Until recently it was widely accepted that startups, constrained by limited resources, should primarily concentrate on individual product. Premature expansion into a wider product portfolio risked distracting from the core ‘hero’ product.
Now, however, the conversation is beginning to change. An increasingly popular formula for success involves having multiple products or having a complex startup. Thought leaders like Dave Yuan go so far as to discuss being “born of many products”.
Is this just the latest fad in startups? We don’t think so.
The creation of a new product is justified when the net present value of the total profit expansion exceeds the opportunity cost. However, estimating this price is proving to be a challenge, especially before the product is released.
A parallel could be made with customer acquisition. Investing in customer acquisition is justified when the net present value of the gains from the acquisition exceeds the customer’s customer acquisition cost (CAC). Fortunately, with the right customer retention and monetization models, this assessment is no longer a major challenge.
Customer acquisition and product development stand out as a startup’s most important investments. This naturally leads to competition between these investment priorities.
Historically, when startups prioritize customer acquisition and new product development, they choose the former. After all, customer acquisition is an effective way to leverage the large investment already made in product development, and the payoff from new products is highly uncertain.
Customer acquisition and product development stand out as a startup’s most important investments.
But times are changing and customer acquisition is becoming more and more expensive. As CAC rises, the relative value of customer acquisition remains the same compared to new product development.
The appearance of complex startups coincided with growth concern about CAC in the technology industry, and this is no mere coincidence.
In retrospect, the logic becomes apparent. When CAC exceeds a certain threshold, developing and marketing new products becomes more cost-effective than acquiring customers through traditional channels.
Innovative products reduce CAC and enhance company appeal, enhancing retention and growth. Introducing new products gives existing customers more buying opportunities, deepens relationships and encourages cross-selling. As the customer base grows, pursuing product-related initiatives becomes even more beneficial.
