine is the third piece of the puzzle that completes the concept. No business can survive without sustaining itself and its people financially.
Schultz possesses all three: the Stanford education armed him to become shrewd and dangerous in the business world with a deep understanding of the economic machine while he stayed in love with the company and continued to deeply care for its people and the customers.
The second part of the hedgehog concept is the sheer simplicity of your objective. When it comes to specializing and becoming the best in the world, you need one clear statement which completely prevails over all the others.
The hedgehog is the exact opposite of the fox concept. Foxes are cunning, smart and resourceful animals who take any opportunity to get ahead using any tactic they can think off. Yet when they encounter and attack the hedgehog, the hedgehog simply rolls up into a ball and protects itself with its spiky hide.
The hedgehog companies have one major driving goal that is ingrained as the cornerstone of its business. In Starbucks, it’s not the coffee quality, but it’s the deep desire to create an experience for their customers. Everything is tied into this.
Sometimes, achieving massive rapid growth for the growth sake reveals cracks in the system if it’s not solid. In 2008, when the company was on the decline, Schulz looked at the strategy of the past few years and, in a letter penned company-wide, explained that Starbucks had “invested in infrastructure ahead of the growth curve” and it was time to “shift our emphasis back onto customer-facing initiatives.”
Imagine, the Starbucks insane growth pace required to hire 1,500 new employees a week.
Culture of Discipline
The success of anything in our lives is in the hands of people. It always is the #1 element in any company.
“In determining the right people, the good-to-great companies placed greater weight on character attributes than on specific educational background, practical skills, specialized knowledge, or work experience.”
When the quality of the work started slipping. Schultz had to close down hundreds of shops for training day. It was a necessary decision to refocus, restructure and boost Starbucks employees to work and deliver on the right things and to deliver the experience as it was intended in the first place.
When faced with a difficult customer or a problem, the Starbucks partners (employees) are taught the customer service by using a L.A.T.T.E. system. The acronym helps baristas deal with any situation in the store.
- Listen to the customer
- Acknowledge the problem/situation
- Take actions and solve the problem
- Thank the customer
- Explain what you did
The simple system isn’t there just to provide clear guidelines but it also boosts motivation and willpower among employers. In the book, The Power of Habit, Charles Duhigg wrote that the LATTE system prevented the customer service meltdown, and sustained willpower throughout the day.
In the end, customer service is there to deliver and exceed the experience which is tied to the brand. Nothing is as important as to deliver the service. Trader Joe’s hires his crew with ingrained traits such as warm personality and friendliness, Lululemon trains their educators to be personable and serve more as personal assistants than sales reps, and Starbucks
“[Employees] are the true ambassadors of our brand, the real merchants of romance and theater, and as such the primary catalysts for delighting customers. Give them reasons to believe in their work and that they’re part of a larger mission, the theory goes, and they’ll in turn personally elevate the experience for each customer–something you can hardly accomplish with a billboard or a 30-second spot.” — Excerpt from book Onward, Howard Schultz
For a globally recognizable brand like Starbucks technology plays a major role in the expansion. The Starbucks app and the emails alone played a significant role in the company’s growth.
With 17 million daily active users (DAU) In the US, mobile orders and pay alone make up an astounding 27% of all transactions (3). Starbucks Rewards has 13 million active members (3). This extraordinary level of engagement on the mobile app and rewards program greatly increases Starbucks’s ability to collect data, and test and roll out targeted data-driven initiatives.
According to Collins, technology accelerators have to be carefully selected. Companies had to sift through the emerging technology, identify and select the right ones and gradually introduce them in the business model.
The Hedgehog Concept would drive the use of technology, not the other way around — Jim Collins
Companies that jumped the gun burned badly.
In fact, Jim Collins discovered that more than 80% of great companies didn’t rank technology as one of the top five ranking factors for success.
“Those that stay true to these fundamentals and maintain their balance, even in times of great change and disruption, will accumulate the momentum that creates breakthrough momentum. — Jim Collins
Down to the core, Starbucks has one secret ingredient to thank for — knowing their customers. Data analytics. According to Starbucks, this function uses “methodologies ranging from ethnography to big data analytics… that helps support Starbucks pricing strategy, real estate development planning, product development, trade promotion optimization, and marketing strategy.”
Starbucks contracts with a location-analytics company called Esri to use its technology platform that helps analyze maps and retail locations. It uses data like population density, average incomes, and traffic patterns to identify target areas for a new store.
The Crawl, Walk, Run Concept
The gradual introduction of technology is a part of the hedgehog concept. Technology is a major proponent to business growth however if it doesn’t tie into the one simple concept, the company has to be disciplined enough to say no to new opportunities.
Eventually, they can adapt the technology in their concept which turns the massive flywheel forward.
In Starbucks sense, they seem like they embrace technology. They started out with gift cards and pay-ahead mobile purchases. Next step was adding the Starbucks Rewards program to cultivate upsells and raise the LTV per customer. And today with big data, AI and predictable algorithms they maximize the relationship with the customers.
See what happens to the SBUX stock, when Starbucks introduces mobile app and rewards program that today brings 23% of the total revenue.
Key Takeaway #8 Successful companies that persevered and thrived with time have found and adopted the Flywheel concept. Focusing on essentials of the business, working with the right people on the right places and maintaining the discipline is the only way for continued sustainable growth.
CHAPTER 9: Starbucks Vs the World
Just as Lululemon Athletica carved its own niche in the marketplace as the premium athleisure retailer, so did Starbucks enjoy the blue ocean marketplace as premium coffee culture experience-provider. Not facing the competition while enjoying filling out the gap shoots you at the front immediately.
But as soon as competitors noticed Starbucks discovering a new opportunity they had to react quickly. McDonald’s and Dunkin’ Donuts were the big ones that introduced their own versions of coffee-to-go. Better than instant coffee and convenient while on the go, the two competitors did enjoy new revenue stream of introducing coffee; however, as companies, they had to keep the focus on what they are good at — McDonald’s with their fast food burgers and fries and Dunkin’ Donuts with well… donuts. DD does serve coffee but had no intention to put more emphasis on it until the late 1990s.
Starbucks kept the lead in coffee concept because of its focus on the coffee culture and holistic concept of their brand, especially customer service. This point can be seen as soon as you look at international markets. Dunkin’ Donuts’ international revenue in 2018 contributed less than 4% of total sales, while roughly 30% of Starbucks’ consolidated net revenues in the same period were attributed to markets outside America.
When International Expansion Goes Right
When you get it right and you know you have the brand, processes, and culture down, you can move outside. When Starbucks expanded its adopted “Coffee culture” to new markets they could follow its own tracks again. In many countries, especially Asian nations the idea of a coffee culture was new, fresh and exciting.
To overcome the culture gap, Starbucks sought partnership through direct investments and joint ventures instead of direct franchising. This solved two major problems.
First, they relied on local retailers who already had experience and experience in the local markets. They married the coffee culture idea with market research of the new areas to discover regional customers’ tastes and preferences. After that, they just had to deliver the employee training, workflows and the product itself.
Secondly, they acquired and absorbed the entire pieces of coffee markets, such as Coffee Partners in Thailand and Bonstar in Singapore. All in one big swoop.
But even today a Starbucks café is opened every 15th hour in China. It already operates more than 3,000 stores in China and plans to add 2,000 more by 2021. Seoul has the most Starbucks cafes in any city (284).
Starbucks is present in 6 continents and in more than 72 countries and territories. But it wasn’t always smooth sailing for the old Starbuck.
And when it doesn’t go so well
While Starbucks had amazing success in Asian countries, they hit a snag in Australia.
In 2008, they closed two-thirds of all stores.
Australia is already known as one of the hardest markets to get into in the first place and they are very proud of their coffee culture. The flat whites, coffee art in ceramic lattes have been served for dozens of years at beloved local cafes and from baristas who knew what they are doing.
What Starbucks was doing in the United States was introducing the coffee culture in the new market because it was non-existent before. But in Australia, this model didn’t fit in at all.
In 2008, Starbucks closed two-thirds of all the stores. The prices of Starbucks’ relatively common-tasting coffee (compared to established coffee shops) was pricier than the local solutions and managed by young students who didn’t have the level of appreciation of either the coffee culture and/or Starbucks as a brand.
Key Takeaway #9 Follow the winning formula of developing the markets first and turning into a product innovator after you have established yourself. Forcing the innovation where it’s not perceived as such, is waging a losing battle.
Bonus Chapter 10: Starbucks on Social Media
The website is simply designed with an intention to present the latest seasonal product in the Starbucks shops in the first fold. The focus of the homepage is also on advertising Starbucks Rewards program.
According to SimilarWeb, it attracts 15.8M visits per month, with an average of 2 minutes and 3.7 page views per session. Starbucks site is the 11th top ranked site for Food and Drink category in the world
The Youtube channel was established at the end of 2005. After 14 years it managed to acquire 211,000 subscribers, which isn’t’ that much if we take the size of the company into consideration.
The most successful videos are close to 10 million views; however, they are short, 15-seconds clips of the product. The channel moderators are not participating in the comment sections.
Luckily there’s not much competition on YouTube; however, as a highly visual channel, Starbucks could advertise their mobile app and Starbucks reward program using socially-conscious values, product innovation or sustainability programs.
On the other hand, Instagram is doing absolutely amazing. Naturally, since the best Starbucks customers are the ones who have been using their mobile devices for ordering and participating in the Starbucks Rewards program
Starbucks Instagram uses a mix of images and video clips mostly displaying their well-designed cups. The posts are mostly re-shared (“regrams”) of other Instagram users. With this tactic, Starbucks incentivizes UGC (user-generated content), since Instagram users have the chance to be regrammed and have their Starbucks shot seen by 17.4 million followers.
Pinterest is another great visual platform where images are split different categories: from coffee recipes, coffee photography to store designs and world recognized Starbucks cups.
Pinterest receives 5.9 million monthly views and has 369,000 followers.
Even though their daily support is dropping, Facebook is still being used as one of the channels where Starbucks shows its videos and posts.
On Facebook, Starbucks pays for mobile app downloads in the United States.
On Twitter, Starbucks shares its globally conscious ideas, news and stories about the company and the products. Twitter also serves as a chance to (as in Instagram) retweet other users’ posts.
Similarly as Slack used its “Wall of Love”, Starbucks likes to reshare the positive messages of happy users who had a positive experience at one of their stores
Since Starbucks success mainly lies in their visual branding, they use social media for their brand awareness and in a Facebook sense, pushing the mobile app downloads.
Key Takeaway #10 When using social media, identify which social media platform brings the best results. If your users are primarily on mobile devices, Instagram would be a smart choice. Delegate your resources to the best performing channel.
Starbucks has become a worldwide success by sticking to its hedgehog concept. The realization of being customer-centric in the practical, not just theoretical sense laid the foundation of expansion in North American markets as well as international ones.
When all of the decisions are catered into the concept of serving their customers, including using technology as accelerators, there’s nothing to worry about their future.
This is a syndicated article which I wrote for Single Grain.
“As hard as it was to convince people to start using it, once they started they almost never stopped” – Stewart Butterfield, CEO and Founder of Slack
Slack has already entered Silicon Valley’s hall of fame as the fastest growing business app.
From its public launch in February of 2014, Slack’s accomplishments include:
- Accumulating 8 Million Daily Active Users (DAU)
- 3 Million of those are paid users
- The highest conversion rate among Freemium Software products – 30%
- The app is used by 43% of Fortune 100 companies
- Their latest valuation in August 2018 showed that Slack stands at $7.1 Billion Dollars
These numbers are just mind-boggling; Slack went from $0 to $7 billion… in less than five years.
It’s even more impressive considering that the Slack app was born out of previously failed businesses.
- Prologue – Slack’s Backstory
- Chapter 1: Brotherhood and Perfect Timing
- Chapter 2: Execute the Perfect Launch
- Chapter 3: Brand is Everything
- Chapter 4: Customer Experience as the North Star
- Chapter 5: An Offer You Can’t Refuse
- Chapter 6: The Blueprint for Multi-Billion Dollar Company
- Chapter 7: Slack’s Friends and Family – Integrations and Partnerships
- Chapter 8: Future-proofing the Company and the Product
Every success story has done three things in their lifetime:
Product-market fit. “Right idea, right time”
Rapid growth. Scaling with hyperspeed.
Reinforcement. A built-to-last model.
In this growth study, we’ll look at the story of Slack, its beginning and underlying strategy for world domination, and how they built a platform that’s transforming office communication.
Founder and CEO Stewart Butterfield is no stranger to fast-growing apps; he built Flickr about 10 years before starting Slack. But let’s dig deeper…
Butterfield, born and raised in rural area in British Columbia, hadn’t been exposed to technology until he went to university the late 1990’s, he became fascinated by the school’s Unix machine, and how it could build something out of lines of code.
After escaping the dot-com bubble in 2000 with $35,000 severance pay from his ecommerce job, he started building a web-based massively multiplayer game called Neverending. With rudimentary graphics and a small but passionate community, Stewart fueled his passion for design and communication.
The game was impossible to fund and thus difficult to scale; however, the side effect of building the game was that the small team built a technology that let users tag images with other users, far before Facebook and Instagram offered that ability.
Meanwhile, Stewart’s $35K was dwindling,and the game was was approaching its inevitable decline. Pressured by depleting finances, Stewart and his fellow tech-obsessed friends iterated to utilize the core technology that made the game unique — image sharing and tagging capabilities.
He then started Flickr , and help from Google, they started getting users with a rapid pace. At the time Google had just bought Blogger – a CMS platform that allowed anyone create a website. However, you because you couldn’t store images on Blogger, Google redirected users to save their images on Flickr.
The Flickr team wasn’t profitable — it had astronomical server storage costs — however it attracted the attention the Silicon Valley giants: Yahoo and Google.
Yahoo! offered Flickr team $20M. The team of eight became millionaires overnight, but instead of maintaining their culture rapid iteration and agile workplace, the 11,000-employee Yahoo! slowed down the startup-style decision-making process.
After three years, they were fully vested, and Stewart took his core employees and returned to his initial project — another web-based multiplayer game called Glitch.
As they were now known for Flickr’s success, the team had an easier time finding investment, They raised $17M which was used for new hires, mostly for graphic animators. Flickr’s success meant that he game attracted a lot of users.
But there was one major problem. The problem that kills the most startups — a leaky bucket.
Even though users found the game and tried it out, 99% of them didn’t return because it was too obscure and abstract. Much to Stewart’s dismay, this project was nearing its end.
Stewart made the hard decision to pull the plug in 2012. Devastated, Butterfield helped every one of 37 employees get a new job.
But he’d find success soon…
Chapter 1: Brotherhood and Perfect Timing
Objectively speaking from a business perspective, Glitch was a disaster. However, the team had developed an internal communication system that made them incredibly productive.
The platform was built on a concept of channels which allowed team members to chat directly or within the channel. It stored all communication. It was an inversion of the typical inter-office communication: email.
The thinking was that in email, team members don’t have the context from the stored communication; 99% of messages aren’t visible unless you’re cc-ed.
The Glitch team didn’t realize how useful the communication system they built was until they shut down the company. It was much better than the typical email-based communication, and they never wanted to work without a system like that again.
Maybe, just maybe, other people would like it too.
After Glitch shut down, Stewart was left with his core people, the same people who were with him from the Flickr and game development days. By now, they had been working together for close to 10 years, and loved making products together.
The hard times had connected the team even further.
Weeks after Glitch closed, Stewart and his team started working on the Slack app. They rebuilt the entire internal communication system within a couple of months.
Solving the Dreaded Inbox Problem
Internal communication was a problem for most companies, even though they weren’t necessarily aware of it.
With more and more software startups rapidly scaling, they realized that internal communication encountered problems when a single-digit team grew to 20, 50, 100+ people in a year.joining the startup, they inevitably encounter problem where a single-digit team turned into 20, 50 or 100+ people company in a year.
Slack was at the right place at the right time.
They weren’t the first new communication system:apps like Yammer, Campfire, and HipChat already had small but loyal user bases.
Seeing a trend, copycats were popping up left and right.
In order to succeed, Slack needed to solve the communication problem better than the others.
Working in their favor was the ridiculously huge Total Addressable Market (TAM) — companies from tiny startups to massive enterprise businesses needed a tool like this.
The core features and capabilities of Slack were: :
- Contextually relevant and segmented communications, including persistent chat, direct messaging, as well as voice and video calls within and between teams.
- Synchronized communication and collaboration across multiple devices and platforms.
- Integration with third-party apps, legacy enterprise software, and custom-built apps and chatbots for Slack.
- Customizable notifications and advanced search across Slack’s real estate.
While the TAM is virtually the same for all existing rivals, Slack differentiated itself through their fun brand, ease of use, customer-centricity… Combining that with a brilliant product launch, Slack had the edge in market share.
Why Yammer Failed
Microsoft’s Yammer was essentially solving the same problems as Slack, but their approach was off. While 80% of the client’s team got on board to use it, senior employees weren’t quick to try it out.
You also had to use Microsoft Office 365 to access Yammer. Many potential users utilized Google Docs (especially for collaborative use). Microsoft Office 365 requires users to pay and commit, while Slack and Google Drive are free.
Slack was able to move past reluctance avoided the problem with aby having a fun interface (Chapter 4), generous freemium model (Chapter 5) and an easy-to-use platform simplicity use, so everyone from more flexible team members to senior employees could see the benefit in the same day (Chapter 6).
The Importance of Emerging Market
Slack’s initial team consisted of four core members: Stewart Butterfield, Eric Costello, Cal Henderson and Serguei Mourachov.
The team communication system developed during their tenures at Flickr and Glitch made them far more productive. They noticed the productivity with the rest of the company members.
Everyone working with the core team realized how effective their system was, and when teams moved on to other companies, they quickly realized how much inefficiency the proto-Slack was solving.
The core team knew they were onto something; they had the market validation they needed from their own team.
Slack Question: One of the Slack reasons for success was the tight-knit community of 4 founders? Does this example of trust and love for work translate to all employees and in what way?
KEY TAKEAWAY #1 Emerging markets are a great place to launch a new product, especially when you already have market validation. Partner with the people who are the best at what they do and able to handle the pressure of a rapidly-changing startup. Competition is a good sign that you’re on the right track, but launching a product in a competitive market means that you have to build a super product and serve your consumer base better.
Chapter 2: Execute the Perfect Launch
If you’re running a startup, the odds are against you.
You need to find a pain point, actually solve the issue, and gain clients who trust you.
If your product hypothesis isn’t right, you have to iterate while you still have a financial runway.
Slack knew they had the solution to a major business pain point. Because of their prior success, the team was able to get venture capital so they could focus on a strategic and exceptional product launch.
Instead of ‘growth hacks,’ the Slack team combined the efforts of product design agency MetaLab, the reputation they had built from Flickr’s success, and PR agencies that came up with Slack’s unique hook: “The Email Killer”.
They launched a ‘preview version’ of Slack so the team could:
- Fix major bugs and errors
- Determine and identify the features and benefits that resonated with the market
- Galvanized the initial user-base to advocate Slack by word-of-mouth
Once they fixed any issues, they were ready to bring Slack out with a strong product launch. Imagine how it would be if Tesla or Apple revealed a semi-tested product.
The Slack’s hook – Killer of Email in Time’s article | Source: Time.com
Slack’s intention wasn’t to replace email.
As Butterfield says: “Email has many benefits, it’s the lowest common denominator for official communications. But it’s a terrible way to manage internal communications.”
“Email will be the cockroach of the Internet, I think we’ve got another 30 or 40 years of email left” — Stewart Butterfield
Preview version gave Slack a chance to test core features at the same time as building the relationship with the select few. Note that Slack intentionally haven’t named the pre-public version “beta” version. There is a massive difference in dynamic and perception from the user standpoint; in beta, they’re there to test out things so they can help the company. But if the users are in “preview” camp, they are one of the elite few who get to use the product before anyone else and enjoy its privileges of being first.
Hiring an outside company to build a brand might be unique to Slack. Slack’s first marketing hire, Bill Macaitis step into the role of CMO in November 2014, which means Slack completely relied on the third party agency to deliver the whole look and feel of the brand. Outsourcing the whole department and relying on someone else delivering the whole look is a journey of trust and belief. Luckily for Slack, it paid of in the best possible way.
Slack’s preview release, August 2013 | Source: web.archive.org
They were confident to release it to the public.
These took months of careful planning and synchronizing across the channels.
As soon as the product hit the market, it went viral.
Here are some assets Slack acquired before they launched:
- Collected testimonials from known companies and displayed them on the landing page
- Use Twitter to show off the “Wall of Love” – tweets of users who sang praise to Slack’s
- Use the PR firm to connect with most of the relevant tech online (and offline) publishers:
- Fast Company – Flick Co-founders Launch Slack, An Email Killer
- TechCrunch – Slack, Flickr Co-Founder Butterfield’s Business Collaboration App, Exits Beta & Goes Freemium (February 12, 2014)
- The Verge – Slack is killing email (August 12, 2014)
- VentureBeat – Flickr co-founder launches ’email killer’ Slack to the world (February 12, 2014)
- Inc.com — Why Slack is Killing Email Once And For All (November 11, 2015)
Slack tested out the product-market fit and figure out what is their way to attract new users with one giant swoop. They used multiple Pr agencies with a hook that immediately attracts the user. PR agencies are usually expensive, but Slack thought it’s the perfect way to get as much exposure in a short time. You can do this manually by pitching to reporters manually. This would take a long time since you have to build a relationship but it will support your launch greatly.
The building of social proof created a cluster of social credit. Using the “email killer” headline hook from the industry-recognized publishers such as Verge, TechCrunch and VentureBeat brought in new unique traffic while the Twitter’s Wall of Love shoved the trust of peers.
|Slack’s Wall of Love|
Whenever a Twitter account post or retweets someone else tweets it appears on their timeline. Slack created some sort of repository of all positive tweets whenever they were mentioned. This created one giant wall of positivity and love. Slack named it “Wall of Love” — it’s a separate Twitter account that stands on its containing everything nice that is being said about it.
Slack combined it with a traditional marketing channel — a print ad in Wall Street Journal.
Slack’s whole page ad in WSJ magazine. | Source: blog.onging.com
Why it works:
Keep in mind that most of the audience were companies from Silicon Valley — from software industries where there’s a lot of conversation happening on Twitter.
Deeper into the Brand Core
Great brands are built on top of solid foundations. Solid team with proven track record – check. Clear value proposition and demonstrated product/market fit – check. Company culture with customer centrism and solid brand – let’s unpack this. If we borrow the term MVB (Minimal Viable Branding) we can deconstruct Slack’s brand to individual elements.
MVB is the concept adopted by Scott Kraft, Denise Lee Yon, Tino Chow, and Madeline Gerber to construct an image of the brand that’s both recognizable to the public and sets the homestead for company culture and how they communicate in-house and outbound.
According to Kraft the MVB of consists of:
- Brand Pillars — one to three one-word adjectives that represent your company
- Audience needs — what are the audience takeaways
- Functional needs — materialized benefits
- Emotional needs — how the audience perceive the brand on an emotional level
- Personality of the brand
- The promise
- The company’s vision
It serves as an immediate blueprint for the product that conveys the future promise the company will be delivering.
Source: “own source adapted by Scott Kraft’s MVB talk at 500 Distro”
SlackAccording to Kraft, brand’s personality consists of brand pillars + Top customer audience + their top 3 needs + top 3 emotional benefits;
- Brand Pillars: Fun, Inclusive, Connected
- Customer Audience: Employees having issues communicating within the company
- Top needs: More effective system to reach out to the rest of the team, faster feedback loop, just-in-time information
- Emotional benefits: Makes the employees feel part of the team, relevant by closely following the evolving project, productive
= Slack – The fun and productive team chat
- Audience: people inside the company
- Functional Needs: one universal system for communicating above and across to the rest of the team
- Emotional Benefits: social inclusion, light-hearted working environment
When you use slack you will feel more connected because of the freedom to reach your colleague
If we try to describe Slack as a brand by the other three elements of the MVB:
- Personality: fun, connected, diverse
- Promise: to connect people in-house with a simple yet powerful system for team communication
- Vision: Make work happen
Whenever you see Slack content, you will be able to connect these values and elements to their brand. As you are going to discover further – this mindset is ingrained to every member of the company across the board.
Slack Question: The launch of Slack back in February 2014 was a carefully planned marketing campaign with the use of PR agencies. Now that Slack employs 1,000+ workers, how much marketing is planned in-house vs hired work?
KEY TAKEAWAY #2 Don’t neglect the power of traditional marketing. Build the hype and use the “hook” message to promote article re-sharing. Slack’s is the Email Killer – a controversial statement which addresses the burning pain at the same time. What will be yours?
Chapter 3 – Brand is Everything
This is the holy grail of success. Slack hired a mega-successful design firm MetaLab to turn their early prototype into a polished product.
Design and UX
Enterprise software is notorious for being big, boring and lifeless. If you compare HipChat (Slack’s main competitor), you’ll have an easy time picking the one that looks more fun to use.
Andrew Wilkinson from MetaLab said “We gave it the color scheme of a video game,
not an enterprise collaboration product.”
Early design iterations for Slack | Source: @awilkinson
With an easily recognizable design that was equally fun and easy to use, Slack created a stark contrast against the competition.
In 2018, 133 million visitors to the website per month
Different kind of marketing:
There’s content that still fills each role in Top, Middle and Bottom phase of the customer’s journey, however instead of just written. Slack opted in with visual and audio content.
Their Animals product video has been insanely popular.
|The “Animals!” project cost the company $1 million. The directors Alan Smith and Adam Foulkes experience the smooth onboarding process as Slack users did. They were able to translate and deliver the correct brand message in the video.|
The animals in the video or as diverse they could be (lion, dolphin, rabbit, sloth, owl, beaver,..) but they are able to complete a complex project with effective communication.
Don’t forget to watch the blooper reel with the beatboxing prawn.
Slack’s first podcast — The Variety Pack, published by Pacific Content launched in May 2015. By the end of the year, there were 17 episodes and more than 3 million listens. The Pacific Content team worked with Slack to produce 28 episodes of Slack Variety Pack. The bi-weekly format with half-hour episodes appeals to the Slack audience.
The themes of the podcast were not specific to Slack as a product however they reflected the interests of Slack users: career change, lifestyle at work, future of jobs etc… The podcasts were also light-hearted reflecting Slack’s commitment to fun.
“Although podcasts are becoming more mainstream, if you’re a die-hard listener of podcasts, there’s a good chance you’re also an early adopter, so it was a way for us to help spread the word about Slack.” — Bill Macaitis, former CMO of Slack
Slack worked closely with Pacific Content broadcaster Steve Pratt, giving feedback for each episode. The focus was on telling engaging stories with small intertwined slogans like “Slack: Love what you do” and “Slack: Making work less work-y”. The podcast reached the wider audience with a very soft sell.
“A brand is the sum total of all experiences a customer has with the company” and Slack relies heavily to keep the word-of-mouth going.
Stewart Butterfield adds: “Every customer interaction is a marketing opportunity. If you go above and beyond on the customer service side, people are much more likely to recommend you.”
Their famous Wall of Love twitter account collects and displays all the complimentary things people Tweet about them https://twitter.com/SlackLoveTweets
Localization over Translation
Personalization is not a nice-to-have any more; it’s mandatory in today’s hyper-segmented marketplace to communicate with users.
On top of customer satisfaction metric NPS (Net Promoter Score) data, Slack’s Global Team marketers look at the growth and activation rates of new customers teams. It’s important that they get a sense of whether people signing up for Slack continue to use it.
With such a wide addressable market, segmenting your approach and creating a solid plan to conquer new customer lands efficiently.
For that reason, Slack chooses a localized approach instead of one broad message for the majority of the markets.
KEY TAKEAWAY #3
Don’t overestimate the power of the brand. If you ever plan to grow your company then make sure your name, colors exhudes your core values.
Chapter 4 – Customer Experience as the North Star
“At the end of the day, that’s what fuels our organic growth rates – Slack does what it says, is delightful to use, and in return, people tell others about it.” – Kelly Watkins, Global Marketing at Slack
Slack was able to enjoy hyper-growth without marketing staff.
“Its growth rate is unheard of. Both Slack’s daily user count and its paid seat count are up 3.5X in just a year.” — Josh Constine, Techcrunch
As mentioned before, Bill Macaitis – formerly the CMO at Zendesk and Senior VP at Salesforce was brought on in November 2014. That was 9 months after the public release. Macaitis was an employee number 50 which tells that Slack did most of the branding and marketing heavy reps before. Slack had grown big even without a marketing team — Macaitis was the first hire as an employee #50 and they already had the hockey stick curve of new users.
Instead of relying on growth hacks, paid marketing channels and short term tactics, Bill Macaitis focused on only one thing — creating the customer experience people love.
Andrew Chen, former VP of Growth at Uber and a marketing leader, talks about the law of shitty click-throughs – it’s the inescapable point every company arrives to. A marketing channel that worked like gangbusters in the past will stop bringing the same positive ROI over time. Or if we say it differently – every marketing channel has an expiration date.
James Currier’s slide about marketing channel rises and decay of effectiveness.
However, there is an exception — word-of-mouth will never stop being an effective marketing tactic
If you can achieve a point where people are consistently recommending you to friends and colleagues,, you’re in the path of real growth.
Once people tried Slack, they had to tell everyone else. An software engineer in the company who adopted the product had to tell his friend how amazing Slack is, while they were fetching Starbucks coffee.
“Unlike almost any enterprise software ever, people would talk about it. Like, they would be in line at the coffee shop, and they would say, oh, my God, you’ve got to start using Slack. It’s amazing. It changed my life. And they would post to Twitter and say, like, I – you know, I recommend it. And that – you know, no one ever says that about the software that they have to use at work.” — Stewart Butterfield on Slack’s word-of-mouth effectiveness
YCombinator CEO Sam Altman’s mantra is ‘customer love is all you need. A hundred people who love your product is better than a million people who kind of like it.’
Hubspot Founder Dharmesh Shah would never trade short-term gratification over the long-term benefit. He says: “Manically chasing growth at the expense of customer goodwill mortgages the future.”
Slack embraced that philosophy:
- The onboarding is fast and frictionless: It takes just three clicks to start using Slack.
- Fair pricing: If you stop using Slack, they will return the credits back to you
- The legal, support and customer success. Every new employee goes through a 9 week training process so they settle in, adapt the company culture and learn how to communicate in Slack’s way.
Slack Questions (branding): User experience and focus on brand made Slack stand out? How does Slack train a new hire to embody the brand values and communicates the product properly?
KEY TAKEAWAY #4 Dare to be different, but never over the cost of functionality and the best customer experience. Word of mouth = growth.
Chapter 5: An Offer You Can’t Refuse
Once a product hits a hot market growth is contingent on continuing to stoke the fire..
Becoming a viral product depends on:
- Your product becoming a part of users’ daily or regular routine
- Making it easy to share and get more people on the platform.
Slack has an amazing freemium option and easy-to-understand (read: transparent) pricing.
Right from the start, you can use all the available features Slack has to offer, such as integration, document sharing, built-in features and more.
The limitations of a free account don’t affect the user as they start using it; it’s only once Slack becomes an integral part of their workflow does it make sense to upgrade. By then you’re already hooked!
The limitations of a free account:
- The number of searchable messages are locked at 10K
- You’re only able to connect 10 third-party or custom integrations
- A modest file storage: 5 GB total
This is done intentionally: Slack wants you to use their products until the ease of communication and functionality is a daily part of your life. and,
Once you hit a point where you want more storage, or more integrations, you upgrade to a paid model. By then the product is integrated into your workflow and life.
Slack’s conversion from free trial to paid version is 30%, showing that giving away value pays off in the long run. Slack is an absolute outlier with this conversion percentage. According to Jason Cohen from The Fader: “A really good conversion rate for free-to-paid is 4%, like Dropbox. Awesome for them, but normal rates are more like 1%, and that’s if users are reasonably active.”
The only that comes close is Spotify at 26.6% conversion rate, while Dropbox and Evernote are far below at 4.1% and 4%.
An important notion is also the fact that Slack is a tool for connecting teams. As soon as you enter the desktop app you’re prompted to invite your team members.
Inviting team members is one of the steps of the onboarding journey | Source: Slack.com
Even inside the app, the invitation CTA is highlighted above everything else. | Source: Slack’s Desktop App
- Slack asks you to invite team members right of the bat.
- It makes it easy to share the invitation link.
- You can invite users through unique URL that can be shared through email, social media or on any website.
In the words of Bill Macaitis – “optimize everything for word of mouth”.
Move the Bar of Success from Activation to Referral
The whole Slack brand was built upon the notion of a product people love. And if people love something they will tell their friends, colleagues and peers about it.
CMO Bill Macaitis moved the bar of success from converting a user to a paid account to convincing a user to recommend Slack further. This is much harder to achieve. The paid conversation is more of a short term goal — it’s important but it pales to a comparison of achieving a massive network effect.
Network effect is a condition when every new user who joins makes the product stronger for everyone. Each one who hears about it or uses it to organize outside of work becomes more likely to infect their whole company with the Slack infection.
It does explain why insisting on NPS and CSAT (Customer Satisfaction) scores as the main metric broad the biggest success. It’s the perfect optimization for word-of-mouth.
The perfect example is Slack’s pricing model.
If you were using Slack on a paid account and one of your team members hasn’t logged in within a 10-day active window, Slack refunded the money and credits back to an account.
This is unusual for any company to do.
But Slack had to ask itself what is the best for themselves as a brand and the customer.
Does the pricing model align with brand customer centricity?
Does it surprise the user in positive way? It does since the user doesn’t to get unused funds sent back to them.
Is it more likely that a customer will recommend the product further. Unusual things are often shared more.
Or let’s think about the frictionless trial. All features are unlocked from the start. You can have a team of 200 users on a freemium tier model.
If you ask yourself those three questions you’ll have the same answer to each one of them.
Deeper in the Customer Success
In the book From Impossible to Inevitable Aaron Ross wrote that customer success is the core growth driver and is worth 5x more important than sales.
It’s for the same reason that Macaitis, coming from Zendesk, where he focused on CSAT scores made customer success a top priority.
In Power of Habit, author Charles Duhigg explains the concept of Keystone habits — they’re beliefs and routines that someone, or in this case company, holds in the highest regards. Achieving the number on most important goal percolates to all the other good stuff.
Just like keeping a daily exercise helps individuals become more organized, having more energy to be more productive and start watching your diet, customer success directly affects retention, drives referrals, and help capture positive case studies.
Slack Question (NPS): How does Slack maintain the customer-centric strategy and the quality of support besides iterating due to CSAT survey test scores?
KEY TAKEAWAY #5 Give out so much value that your users can’t live without you. Make a product and experience amazing enough that they’ll want to tell all their friends about you. Make it easy for people to begin using your product AND get friends and colleagues on it. Competitors might be able to clone basic features, but they can’t clone the community.
Chapter 6: The Recipe for a Multi-Billion Dollar Company
When Great Product Isn’t Enough
Having an amazing problem is not a ticket to riches. Actually, it’s a prerequisite for growth. But there are two ways you can grow – slow, hard growth where you feel like pushing a boulder uphill.
Or the easy way, where you just feel like you’re guiding the rolling cart downhill.
But there are terrible products as well which achieved amazing growth. Brian Balfour (former VP of Growth at Hubspot) explains you need 4 pieces of the puzzle for growing to $100 million and beyond Annual Recurring Revenue (ARR).
- Market/Product Fit (already covered)
- Product/Channel Fit
- Channel/Model Fit
- Model/Market Fit
The companies who can make these 4 frameworks to align are the ones where the growth happens naturally – like a snowball.
The Market/Product Fit
While the great product is necessary you still need to find the market. Finding a solution before fixing a problem is just like putting a cart in front of the horse.
We should be thinking market first, then the product.
[How about Steve Blanks – get out of the building idea]
For instance, in 2016 and 2017 there was a big hype about virtual reality. It sounded new and exciting and numerous startups and companies tried to build something around it.
Or in the last couple of years, cryptocurrencies and blockchain has been popping out in every inline publishing magazine. Yet, we still don’t have a sticky solution – a tangible clear way those technologies are fixing the problem.
It’s because it doesn’t solve any major burning pain.
Slack’s team communication has a very clear value proposition – it reduces the time effort for team communication so everyone can get the info just-in-time. Thus working feels more smooth and productive.
Let’s look at ti in a visual representation
|Category:||Project Management, Team Communication||Core Value Prop:||Get the information from your coworkers right when you need it|
|Who:||Department heads and everyone else||Hook:||The Email Killer|
|Problems:||Digging through archives, ineffective email, slow communication||Time to Value:||Create Account -> Invite team members -> Send message|
|Motivations:||Productivity, connectedness||Stickiness:||Growing archive of all communications, integrated tools, fun UI/UX, social connectedness to the team|
The product market fit has to be proven with a combination of qualitative and quantitative measurements.
Slack’s Northstar Metric has always been NPS which is one of the best qualitative predictors. If your product solves the problem and it’s made in a way people love using it, then they should recommend it further.
At the same time on the quantitative side you have to pay attention to two things: direct traffic and flat retention.
Flat Retention Curve is the key to growth| Source: Medium.com
Slack figured both things out. The product is a quicksand, the more you use it the more you depend on it. Every new person that joins the company has to use it as well.
QUESTION: Can Slack share their retention information?
Product Channel Fit
What most startups fail to understand is that the product and channel are connected. We shouldn’t treat them as silos. They are not separate entities but connected pieces that correspond with each other.
But product are built to take advantage of a specific channel.
Channels do not mold to products.
We can’t define the rules of the channels. Google defines what gets ranked in SEO and shown as search results. Facebook defines what gets shown in the feed. Gmail defines what gets in the spam and what into the promo tab.
What you need to do, you have to mold it into one of these channels as seamlessly as possible.
How Slack did it.
Slack’s product has an amazingly quick time to value which doesn’t only target an individual but a whole team.
Secondly, it’s got a broad value proposition – everyone in the team gets the the same similar benefit of increased productivity and shorter times of getting information.
However, Slack managed to get all of those channels to percolate down to the holy grail of channels – word of mouth.
Peter Thiel, one of Silicon Valley’s most known venture capitalist’s said:
The Power Law of Distribution tells us that 70% or more of all acquisitions will come from one source (or one marketing channel).
One quick look Slack traffic sources will tell you what this is.
It’s not just virality but the combination of brand and WOM. It’s the Direct channel. This means that Slack brand is so well known, most of the users are coming on the website by directly typing s-l-a-c-k dotcom in the browser. Every company wishes for this kind of channel distribution.
You probably heard of Pareto’s Law (also known as 20/80 rule). 20% of effort gets 80% of results.
The Power Law is something similar however Peter Thiel used it in a quote:
“We Don’t Live In A Normal World; We Live Under A Power Law.”
This is explained by the Product Channel fit. Any business use one or several channels to get users or revenue. In the book “Traction” by Gabriel Weinberg and Justin Mares you will find 19 marketing channels you can explore.
But it’s unusual to expect the traffic or users are going to be distributed evenly across different channels. The companies that really makes it work find one channel that brings in 70% or more users from ONE channel.
Some examples of companies that made it work:
Virality – DropBox storage referral program and Harry’s shaving waiting list
SEO – HubSpot and Neil Patel who covered almost every piece of marketing with content
User Generated Content (UGC) – Reddit, TripAdvisor, Twitter, Instagram
Sponsored Podcasts – Website builder Squarespace and Casper mattresses are known to sponsor podcast hosts who plug their plug their products
Channel-Model fitness defines the relation of your pricing model and your channel. It should answer how you charge your customers and how much are Average Annual Revenue Per User (AARPU) are you receiving.
To determine a good business we need to look at the relation between the ARPU revenue and Customer Acquisition Cost (CAC).
On one end you have low ARPU and low CAC sections – these are channels that monetize quickly but in lower amounts. Think of Facebook or Mailchimp.
On the other side, you have high ARPU and higher CACs. These are companies like Palantir (Palantir sells software to government agencies and corporations).
These companies pricing model has to be congruent with the channel. According to Brian Balfour, the worst thing to be is somewhere in the middle. This doesn’t mean it won’t work but it might be harder to execute.
How about Product Tiering? Bigger product with a variety of services can exists across the ARPU <> CAC Spectrum? If you look at LinkedIn, they have a product offers on low and high end of the spectrum.
What about Slack?
We defined the Slack as a product that uses virality to grow. It’s freemium model allows it to onboard and value-lock the whole team quickly.
But most of the users convert to paid ones in the first 3 months. This places Slack near left of the middle of the Spectrum
On the Product tier level, Slack has benefitted from clear pricing. But they also have a solution on the Higher end of the Spectrum — Slack Enterprise Grid. At SEG companies manage multiple workspaces with increased security features.
Model Market Fit
For some companies, growth can feel like slow lumbering mammoth, where you need to put a ton of effort to get it moving. For others, growth is a smooth natural process — it feels like growth just happens itself. Slack is definitely one of the latter companies.
Why is that?
Because the road to the 100M+ annual revenu is different depending on the pricing model and the market. Venture capital investor, Christoph Janz from Point Nine Capital developed the pricing matrix and named the different product by animals they represent:
- Elephants – are large enterprise products worth 6 or more figures. You need 10 client to have your first million
- Moose – are upper market B2B products where an account is worth around 10k. You would need to get a hundred of these customers to get to the first million. Example: Hubspot
- Rabbits – the majority of SaaS tools and software priced between $49 to $249 per month. Example: Most of the email managers like Mailchimp.
- Mice – A small B2C tools worth a couple of dollars per year. Think of Shopify subscription or New Yorker paid content.
- Flies – Small B2C tools only worth a about $100 per year. These are companies that get a tiny fraction of revenue. Example: Buzzfeed.
Depending where you place in the Animal Pricing Matrix dedicates the market. Are you going to hunt the big corporate/enterprise deals? You only need a couple of them.
Slack default product is hunting rabbits and deer elks – small (2-20) to medium sized teams (up to 150) where they can quickly earn a decent revenue. Since they earn per user the price stack up quite fast depending on the size.
For that reason, Slack held a record of earning one million ARR (annual recurring revenue) every 11 days. That’s impressive especially, because it was in the first year of the launch.
If we’d drawn a line across the animals we’d get a Model Market Fit Threshold. On the the line and on the right we’d still have a Model Market Fit, while everything below we’d be failing the algorithm for high-revenue company.
How do you calculate your Threshold. Write this down.
Start with the total customer in the market which you’ve already done at the Market Product Fit stage. If the customer size feels to small, you can cast a wider net, however you’d need to check the Market Product Fit to see you’re still covering the customers according to your criteria.
Then calculate how much your customers are willing to pay. You have to be above the Market Fit Threshold. If your product sits below you can raise the prices but make sure the Product Model Fit supports positive ROI.
Lastly think about how much % of the market you can capture. This is the hardest metric to calculate since it’s tough to predict. Brian Balfour suggest 10% as a rule of thumb as a starting point.
Summary of the all 4 frameworks and how it applies to Slack
Let’s put Slack in the table and review the frameworks to see if the hypothesis holds true.
|Wide (SMBs and MidMarket), Enterprise||Low (Freemium) to Med ACV||Virality|
Slack is valuated at $5.1 Billion.
During the years it has evolved to cover a larger piece of the market with different pricing models but for the sake of this equation let’s look at the most common one.
Product – Slack is a team communication tool that solves an internal communication within the team. It has a clear value proposition and solves a major pain. It’s simple to use, however with a plethora of apps and integrations it becomes a valuable piece in the company’s stack.
Market – Their most common client is a software company which starts in small numbers of emplyees (between 5 to 20) and quickly swells up to a hundred or more if it’s successful.
Model – Pricing is straightforward. It’s based per active members. If a company of 20 takes a standard package, it costs them $1,920 per year. For every new member that joins the company, Slack earns another $96 towards their ARPU. This puts them in medium ARR (annual recurring revenue).
Channel is viral. Word-of-mouth is accelerated by strong brand high customer satisfaction scores. Every user that joins Slack has the ability to pull another person as well. Since the product is simple and doesn’t require much setup, the viral channel works amazingly well.
There are roughly 20k tech startups in the Bay Area. 10% of 20k is 2000.
2000 companies with 20 members gets Slack an Annual Contract Value (ACV) of $4M.
But Slack is not just targeting software companies, it caters to regular brick and mortar business, offices, government companies and more. The Total Addressable Market (TAM) is absolutely enormous since it’s growing with the size of internet users.
Slack expanded the Model with enterprise option where they don’t hunt the rabbits and mice but bigger beast. The virality and word of mouth is the most scalable channel they can ask for. They figure out the pains and desires of their users which gives Slack an incentive to approach new international markets. In fact, more than half of Slack users are in more than 100 countries outside United States
These markets have localized support and offerings.
Every channel is constantly evolving and moving, which demands that every company stay on their toes and manage all four frameworks.
KEY TAKEAWAY #6
Sustainable Hyper Growth works only if all the magical pieces work together. Don’t neglext them.
Chapter 7: Slack’s Friends and Family – Partnership Moves & integrations
Successful companies often acquire another company to get rid of competition (i.e. travel and restaurant TripAdvisor buying a plethora of local travel apps), acquire another customer base (Amazon with Whole Foods and Zappos) or gain access to the proprietary technology that will help them grow (Facebook with the acquisition of Instagram).
Most of the big companies wait for the disruptor to reach a certain stage: The acquirer eliminates the threat, prevent other competitors from swooping and stealing the technology, and instantly reaches new audiences. Sometimes, acquisitions happen just because a company needs high-tier development talent and knows that a startup has the top minds in the business.
A merger is a different strategy. When Facebook acquired Instagram for one billion, most of the public thought it was way too much for a simple mobile photo app run by twelve people with no revenue model.
But six years after the merger, Instagram has a billion monthly active users which are exposed to Facebook Ad campaigns. Instagram already makes up 28 percent of Facebook’s mobile ad revenue. And the channel is growing year-over-year.
Since Slack’s product idea isn’t hard to replicate — internal chat technology isn’t much different than IRC. Keep in mind Slack’s competitors CampFire, Yammer and HipChat tackled team communication years Slack’s solution. For Slack to stay ahead of the pack, they had to grow fast. They decided to use mergers and acquisitions to strategically fill in their success gaps.
Companies like Yammer, Microsoft, and others looked to remake internal communications in ways that looked more like consumer tools in the Web 2.0 era, but Slack came out with an approach that was initially just a slick chat and team communications tool. — Matthew Lynley, Techcrunch
Sep 26, 2014 – Slack acquires Spaces – Spaces had a document collaboration technology that greatly increased Slack’s capabilities
Jan 28, 2015 – Slack acquires Screenhero – What’s a messaging app without screen-sharing and voice chat? All six employees who worked for Screenhero joined Slack.
July 17, 2018 – Slack acquire Missions – Robots and Pencils’ app Missions allower Slack users to build tools to automate simple routines without much technical knowledge. It’s a lot like Zapier for Slack users.
Slack’s integrations are key to its success: Slack has more than 1000 apps available in their app directory. According to TechCrunch, 94% of paid business users use apps and integrations while 65% of teams have built their own.
With Mission’s, visual flow the creation of new integration is easy, and allows for the customization Slack users want.
Jul 27, 2018 – Partnership with Atlassian
Slack announced the acquisition of the Stride and HipChat products from Atlassian. Slack and Atlassian had a previous relationship, with Atlassian tools like Trello, Bitbucket and Jira already integrated with Slack – adding project management to the already robust communication tool.
However, Slack’s acquisition of Stride and HipChat allows it to upgrade the workflow capabilities of the product, especially large enterprise businesses. The Stride collaboration tool enables video, voice and chat at the same time, while HipChat has been one of Slack’s largest competitors. As a predecessor (HipChat launched in 2010), they acquired significant user base over the years before losing out to Slack’s accelerated user acquisition
Both HipChat and Stride will migrate their users to their once rival’s platform, and cease all support by February 2019. About 2,600 employees from Stride and HipChat will begin using Slack. [http://fortune.com/2018/07/26/hipchat-slack-atlassian-chat-software/]
KEY TAKEAWAY #7 Acquisitions are more than just getting rid of competition. Consider what else you can win by purchasing a competitor or complimentary product…. Customer base, new talent, new technology?
Chapter 8 – Future Proofing the Company and the Product
We’ve seen multiple high-growth companies ‘rest on their laurels’ rather than continuing to iterate and optimize.
Slack’s initial intention was building a solid customer-centric product that isn’t just functional, but adored.
The majority of their marketing efforts were poured into making their brand fun, lighthearted, and accessible.
People who use it have the same perception of the brand. It’s ingrained in their brains because Slack put all the effort in conveying that core message.
This is something Google or Microsoft cannot achieve. At least not in the short run.
While they can offer the best integrations, tools, and technical perfection it will still be the product of Google/Microsoft. It’s the product of a big corporate company who owns everything.
When someone looks at Slack they see Animals! Video with bright colors and quirky loading messages. If they look at Microsoft, the see a different brand message – a more corporate oriented machine with a serious tone.
It’s the same reason why HipChat which is arguably the same product and was launched 4 years before Slack, couldn’t grow.
“Slack won the branding game because they invested in emotional capital. “
Integrations and technical flexibility keeps the team at the forefront of the team-communication industry. Strategic acquisitions of companies allows them to have the best-in-class talent and even an instant surge of new users.
Stewart Butterfield talks about the importance of inclusion and diversity. And it’s not just empty virtue-signalling.
- Globally, 43.5% of the workforce is comprised of women (48.1% of managers are women)
- 11.5% of the workforce is comprised of people from one or more underrepresented racial and/or ethnic group
This is significantly better than Microsoft or Google who haven’t made any improvements from the baseline at 30%.
This tells the public that Slack cares for its employees and they love the company.
Source: Diversity at Slack | https://slackhq.com/diversity-at-slack-2
Because their care of safe environment and appreciation the reviews on Glassdoor are glowing.
- “The NICEST, most thoughtful company culture I’ve ever experienced”
- “genuinely cares about you and your life inside & outside the company “
The core Slack team – the original founders love working with each-other. They have been through thick and thin, ran the gauntlet and stepped over the charred corpses of failed products. They are connected with a common goal to keep their customers happy.
When you look at the military history, the battle-hardened and seasoned soldiers who were a part of the same company fared much better in the field than fresh recruits. It’s only natural. Every individual in the tight-knit group knows each other and rely on them because they know their capabilities.
In the book, From Impossible to Inevitable, author Aaron Ross talks about defining your destiny — in every moment of growing your business you have two options:
- You give up in the face of challenges or
- Use them to motivate yourself and others and push forward.
During BUD/S (Basic Underwater Demolition/ SEAL) – notoriously hard training phase of becoming a Navy Seal, the training officers figured out who will make it through the training. It’s those individuals who find a buddy — a brother to rely on during the most grueling, mentally and physically challenging conditions.
You go through a trauma with a group of people, and you really get bound to them. You know, like, it’s a really – it’s a – makes you very close. And so I think we all wanted to continue working together. — Stewart Butterfield, Interview on How I Built This with Guy Raz
Key Takeaway: Brand is everything your company does with your customers. Tie everything into that mantra – the happiness of your employees, the love of the product and most importantly – your customers’ satisfaction.
Slack has established itself as an idol of a business company — they are loved by small startup teams and large enterprises. Their panacea for internal communication was not only effective but also packaged in a way it’s easy and fun to use. The extreme focus on customer satisfaction only made it better through the years and minds of new users. And on top of that, the employees love working for it, believing they are making a positive change.
Part 1: The Levers of Lululemon’s Growth and Success
“There is a company that makes yoga pants that are so tight, they cut off a circulation to the part of the brain that decides how much money it’s ok to spend on yoga pants,” - Jimmy Kimmel Click To Tweet
Lululemon Athletica went from 0 to 3.57 billion dollar company in 12 different countries around the globe. Lululemon went from one tiny yoga studio, which was converted into a store in Vancouver’s Kitsilano neighborhood in November, 2000, to a cultural icon behemoth it is today. In NPR’s interview “How I Built It” the company is worth over 14 billion dollars.
How can an unknown apparel company reach such brand recognition and revenue worth in one of the most competitive industry — clothing retail?
I’ve written this guide in two parts. In the first part, I am going to break down the EXACT pieces of the puzzles that put Lululemon Athletica as one of the most recognized brands in athletic apparel.
In the second part, I am identifying few missed opportunities that Lululemon’s hasn’t fully engaged and/or optimized yet.
If you’re in a hurry, just click on one of the titles to skip to the most intriguing part:
Part 1: Lululemon's Pillars of Success
In case you want to skip to the Lululemon’s growth gaps:
Part 2: Identifying Marketing Opportunities
Chapter 1: The Retail Experience
Founder Chip Wilson has had 18 years of retail experience behind him when the idea of Lululemon came into existence. He has already built a surfing and snowboarding apparel company Westbeach in 1979 already.
The company was relatively successful in the early days; mostly because of the market in Japan. The sub-brand Homeless did particularly well (Chip believed it was because of the letter L in the brand’s name, which is a clear sign of American brand authenticity to the Japanese.)
But it was struggling nonetheless (in 1987 they barely made payroll). Chip decided to sell the company for $15 million from which he was able to keep $1M. That was the basis of Lululemon.
“In Westbeach I made 2 millions in two small vertical retail stores and I lost a million dollars on this global wholesale business. If I can deliver through vertical business at a price women will buy in volume. Click To Tweet
Since the founder has had the experience in snowboarding, skateboarding, and niche fitness apparel, he did not only learn from previous mistakes in the field but also gained access to journalists in the same field. Being one of the first in the fiel, gave him the permission to become a sort of a de-facto person in all things related to surf, ski, skateboard, and yoga business.
According to Wilson, the biggest lesson he learned was a steady cashflow (if you’ve read Shoe Dog, you could imagine how important it is). Steady cashflow allowed Wilson to pay the suppliers who delivered the best quality product on time, making sure the stores are stocked.
During the year, Chip also learned the key lessons of educating their staff. More on that in a later chapter.
Chapter 2: Emerging Trend
Business meetings with cigars and steak dinners have been replaced by 45-minute cycling classes at spin class, as Jason Kelly describes in his book Sweat Equity.
To think about it, how much are you spending each month to break a sweat? It used to be a $20 gym membership or putting on high school shorts and going out for a run or a pickup basketball session.
The professional segment started to embrace the premium fitness classes as the place of business development. And if you pay $34 per spinning class or yoga sesh with the potential strategic partner you better change your business suit to professional athletic apparel.
Keith Ferrazzi, author of Never Eat Alone, a book about networking, suggests taking business partners with you to create a stronger bond and close more deals.
Yoga joined the trend of high-priced fitness memberships with upper-class clientele. Harem pants were out of the question for the setting. The market responded with a constant feeding of magazine covers with slim/thin white women. In 2012 Yoga Journal study, 4 out of 5 yoga practitioners were high-income white women.
Members preferred smaller fitness classes with dynamic instructors because they felt more significant – as a part of the tribe. Once you start being a SoulCycle member, a Yoga practitioner or CrossFit firebreather, you also need to dress the part.
The Yoga industry has been growing steadily and is expected to hit 11,6Bn in the US in 2020.
Chapter 3: Building the Perfect Product
It’s almost redundant to talk about the quality of the product since this is always the prerequisite for any company to move forward. At Lululemon, they went all in on the design and the quality that resonates with their target persona (chapter 5).
- Design – Shannon Wilson (Chip’s wife) and Chip were both coming from the apparel design background. Chip was adamant on having stitches on all the right areas. He doesn’t hide the fact that yoga pants are intentionally designed to be as comfortable and as flattering to the female body curves. And let’s be honest, women love it too.
- The Tech – Primary function of performance and fit has been achieved by the construction of the garment which hugs and promotes performance. Lululemon’s’ apparel includes reversible, brushed and textured fabric with water repellent finish and Silverescent tech (prevents funky BO).
- Materials – to add a special flair and solidify the brand, big brands “invent” their own technology. Lululemon calls itself a technical apparel company. That’s why Lulu yoga pants are made from engineered fabric (Luon™, Luxtreme™, Nulu™, Nulox™) depending on the compression level and the intention of the garment (run, train or yoga practice).
These names aren’t just an easy way to differentiate from the competition but they also carry unique features.
Luon is 86 percent nylon and 14 percent lycra. VitaSea fabric is made from SeaCell. SeaCell is a yarn made from seaweed and blended with spandex and cotton. VitaSea allows for an ultra-soft fabric that holds its shape and stays soft after many washes. This can be found in the company’s t-shirts and light layers. Silverescent is a stink-stopping fabric technology. The X-Static technology is woven into Silverescent fabric bonds 99.9% pure silver into the surface of each fiber.
- R&D – besides having the internal designers and innovators working on the designs and fabric options, Lululemon innovates through customer feedback and their retail staff. Some Lululemon stores have a blackboard where customers can leave suggestions or they share it with the staff. The store managers translate the gathered qualitative info back to Lululemon’s HQ in Vancouver. There are no focus groups or website data collecting. This (conscious) lack of data collection works great for Lululemon in product innovation: however, it hurts them a little on the e-commerce shop (more on that in part 2).
- Price – the quality justifies a high price tag, the target profile and creates a healthy margin for expansion. Just like Apple, Tesla and other premium golden-goose products on the price matrix (high quality, high pricing), Lululemon products don’t have discounts. That would be detrimental to the brand.
- The practicality of it – As much as it is frowned upon (especially for men) to wear sweatpants as a streetwear, Lululemon yoga pants doubled the activewear as streetwear, thanks to the design aspects of the product. The new trend was born – athleisure – more on that in the Law of Category chapter)
Chapter 4: Nailing the Niche – Law of Category
In the book, 22 Immutable Laws of Marketing, the law of category states: “If you can’t be first in a category, set up a new category where you can be first.
Example: What’s the name of the third person to fly over the Atlantic Ocean solo? You probably don’t know. Yet you do. It’s Amelia Earhart. But she isn’t known for that. She is known as the first woman to do so.
Lululemon completely embodied the law of category. They stepped into the emerging trend of premium athletic apparel and targeted it directly at the yoga industry.
They picked a narrow field and focused on the target persona of a middle to upper-class women who appreciate the comfort and designer clothing.
If they’d just become another athletic apparel they would have to compete against Under Armour, Nike, and Adidas, which it would be waging a losing battle. The Law of Duality from the same source says that in the long run, every market becomes a two-horse race (e.g. Pepsi and Coke or Samsung and Apple).
Lululemon yoga pants became an iconic piece of clothing of the fitness economy. In its utility and ubiquity, sleek and expensive epitomizes how fitness has shifted from Old Navy practical running shorts to a piece of apparel that tells the person and the observer who we are.
Chapter 5: The Cultural Shift and Nailing the Target Profile
While it seems like the founder, Chip Wilson was just at the right place at the right time, he actually used demographic data to predict the ripe environment for his idea to grow.
According to TedX talk, Chip expected a gap in the market that would serve his company in talent section as well as in customer audience.
In the late 80s women in a managerial position weren’t so common. He has noticed that 60% of University graduates were women (and the trend of university graduates have skewed even further in the women’s way). This makes some sense but there are also some off-the-wall statements, such as connecting the success of Lululemon and the increase of breast cancer and high divorce rates to,“Power Women” who were on the pill taking on work-related stresses, only previously assumed by men. These all lead to the future market of Lululemon’s clients.
Ocean and Duke – Lululemon’s Customer Personas
Many companies identify and create a profile of a perfect client. To embed it into the marketing heads, this illusionary person has a name. In Lululemon’s, these muses are Ocean and Duke.
|I’m Ocean||Hi, I’m Duke|
Ocean is a smart 32-year-old woman, who is well travelled, athletically fit with her own condo and just about to be married. In NY article, Wilson explains the observations in yoga classes. As he looked around the mostly female yoga class, he noticed that women wanted well-fitting athletic clothing that also easy on the eyes. In his opinion, there will be a market segment of women that fit a specific target persona.
Going narrow also means eliminating a broader segment of the market. Founder Chip Wilson was notorious with his statement that some women “aren’t a good fit for Lululemon’s product”. This is true. His delivery has ruffled some feathers but the company’s plan to circumvent the plus size yoga athletes was on point.
Are they hitting their customer persona audiences?
Absolutely — one quick insight from the demographics section of their websites tells us the majority of visitors are coming from 25 – 34 years old women.
By the way, if you want to see the sizes from 10 to 12, you would have to go towards the back of the store or simply ask the staff members to bring it to you.
This is definitely a ballsy decision, since opening the plus sizes would bring Lululemon Athletica to tens, if not hundreds of millions of fresh new revenue — according to NPD’s 2012 report, women are craving for bigger sizes of premium apparel. But that would move them away from their core branding decisions and those are sacred.
Chapter 6: Happy Employees
Happy employees definitely help with the growth of your business and the representation of your brand. Lululemon takes special care of their talent. In retail section, they pay over 30% over the local rate. The higher wages also mean less turnover and progression up the chain of command.
These are mostly younger, educated women straight out of college.
Every “educator” is asked to write multiple year goals and share them publicly. Chip Wilson is also known to be a big proponent of the Landmark Forum program — a self-help personal development program that is supposed to help with the growth of your integrity and leadership capabilities.
On the HR end, Chip created an environment for women who can grow the company with their skillset, resourcefulness and grit while still having a family life and a time-off for maternity leave. Since retail workers are usually underpaid (especially women) he decided to pay them much better so the workers would have a financial incentive to come back and continue working for Lululemon.
For all those reasons, Lululemon is on top 10 Best Places to Work according to Glassdoor.
Chapter 7: Branding Perfection
In retail, a brand is of the utmost importance. We’ve already mentioned that people buy the identity more than just a product.
There’s a problem with branding since there are so many intangibles connected with the term. Can you measure ROI of the brand with an exact dollar amount?
However, we can see the consequences of building a good brand:
- Higher ROAS, gross margins, and LTV
- Our CAC is going to be lower
- We will attract more and stronger talent
- PR pull is greater and we can reach more
But the best reason is — speed.
Once the company knows what it stands for – its values, what their audience cares for and who they are, the decisions will come naturally. It sets the tone of how the company behaves, what is its voice.
According to Scott Kraft (CMO of Menlo), the brands start with brand pillars, which serve as a foundation of the company — the core values. We all know what MVP stands for — a product that with just enough features to satisfy initial pain points for core clients. But there’s an idea about MVB — minimum viable branding.
The key components of MVB are:
Audience needs and functional needs are the products’ domain. Real branding starts with the emotional benefits – the fuzzy area where we are touching our audience. Then you have the personality which determines how the customers are going to perceive you.
The difficult part is that the emotion, personality, promise, and vision are intangible. Lots of companies just pulled the nice adjective from thin air and put them on the about page. As you are going to find out, Lululemon took branding extremely seriously.
And it paid off better than anyone could have imagined.
What are the Brand Pillars
What are the 3 attributes that the company couldn’t exist without? If you’d have to choose what three adjectives describes your company the most – what would they be?
For example, if we put together: American, Free and Badass a brand like Harley-Davidson comes to mind.
Lululemon Branding Breakdown and Personality
Lululemon as a brand that triggers an emotional impact. The point of branding is to bring people to the point of making somebody feel [insert the emotional benefit here].
When you’re wearing Lululemon you will feel more beautiful, protective, cared for.
- Branding Pillars: Quality, Fun, Empowerment
- Top Audience: Women who do Yoga. Narrower Audience: Successful Women in Early 30’s Doing Yoga who need gear designed for modern practice
- Emotional benefits – Feeling Vibrant, Sexy, and Balanced
All those components combined lead to Lululemon’s personality: A Cheerleader of the New “modern” Yogi
Lululemon built an amazing brand. Their customers are proud to show-off their product (exposure through UGC content) on social media. They strut on the walkways with the company’s branded shopping bag with the manifesto printed on it.
Chapter 8: The Customer Experience
If there’s something we have learned from the companies that made their name for customer service is that it solves two major problems
First, It creates a foundation for the company culture. If ridiculously good customer service becomes a keystone habit in the company, it starts pulling all other positive elements in the big picture.
And second, it starts the word-of-mouth effect among customers. Zappos customer service is so good it made a book about it. Every time I have a chance to go to Trader Joe’s I feel like a fat kid in a candy store; the TJ crew is always positive, helpful and chatty.
Best customer-faced salespeople establish the personal relation first. Finally, they lighten the mood and really take the time to get to know the potential client. Once the solid foundation is established, only then they move into the sales section.
Lululemon, as is expected for their incredible focus on company culture, translated that into the customer service. Shopping at Lulu’s is an experience. The customers are asked by their first name before they go into the changing cabins. The retail salesperson (referred to as ‘educator’ in Lulu’s naming convention) scribbles the name on a tiny whiteboard and proceeds to address the customer by their first name.
For the whole procedure of the sale (customer success journey), the customers are called by their first name by the entire retail staff.
Consider the product they are selling. There are cheaper alternatives with arguably better value. But one of the core values at Lululemon is to feel significant. Hence the first-name basis, hence asking about the needs.
If the price is the objection (which usually isn’t), then they come up with the technology (which is often just a way to justify the high-price product purchase. “I bought the Mercedes-Benz because it’s safe”, right?).
Sometimes they turn the entire store into the free yoga studio. These social pop-up events start building even more positive connections to the brand. What was that one class-based fitness craze that has been growing like crazy in the last 10 years? Oh yes, CrossFit.
Combined with the quality of a product and having a sense of being in the premium circle the experience becomes addicting.
Since every store has only a limited stock of products (thus creating a sense of limitation).
Chapter 9: The Ambassador Program – Lululemon’s “Secret Sauce” Influencer Marketing
Adidas is paying millions of dollars to dress the biggest icons in sport. Crossfit athletes and UFC fighters are wrapped in Reebok from head to toe and Nike put on neon banana track spikes on every track athlete in summer Olympics.
There’s a clear necessity of putting an influencer, an icon or archetype of an avatar in front of people. These are usually charismatic celebrities in sports, entertainment and even business (I’d be curious to know who buys a golden apple watch for the features only).
When you target a narrow niche, especially in a hyper-local environment you have to take the local stars and put them on the pedestal. This strategy worked out great because it works in symbiosis. The local yoga and fitness coaches got exposed in the store, got free high-quality products to wear and started growing their business. In return, they have to put in a number of hours inside the Lululemon retail stores and run free yoga classes and represent the brand.
Since Lululemon’s has such a large reputation, the ambassadors are getting a significant surge in business. Some of the trainers and coaches are trying hard to become ambassadors.
Chapter 10: Tackling Social Marketing
If you would have to pick a social media channel and your audience are women interested in fitness and design aged between 25 and 35, what would you pick?
That’s right, Pinterest is known to have a massive female audience and Lulu is making a killing on it.
While it’s arguably a tough channel for selling, it does well for branding and inevitably serves as one of the touchpoints that leads to a sale.
However, even though those numbers look fabulous, it works mostly in branding perspective. Hence the photos are high quality, professional and highlighting the design features — perfect for saving them in a lookbook for the next Lululemon haul.
Unfortunately, they are not utilizing it as much as they could (more on that in the second part). This might be the result of Wilson’s persistence in ethereal, transcendental conviction on branding alone and abstinence for numbers and data. His replacement Laurent Potdevin (ex-top of Burton Snowboards) incorporated more data-driven approach which resulted in increased sales and better social media presence. But there are still opportunities.
“Despite the sudden exit of its CEO last month, Lululemon Athletica is seeing sales success thanks to a focus on digital improvements and brand marketing. The Canadian yogawear marketer reported an 18 percent increase in fourth-quarter net revenue to $928.8 million, along with a 12 percent increase in comparable sales.” — AdAge
The Facebook and Tumblr are also doing ok, however, nothing too earth-shaking. The one thing that works really well though, is the symbiosis with the ambassador program. Each ambassador has its own social circle of influence which extends to the online reach.
The Instagram Control Center
Instagram proves as one of the biggest opportunities. The social media channel has just reached 1 billion monthly users and is great for branding and impulsive decisions. It would be interesting to use it locally to invite yoga practitioners to the free classes.
Lululemon’s capitalized on it just recently. Even with all the confusion about the CEO, the Canadian yogawear marketer reported an 18 percent increase in fourth-quarter net revenue to $928.8 million, along with a 12 percent increase in comparable sales. This is all thanks to invigorated effort online and e-commerce.
Their account is filled with live events, motivational sayings and no sales posts whatsoever. Those product-pushing posts are now a part of the stories section where people are more inclined to impulsive purchases.
With a 2.5 Instagram follower base, Lululemon developed multiple destinations where the brand followers can turn to.
- The Spotify soundtrack. Goal: Brand affiliation
The keyword ‘lululemon’ in Spotify and Apple Music leads to Lululemon created playlist for various workouts.
Goal: Brand affiliation
- The Desktop Instagram Dashboard
With a click on the explorelululemon, the Instagram desktop app will curate and duplicate the content of the original post wall into CTA funnels for each image. This is the service Lululemon is using for each post — Curalate.This is a regular Instagram post on desktop and mobile:
And this is the post with Curalate add-on with CTAs that lead to the online shop:
Goal: Multiple — Brand Experience and sales through events and residual word-of-mouth points from attendees
- The Instagram stories.There’s more to the brand than just clothes. Lululemon developed a wholesome lifestyle catered towards the modern yogina:Fuel – Light nutritional recipesDiscover – Upcoming trends
What We Love– In-house weekly news of new product arrivals
Visio+Goals– Motivational, goal-setting stories
Travel– Travel tips and styles mixed with travel destination’s inspirational imagery
Workouts – Yoga sessions, HIIT classes, movement
What’s New– New productsIGTV – On the Instagram mobile app you will also find the newly launched IGTV section where Lululemon’s shows off longer 20 minutes Yoga flows
Goal: Content marketing and brand affinity.
Part 2: How Can Lululemon Grow Even Further
Lululemon has made an incredible job in becoming a household worldwide brand. The focus on branding, retail experience, and constant innovation is keeping them in the forefront of the premium tech apparel.
Their website has become a high traffic destination for clients worldwide. They are doing a good job segmenting the users based on geographical locations (they cover free shipping worldwide) and the bounce numbers are way below 50% which tells me that people are looking at products (8 page views on average).
But the intangibles around the culture could also cause the company to spin their wheels. The unnecessary PR stunts didn’t help either.
The online shopping has some glaring holes and opportunities that could be fixed and built upon. The digital shopping experience is as important as the ‘in-store’ one. While they can surf the benefits of their renommée, a lot can be done to skyrocket their reach and sales numbers on the Internet.
It’s a bit surprising the company hasn’t put a bit more experimentation and data science on it. I’m sure they must be doing it now. They are getting tons of traffic on their website already. Retail giants like Nordstrom are hiring dozens of data scientists to maintain growth through the years.
This section will review a couple of strategies with which Lululemon could improve their revenue goals.
1. YouTube and Instagram Influencer Marketing
Lululemon prides itself with ambassadors in every brick and mortar shop and retail space. However, they seem to be missing the train on online influencers. Channels like Instagram and YouTube are the perfect fit.
First, people believe word of mouth much more than one-way communication from company-to-client.
Andrew Rea (a.k.a) Binging with Babish also generates millions of views for his high-production cooking videos. Squarespace has already approached him and I’d be curious to see how many conversions happened towards Squarespace. Plus, creative artists on the rise have a chance to become viral (Here’s a reminder how virality works) which gives you the opportunity to get massive exposure when a content snowballs to daily trending page.
How I would do it:
Identify the rising movers and shakers on YouTube and strike up a deal. One of my personal favorite channels is Yoga with Adriene. The charismatic and warm Adriene gets millions! Of views for her 30 day Yoga Challenge. She’s personal, warm and friendly. Her good humor and occasional pop culture jokes keep you returning to her videos. The Day 1 of 30 Days of Yoga Challenge clocks in at 15 million views.
The following days are naturally having a lower view count but they are averaging around a million
Lululemon already has some ambassador practitioners who would film a high production flow class; however, these are one-offs mostly aimed towards the local audience. A 30-day free yoga challenge offers continuation, relationship building and a deeper connection at the end. It serves as a perfect TOFU content.
Is it worth it?
Take a quick look at the chart:
I’d dedicate a budget to find micro-influencers on Instagram (there are fitness models with millions of followers) and run a two-three month experiment. During the creation of this growth study Lululemon has done an amazing job of optimizing the Instagram channel, but there’s still room to grow. Just like their local ambassadors, the online world has their own community ambassadors that have an enormous reach. Just one quick research about Twitch streamers and YouTube creators confirm the theory.
Every industry has their own pockets of communities. With millions of data points, Lululemon Athletica should crunch the numbers and find the thought leaders among the VIP / highest LTV clients.
As a reminder, Lululemon has a very healthy margin profit on clothes. Imagine the ARPU or LTV per customer.
The second part of the budget would go to YouTube creators with 100k or more followers that fill in Lululemon’s target profile. Setting up an alert and watching daily trends would quickly identify a couple of those users.
Low hanging fruits:
- Define relevant and measurable CTAs for YouTube and Instagram influencers
- Identify potential influencers
- Run a 90 days test pilot program and measure the results
2. Personalized Quiz and Better Email Onboarding
“There are emails you sort of gloss over, delete or actually look forward to getting them. To be a successful e-commerce you will have to earn your customers’ inbox real estate. And if you solve email, you have a permanent communication with your customer
Looking at Lululemon, their emails are nothing special. To see the masters of the email game, check Chubbies (I’m not a customer because of geographic distance, but I enjoy getting their emails just because they are fun).
Of course, Lululemon can’t switch to Chubbies language which has their own set of rules for communicating with their target profile, but that’s no excuse for drastically refreshing their email game. Their audience has their unique set of values and messages to respond to.
Warby Parker’s Home Try-On is an excellent use case example. The service sends a potential customer up to five different frames.
On their website, you can take a short quiz where you decide which 5 frames look the best. In the end, you provide them with an email and address. The 5 frames you’ve chosen are going to be sent to your address.
Amazing idea, but the execution is even better. The email sequence that accompanies the process has clearly gotten a lot of attention and thought.
Here are the emails and their subject lines and screenshot (The full case study was captured by Joe Putnam at Rejoiner):
- Email 1: We received your Home Try-On order no. 101767816 – Confirmation for the Try-On order
- Email 2: Right on Track – order has shipped
- Email 3: 954 questions later – an email that shows a client the most popular frame based on customer’s inquiries
- Email 4: Touchdown – package arrives on destination & advice on how to find the perfect pair of glasses
- Email 5: Signed, sealed, delivered – CTA on choosing the right frames from the ordered package
- Email 6: First impressions and second opinions – WP is asking the client to send pics on Warby Parker’s Social Media (FB, TW, IG and email). This is ingenious since the WP is getting UGC first, plus creates a valuable relationship with the client
- Email 7: That was Fast – instructions on how to send back the try-on frames
- Email 8: Nice job – WP thanks the client for sending back the frames with a soft sell ask
- Email 9: Help is on the way – In case the decision hasn’t been made, you are welcome to call a personal consultant
The experiment doesn’t require a lot of engineering and judging by the Lululemon’s high-price items, this would be a very interesting test to pull out. Warby Parker has a dedicated department, which core purpose is to make the process of buying glasses as easy and fun as possible.
I signed in on the newsletter to see what kind of messages I’d receive. It was a generic weekly retail email without any kind of personalization. They didn’t ask me what kind of fitness regimen I’m running. Not only that, I’ve received 90% women-related product announcements.
Email is one GIANT opportunity where the company needs to gather data, come up with a fun customer journey and develop the brand. Again, I’d point out to Chubbies who are masters of using the language that their target audience understands.
- Segment initial customer base by gender and activity
- Create personalized sequenced journey for each segment
- A/B test them
3. Keep The Dirty Clothes Outside the Public
Founder Chip Wilson has done a lot of good for Lululemon Athletica. His expertise in retail apparel and specialization in technical wear and branding was the reason Lululemon took off the way it did.
But some of his public appearances and statements hurt the company. There were the “Lululemon products aren’t a good fit for some women’s bodies“ one and the “worst apology one“. His reasoning about women and future buying power is controversial. Even though Chip Wilson meant good, the news media is praying for exclusivity and dramatical conclusions.
It cost the company’s reputation they spend years to build. Similar to Uber‘s Travis Kalanick, the stock dropped by almost a third overnight after the incidents. We have all learned from Uber to keep our dirty secrets away from the public eye.
Low Hanging Fruit:
- Have a common-sense and experienced PR people for consultation before winging it out on camera or in press
4. Narrow targeting can be expanded to the new niche
Potential mistake – targeting men in Lululemon would be difficult since it’s so much further away from the core company’s brand personality.
On the other hand, women are already using Lululemon’s product in CrossFit gyms. The target profile fits perfectly, the product has been tested through millions of WoDs and the audience has money to spend on premium apparel (gym memberships for Crossfit classes even exceeds yoga studio membership).
Crossfit is (still) a growing trend which attracts worldwide attention. The biggest opportunity would be after 2020 when the Reebok’s monopoly runs out.
Brooke Ence – a Crossfit Athlete influencer has over 1M Instagram followers and appears to be rocking Lululemon pants. Unfortunately for Lulu, Brooke launched her own apparel company — EnceWear. Before that she was promoting No Bull crossfit trainers.
I see two potential problems:
- It might be too late – in early 2010s Crossfit was mainly supplied with Reebok’s merchandise; however, Nike has made its move with Metcon trainers, while other niche companies started popping out to fill the gap (i.e. NoBull, Hylete (mostly men), 2pood, 21-15-nine). For now, these are more aggressive brands, which are more suitable for men, so… there’s a chance.
- It could dilute the brand. If Lululemon would take up on the opportunity it would have to be in a similar fashion as Ivivva – special line for a special segment of customers. One good thing is that they could use the same hyper-local ambassador strategy but also extend it to online communities and specific social media channel influencers (Instagram, youtube).
5. Outdoor Out of Home Branding Exposure by using Data
Out-of-Home advertising or Digital OOH is usually the domain of big brands since it’s so tough to measure ROI and one of the last things on our minds. But looking on Spotify, which is an entirely digital product, they have enjoyed a lot of success by having fun with their collected user data.
Spotify’s OOH campaign was very personal and particular. They injected humor and lighten up the advertising environment. Instead of screeching down with salesy banners the OOH campaign made the passersby stop and smirk.
Spotify’s first forays into OOH happened in 2016 with the “It’s been a weird Year” campaign. The public response was so positive, they scheduled the outdoor advertising for the next year.
Here’s the banner of 2018 Goals OOH campaign.
These ads work because they are personalized, funny and localized.
One of the pillars of Lululemon’s success is the hyperlocal influence marketing. Expanding a message that either combines or takes the elements of local heroes, branding power or their manifesto on the streets would be an interesting experiment to try.
The problem that comes from this is, the ROI is tough to measure since it’s mostly brand awareness. There is a way to include specific OOH, dedicated CTAs and hashtags to track the public response. Until more sophisticated DOOH technology become more standardized with clearer outcomes, this is still a great way to increase hyper-local awareness which Lululemon has already done amazingly well with the Ambassador program.
Feel free to steal these ones for yourself 🙂