A Product Market Fit Show | Startup Podcast for Founders

Sean Ellis led growth at Dropbox—& invented growth hacking. Here's his step-by-step growth guide. | Sean Ellis, creator of the PMF test & best-selling author of Hacking Growth.

Mistral.vc Season 3 Episode 43

Sean Ellis created THE test for PMF. He led growth teams at Dropbox, Eventbrite and LogMeIn, which sold for $4.3B. He coined the term Growth Hacking and wrote the best-selling book Hacking Growth. 

Today we go deep and tactical with him. He takes us through how to use the Sean Ellis test to perfectly measure and understand product market fit.

He takes us to case studies of things that he did at LogMeIn and Dropbox to dramatically increase growth. And he shares exactly what you can do to drive more referrals for your startup. 

Why you should listen:

  • Why the Sean Ellis test is THE product-market fit test every founder should use. How to implement it today and use it to get closer to PMF.
  • Why a great first-time user experience is the key for growth and referrals.
  • How to optimize each growth levers, such as acquisition, activation, engagement, retention, and referrals.
  • How to build a data-driven culture that is focused on measuring and improving PMF.

Keywords
product-market fit, Sean Ellis test, growth hacking, referrals, first-time user experience, optimization

Timestamps:
(00:00:00) Intro
(00:1:55) The Origin of the Sean Ellis Test
(00:13:13) Finding Product Market Fit Using the Test
(00:18:21) Focus on "Must Have" Users
(00:21:38) Growth Vs Marketing
(00:25:38) Old School vs New School Marketing
(00:30:17) 4 steps to growth
(00:36:24) Improving Sign ups to Usage
(00:41:37) The impact of Referrals
(0045:31) One Piece of Advice

Send me a message to let me know what you think!

Pablo Srugo (00:00)

Our guest today is Sean Ellis, the guy that came up with the Sean Ellis test, which is the test for product market fit. He's also the guy who coined growth hacking and wrote a book called hacking growth that has sold over 750 ,000 copies. He's been head of growth for companies like draw box, event bright, and LogMeIn, which sold for $4 .3 billion. Today we go deep and tactical with him. He takes us through how to use the Sean Ellis test to perfectly measure and understand product market fit. He takes us to case studies of things that he did and logged me in and draw box to dramatically increase growth. And he shares exactly what you can do to drive more referrals for your startup. Welcome to the product market fit show brought to you by Mistral, a SeatStage firm based in Canada. I'm Pablo. I'm a founder turned VC. My goal is to help early stage founders like you find product market fit. So man, I'm really excited to have you here because you're one of those people that I've known of way before I met you. I think the first time I heard of the Sean Ellis test, which I find is like the NPS is maybe close, but I think Sean Ellis test is by far the best way to determine product market fit. And it was with that superhuman piece, superhuman, robust piece about how they used it. And that was many years ago. I don't know if you remember when it was. 

Sean Ellis (1:20) 

At least four or five years ago, yeah, they definitely...They definitely helped to popularize the test a lot with that blog post they wrote. think they wrote it for the First Shown Capital blog. 

P124 

So curious to dive into a bunch of topics, honestly, really mainly around growth and really looking for this to be kind of like a tactical episode that founders can take away a few things that they can action. But maybe that's the first thing then is like the Sean Ellis test, like walk us through what it is, how it works, maybe even the origin of it.

How do you know the test is valid? How did you come up with it in the first place?

Sean Ellis (1:55) 

 Yeah, so I'll give you the origin based on kind of where I was in my career at the point I came up with it. So I had just come off of my second company where I had run marketing actually for both companies. So both of them had listed on NASDAQ, great outcomes. I was thinking, I'm a more realist, so I'm like

 

Okay, so - 

Pablo Srugo (2:22)

Which companies were they?

Sean Ellis (2:23)

 First one was a game company called uproar.com, launched in the mid 90s, so 1996, and we became a top 10 website in the world, but I had no marketing background when I went into it and was essentially just kind of figuring it I was originally hired to sell advertising, but we didn't have any users on the product, and so

I was like, no one wants to advertise on a product with no users. so the CEO gave me an opportunity to try to build the audience up. And I think my lack of knowledge in how marketing worked was an advantage because then I was just like, all right, well, I could measure stuff. This is the internet. So I asked my engineers to implement a good tracking system and just started. start trying things and once you could measure, then you start thinking about how can I drive improvement and fast forward to where we ultimately became the top 10 website in the world, number one game site competing against massive companies, Yahoo, Microsoft, bunch of Silicon Valley founded companies. That company, some of these things are just luck too. We listed on NASDAQ the day it crashed. So in 2000, so we raised like $200 million. And before we had a chance to waste any of it, we knew that the markets were closed to raising more money. So then we were able to kind of roll up the space a bit more. And that was part of our growth. But the same founders then founded LogMeIn after we sold the game company to Vivendi Universal in 2001. And then a year or two later founded LogMeIn. So LogMeIn remote access software you could install on your computer and then control it from any other computer. LogMeIn eventually sold for $4 .3 billion. I ran marketing there through about 100 million active devices connected into the system. so after I left LogMeIn, I was like, statistically, whatever I work on next is going to fail. So if it's going to fail, why is it going to fail? I'm pretty good at marketing. when would I fail with marketing? Gosh, if I get people to come in and try the product and they ultimately don't like the product, it doesn't matter how good I am at getting people to try the product. that's what would cause me to fail. So I basically started coming up with the concept of product market fit without reading it anywhere else, but just reverse engineering my failure. And then I didn't, at that point, come up with a test yet. I did a short interim role between LogMeIn and Dropbox. So Dropbox I started about six months after I left LogMeIn. so this company in between was called Zobny and it was actually kind of a competitor to Superhuman before Superhuman was around. And it was this add -on for Microsoft Outlook email that would essentially scrape all your emails and almost turn it into a social network. So be able to tell you your entire relationship with anyone and almost like automated CRM in your email. so it turned out that senior management really liked this product. And so

 

The typical thing you would do is ask a customer satisfaction type question. so I was thinking, I don't want to ask senior management how satisfied they are with the product because any good manager is never satisfied. so I'm hoping to get a pretty disappointing answer back. So I'll reverse it and ask them how would they feel if they couldn't use the product anymore just to try to get a more honest, visceral answer out of them.

 

If they really care about this product, they're going to tell me they'd be very disappointed without it. That was the origin of me coming up with the question. I started sharing the insights of the answers to that for anyone who's not familiar with the more commonly called Sean Ellis test now is very disappointing.

Pablo Srugo (6:53)

 Is that weird by the way? 

Sean Ellis (6:54)

Yeah, it is. I called it the Product Market Fit Questiion but 

 

I had more more people call it the Sean Ellis question. I didn't want to correct them. 

Pablo Srugo (7:07) 

Exactly.

Sean Ellis (7:08) 

 Maybe that's a good thing. But yeah, the answer is very disappointed, somewhat disappointed, or not disappointed, or even I've already stopped using the product. initially, I didn't ask the question as a benchmark question. I really just asked it to figure out who those customers are that would be very disappointed without it so I could … really dig into those customers and more deeply understand them. I was able to share it with friends at other startups and just like, this question is really helpful for me. Why are you running it against your audience? What I started to see was this pattern that when enough people said they'd be very disappointed without the product, those companies were succeeding at a much higher rate than companies who obviously had a low percentage who said they'd be very disappointed without the product. And so I didn't know exactly kind of what the benchmark was. Over time, I started to hone in that it's probably around 40 % saying they'd be very disappointed that would essentially set that company up for success. And when I went to Dropbox and I ran the question, I was like 50 % of people said they'd be very disappointed without the product. And then I went to Evemp right after that and 80 % of the people said they'd be very disappointed if they could no longer use the product. So, and both of those companies went on to the unicorn status and this was the super early days of those companies. That's the origin of the question was kind of like originally just for one situation, but then finding that it's actually pretty useful when I apply it in other companies as well.

Pablo Srugo (8:49)

And how is the question framed? Like one of the things I think about with that question is, you know, if I'm the one, let's say answering it, I might think to myself, well, I'd be really disappointed unless I could just switch to a competitor. Maybe then I wouldn't be that disappointed. Does that mean you would say somewhat or not?

Sean Ellis (9:06)

Yeah. So that's interesting. Yeah. So tend to have multiple questions. So I have the template that I start with at PMFsurvey .com and it's eight questions and

I don't think it's on that particular survey, but a lot of the times when I'd run the survey, I would ask, why did you select that answer? What I saw when people picked somewhat disappointed, most of the time they would say somewhat disappointed because I would just switch to product X instead. So if they thought it was kind of a commoditized use case, then they were okay to switch to another product. But then I ran it on...

I was working two or three years later on one of the big website creation products. This was an experiment for me to see if I could retroactively go into a company that was already pretty big and apply some of the things that were working in these early stage companies. This company is called webs .com and they were a top 100 website at the time. They had kind of a legacy website creation tool, so they were huge and so they had the network of all those websites saying like powered by webs that help them stay big and build that brand awareness. But things like Weebly and Wix had come onto the market that I thought were actually kind of better. And so I was surprised when I asked that question because I thought, okay, this is kind of a commodity space, not even necessarily the best. And when I asked the question, they were the highest I'd ever seen. think they were like 90 % of people saying they'd be very disappointed. But then when I read the answers on why those people would be very disappointed. They're like, I've spent so much time building this website. I don't want to change. And so then you realize like you can actually boost the score by having people kind of become more invested in a product. so if you've ever read a near real's book hooked, are you familiar with that book? Yes. Yeah. I while ago, but I did read it. Yeah. So when he, when he talks about building a habit on a product, what, what he talks about kind of the last step is once you've come in, you've got the benefit of the product, the last step is try to get the customer to invest something into the product. That was what we were seeing here is that they had essentially customized their website that they didn't want to change to a different website. 

Pablo Srugo (11:33)

Makes sense. There's a huge sunk cost. .. 

Sean Ellis (11:36)

Yeah, the learning curve and how to do the edits and all of those things. It wasn't so much that the website creation tool was better. It's just they had already built up a big asset inside of it.

Pablo Srugo (11:47)

And why do you think like, would that makes me think about like the other obvious test is like network motor score, right? And it's like, how, likely would you be to refer this to someone? Like, why do you think that the Sean Ellis test is a better representation of PMF than, than NPS? Like, what do you think one gets at that the other one does and vice versa?

Sean Ellis (12:06) 

I love NPS. think NPS is a, is a great, survey as well, but I think it's more of an operational, it's like kind of an operations feedback. Let's say I have a product that's a must have, but their customer service is terrible. Like the person yelled at me in customer service, I'm probably not going to recommend that product to someone else, even though I personally need it. I just hate doing business with that company. The likelihood of recommending the product is more a function of your entire experience using that product, where from a product market fit perspective, the first most important thing is: do people actually need the product in the first place? Great customer service on a product that no one needs isn't gonna get you very far. 

Pablo Srugo (12:54) 

On Ellis' test, it's true. It drives at the must haviness of a product. 

Sean Ellis (12:58) 

Exactly! 
 
 

Pablo Srugo (12:58) 

How's this pointer would you be?

Sean Ellis (12:59) 

 I call it the must -have score, exactly. 

Pablo Srugo (13:01) 

Right, right. That makes total sense. So you're looking for, let's say, 40%. I guess the question is, what do you do with that? You're a founder, you run this test, you get something. Maybe it's 30%, maybe it's 50. What's your next step after?

Sean Ellis (13:14)

I'll give you an example on exactly how I used it to get to product market fit. Right after Eventbrite, I worked on a product called Lookout, which is a mobile security product. I committed to a six -month interim marketing VP growth role with them. I ran the survey and only 7 % of the people said they'd be very disappointed without the product.

 

I should have probably run the survey before I committed to six months, but okay, I'm committed to six months. We were able to get it to 40 % in two weeks. So based on what we learned from the 7 % who said they'd be very disappointed, the changes that we made, the next cohort of people who signed up and were surveyed two weeks later were at 40%. Six months later, it was at 60 % of all people saying they'd be very disappointed, and the company hit the billion dollar valuation, I think, within five years. so what we did was we studied the feedback from the 7%. So that's why a lot of times it all starts with, I just need one person to tell me they'd be very disappointed without the product. That means that I found someone who really needs this thing. And so then I want to dig into why. How are they using it? What problem are they solving with it? What benefit are they getting? How did they used to do that? Is it a new need or is it a need that they used to solve with something else? Then why is this better? So in this case, with this company, we found that this was 2009. it was kind of, most of the stuff is built into, or all of this is built into smartphones now.

But at that time, there was use cases like, then this product, we'd back up your smartphone. had a system to help you find your phone if you lost it. So you'd be able to see it on a map and make it send a sound to you. All these things that we're used to with our phones today. It also had a firewall, to protect from intrusions, and then antivirus. And so what we found was that the people who said they'd be very disappointed without the product, they were all focused on antivirus. For them, they were used to protecting their computers from viruses, and it just was a natural leap for them to say, need to protect my phone from viruses. And so how did we then use that information to drive the improvement? By basically repositioning the product, not as a general mobile security product, but as a protect your phone from viruses and with the benefit of the peace of mind that you're not going to have a virus on your phone. That creates a filter for people who essentially hit the webpage. Not everyone's going to convert when they see that message, but anyone who converts, we know based on the feedback from our existing customers that they're much more likely to consider the product they must have if that's the message that they're converting for. I'd say that's a really typical mistake I see a lot of companies make is that they A, B test their messaging for maximum response, where ultimately if people are converting on something that product's actually not good at doing or something that's not that important, you're not converting the right people. so that probably got us halfway to the target 40 was just changing the message. Now we're converting the right people. I don’t think we significantly improved the signup conversion rate when we did that, but we didn't really hurt it either. But even if we'd slightly hurt it, it would probably still have been worth doing because now we're getting the right people on the right promise. And then the second thing that we did was change the onboarding. we couldn't have changed core product in two weeks, but we can change what someone sees when they first come in and use the product. so instead of bringing them into a screen where they could kind of set everything up, we took them first to the screen where they would set up the antivirus and then get a message that says, you are now protected from viruses. That's the aha moment. So we've set a promise. We've worked to quickly deliver on that promise. And now we have people that are stoked that they're protected from viruses. And that group of people when we surveyed them, they were at 40%, as I said, and it continued to go up after that. 

Pablo Srugo (18:04) 

And would you say that's common, which is that you run this test and then your goal isn't to take the somewhat disappointed and make them very disappointed. Your goal is actually to understand who and why, like who's very disappointed and why, and go get more of those. 

Sean Ellis (18:21) 

So, I mean, there's a couple of different ways to go with it. For me, with my marketing background, I always kind of took product as a fixed asset somewhat.

Pablo Srugo (18:30)

 laughs haha yeah. Fixed variable.

Sean Ellis (18:32) 

How do I put the best shine on this thing? and the other benefit is changing positioning, changing targeting is relatively fast. Changing core product could take months or years. Yeah, there is some benefit to this approach just in general. But again, I was looking at it more through the lens of a marketer. What's interesting with the superhuman article that you mentioned, it's the benefit of putting something out like this survey. I had blogged about it quite a bit before they put that out. Our book came out before they put that out, which talks about the survey as well. you get people who start to figure out different uses and ways to act on it. I never really thought about how, to me, either someone would be very disappointed without the product or I'm just going to forget about them and ignore them. I'll back up a little bit, my fear is always that if I try to fix it for the people who don't love it, I'll break it for the people who do love it. I was just a little bit nervous of doing that. So the way they reconciled that, which is great, is that they used the survey to figure out what that must have benefit is and again, reposition on that. So they get all the benefit that I just talked about of now having that filter of bringing the right people in, streamlining the delivery of that core benefit. Then they said they studied the people who said they'd be somewhat disappointed and segmented that group into

 

people who said they'd be somewhat disappointed who were also focused on the right core benefit. And so they're not trying to change it based on all the feedback from those somewhat disappointed users. They're really only focused on the people who are focused on the benefit that creates must -have users. What would it take to enhance the product so that those people would then also consider it a must -have? So I think that little nuance there protected against what my big fear was, was that you start trying to fix it for every group that doesn't like it and you start breaking it for the groups that already love it.

Pablo Srugo (20:52) 

 Well, I love that too because it ties into this whole idea that it's not just about like top line growth. It's not about maximizing the number of users generally. It's about maximizing the number of must-have users. Like that's the core piece that's then going to lead to long -term sustainable growth. You know, the other topic I want to talk about maybe just quickly, but this comes up a lot, believe it or not. you, you wrote the book hacking growth, you coined the whole term growth hacking. And now there's this whole like divide or I don't know if it's semantics or not between like growth and marketing, right? And I've had early stage founders ask me about this, like, what's the difference between growth and marketing? Is there, is there a difference? what's your take on that question?

Sean Ellis (21:29) 

I think for, for a super early stage company, maybe there's not much difference that you probably don't have the luxury to have a marketing team and a growth team. So you're really having a small group of people are just thinking about how do we grow this business. But over time, marketing is just one of the levers of growth. probably the more important lever is actually product. product people tend not to think in terms of units of creating must -have users. They think in terms of roadmaps and what... Features, yeah. How do I improve the product long -term based on feedback from my customers. Or maybe it's like I might capture a new market that I'm not getting if I add this feature, but it's all about kind of new feature development where I think the role that product can have in growth, those are all important things, but what the role that product can have in growth as well is how do I have first -time users have a great experience with the product? That's a huge part of making marketing work. so, if first -time users, there's this great promise on the product and it's super compelling. You get people signing up and then the product's just too hard to use for a first -time user. You're not going to grow. The marketer's going to fail and most product people aren't really oriented to thinking about that. so, ideally, you want to have someone thinking about particularly what is that first user experience like? And so in an early stage company might not be that hard to get the product team focused around that and the marketing team kind of working together. But as companies get bigger, silos grow, teams get more specialized, their own set of KPIs. And then that first user experience with the product kind of falls into no man's land. And most companies fall well short of their growth potential as a result. so ideally what you want to have over time is a growth team layer that's cross -functional, that sits on top of the does not own marketing and doing growth because now if they own marketing, then they're essentially, and I came across this as a VP of marketing a lot, they do not want the VP of marketing, the product team does not want the VP of marketing telling them what to do. And so it's just like normal egos and I know better, I'm a product expert, you're a marketing expert, you stay in your lane, I'll stay in my lane. But the truth is, it's one customer experience and that you need this cross -functional collaboration to get the handoff right. so a growth team that sits and looks at everything from how do I acquire, convert, engage and retain, drive referrals, even get monetization right in the product. Any improvement in any of those areas is going to accelerate growth. so having a growth team that's essentially looking at the full engine of growth and is able to own none of them, but influence all of them by collaborating with the teams that own it, I think is the model that's proven to scale the most effectively. so in a super early stage company, growth and marketing might be the same thing, but pretty soon you're going to want to split those out because eventually growth is going to hit a wall if they start trying to tell the product team what to do if they also own marketing. 

Pablo Srugo (25:13) 

Makes sense. But growth feels like it's a bit more kind of cross -functional. It's a bit of a mindset that spans the whole kind of organization, whereas marketing is its own department. Do you also see a difference between old school versus new school marketing. Like I think of old school for what it's worth is like branding, social media, PR, know, like things that you do to like get general awareness and growth hacking to me, you know, at least colloquially is like, is the sort of things like Airbnb did, you know, posting on Craigslist to get in front of the right audience, you know, in a really low friction way, or I've heard people doing crazy things with like emails and I don't remember the exact example, but just finding the right way to craft the right email, the right person, just to drive conversion. These kind of little things, is there a difference there, kind of between the mindset of old school marketing and maybe the more data -driven kind of new school marketing? 

Sean Ellis (26:06) 

I think there's a difference. I mean, there's definitely a creativity difference on that. But at the end of the day, the Airbnb Craigslist hack still was a customer acquisition tactic. So it still essentially sat within the responsibility of marketing, but required engineering insights to be able to pull it off. And so most marketing teams don't have the engineering insights. So even in that case, you're going to want to have the skill sets there. And then even the insights might not be enough. It's also the skills to execute that. Yeah, think there's, some level is sort of like, is the right way to do customer acquisition? Like big old school consumer businesses that, yeah, I mean, they're really good at what they do. The Procter & Gamble's of the world, the beer companies, they're really good, but the cause and effect of like, what's the ad that got someone to walk into the store and buy that thing? It's really hard to make that connection, but they have enough money that they can throw a lot of stuff out there and maybe do some things in some zip codes and not in others and start to see a little bit of what works and what doesn't work. And a lot of it is awareness building and kind of brand affinity. Startups don't have that luxury. The average person sees 4 ,000, 5 ,000 advertisements a day. There is no startup budget that is going to break through 4 ,000 to 5 ,000 advertisements and actually create some awareness for your product. When I first got to Silicon Valley, having a couple of big successes under my belt, then especially once I had Dropbox under my belt as well, I had a lot of VCs reaching out and making introductions to their portfolio companies. Whether it was the VC or the CEO, they're like, we need help building awareness. was like, no, you don't. Awareness building is not how you are going to build a business. Well, the average person sees 4 ,000, 5 ,000 advertisements a day. are, how many new experiences do they have with products in a week? Maybe one or two. So if you can be one of those new experiences, you're much more likely to be able to really break out and build some, not just brand awareness, but a brand experience, something that's much more memorable. And then once you're getting them to experiences, now you have a digital trail where you can start to see what is my return on investment of getting them there? What's the most cost efficient ways of getting more people to the right experiences that lead to long -term retained customers? And so now you can actually start to do these things in a cashflow efficient way, in a way that I think actually long -term ends up building much more awareness and bigger brands. And when I think about some of the biggest brands in the world, Starbucks never invested in brand building. They invested in having really consistent, great brand experiences. And by delivering enough of those, they built a massive brand. And that's much more how I think about it in the digital world is like, focus on brand experiences and you'll build a brand much better than if just focus on brand impressions.

Pablo Srugo (29:45) 

That makes sense. My next question was just, you know, you're a founder, you've done, let's say the Sean Ellis test, or for any reason you've kind of figured out, like you kind of have, you know, that product market fit. And what I see is that's the point when they try and hire head of marketing, head of growth, and, you know, just try and try and like scale that, guess, like, what are some of the most common things you've seen at that stage that work? What are some of the most common mistakes that you see at that stage where, you know, you're going from kind of organic product market fit to trying to take a bit more control of your own growth. 

Sean Ellis (30:17) 

Yeah. So one of the big things I still do is these interim VP growth roles where it's pretty infrequent, maybe one every couple of years, but I’ll go in and essentially between like 90 and 180 days, it's basically trying to build this sort of repeatable growth engine built on top of product market fit. So I have really four phases to that. The first phase: I want to deeply understand that product market fit. So that's a lot of surveying, a lot of customer interviews to basically boil it down kind of the way that I explained with Lookout. Like who are the must have customers? What's their profile? How are they using the product? What's that aha moment? The first thing they do inside the product. if I have that, then it's like, okay, now I'm trying to build an engine around delivering those experiences. What I know is that any company that has good product market fit is going to grow and as it grows, it's going to start to specialize and it's going to get siloed. So I have to, as quickly as possible, create this kind of cross -functional growth mindset that will persist through that desire for specialization and becoming more siloed. so within the first couple of weeks when I start with a company, then I'll do an all -day session where I'm sharing that product market fit information. I'm essentially getting the insights cross -functionally of like, do we collectively think the growth engine looks like today? How do people discover this product? What's the first thing they do that really makes them love it? What's that engagement loop end up looking like? Is the referral, what drives that referral? Once we get on the same page around how the business works, it's a lot easier to work cross -functionally to grow it. I'm basically doing a full day session on why testing is important, but essentially starting with the foundations of what is this asset that we already have and why does it work and then how do we drive improvement on this asset. So I want to do that early because I know people are excited when I join the team, but within a month I'm just another pain in the ass asking them to do things they don't want to do. So I have to kind of leverage that honeymoon period to get the necessary buy -in. 

Pablo Srugo (32:38) 

Marketing is that sales are the two hearts where it's like the most rollercoaster of emotions, right? Because you get the person feeling like they're going to change everything and then, you know, it always takes longer. It's always hard.

Sean Ellis (32:50) 

Yeah! Like inertia kicks in and people just kind of fall back into old habits and so I have to, I have to basically get people to take that step back and think of the better way that will scale long -term. Then the next phase for me is just like really optimizing everything around product market fit. So speed to value, basically through the full day session, we're identifying those high leverage opportunities, brainstorming some, building some ideas, but it's essentially running kind of focused testing campaigns around the biggest opportunities for getting the right people to the right experience and optimizing engagement loops, optimizing referral loops.

Pablo Srugo (33:33)

And do remember any examples, especially on that phase, once you figured out, you know, who the customers are, why they're kind of getting value, just some stuff that you did this before. 

Sean Ellis (33:45)

 A lot of the big focus that I tend to go into is activation, like speed to value. That's, that's just like a lot of AB testing of what, yeah. I give you even from my very first company, I'm like, I was already somewhat wired this way. You could look at the funnel in a gaming company and say, so people see a banner advertisement, they click on that banner advertisement, they see a form, they fill out the form, they then go in and start to play some games. And that's how all our competitors worked. And I thought, why are we delaying the actual beneficial experience, the fun experience that long? Why can't we flip that and we actually start with a gameplay experience. And so I basically built one of the first affiliate programs. I was inspired by looking at what Amazon had done with their affiliate program. But then also Hewlett Packard back in the 90s ran a banner that you could play Pong inside the banner. I thought, that's really cool. We could have something where you could play the game inside a banner, but if I do it in the size of a banner, people are going to make me pay banner costs for it. If I do it in a different size, which turned out to be almost exact same dimensions that a YouTube video is, an embeddable YouTube video, but this was years before YouTube made the embeddable videos. And then let's put a little, this game to your website. And so we essentially spread these games across, it ended up being 40 ,000 websites that for free all embedded these games, but then we did pay them an affiliate fee. People converted and then played a game on our website, but we paid them 50 cents for those converted sign -ups, but they were actually having a higher yield than they would typically with banners, and we were paying a fraction of the cost of anyone else. So, yeah, once you identify what that aha moment is, what that value is, how can you rethink bringing that that value much sooner in the process. So that's like a classic example, like start with the value and then- 

Pablo Srugo (36:02) 

How do you do that? I'm curious, and this may be too high level, but like, you know, I think of a lot of SaaS specifically where it's like, there's just this onboarding that's required, right? Like there's these calls and things like that. Like how crazy can you get, at some point you hit a limit where it's just like, mean, so that was- 

Sean Ellis (36:17) 

yeah, that was unique to a game company, but the next company being LogMeIn… When we first launched the business, our sign up to usage rate was only 5 % because it was really hard. You had to configure firewalls. We had probably a 10 step onboarding process where each step was really hard and you didn't have any benefit until you got to the very last step of doing a remote control session. We had to go to a different computer to do that and so I was stuck on the marketing side. We had such bad conversion economics as a result because if they don't use the product, they're not going to pay us anything. My ability to scale the marketing side was completely ruined by this onboarding, but the product team was not focused on the onboarding. were focused on, we're three features away from not even needing marketing anymore. This product will be so great. They were very roadmap oriented. We had a CEO that once I shared the data that only 5 % of our signups were using the product, he basically said to my team, I'm trying to find new marketing channels. And he said to the product team, I want you to put a complete freeze on the product development roadmap. And both marketing and product are going to work together for the foreseeable future on improving the signup to usage rate. A bunch of different tests, a bunch of different things we tried there. We improved it from 5 % to 50 % of all users having a remote control experience after signing up and the entire business. I told you that that business ended up selling for $4 .3 billion.

Pablo Srugo (38:08)

 But a lot of that was just removing steps, like things like configure firewall. There's a place where, what can you do about it?


 Sean Ellis (38:13)

Yeah, but I know part of it is in the design of the product that we could make that easier. We even had theories because when we had the game company before, it did not require software downloads. we thought maybe it was just not realistic that downloadable software can't get into the millions of users that we're hoping. But then they were like, are there any counter examples to that? And we thought, the instant messengers are there. let's go study what their download process looks like. And so we got some inspiration from their download process and ran tests based on that. And that gave us some more ideas. But really, like with anything, if there's enough desire, people will walk through fire to get to a product. So how do we kind of keep that desire level up and then just keep reducing the friction to get someone to that first experience with the product? It was a whole bunch of little tiny tests that ultimately made it much easier to get started with a product. 

Pablo Srugo (39:13) 

I took you a bit on the tangent there. I think you were on like the third step of your four step process.

Sean Ellis (39:18) 

No, but you get it. Like that's really what the third step is, is all these things that actually make the business growable. There's some channel discovery that fit in there as well, but it's like, do I optimize? You get that below hanging fruit in each of the key levers from acquisition, activation, engagement and retention, referral, get the revenue model right. I'm spending two or three months just focused on running that optimization. And again, that's a lot of cross -functional stuff. So that's why I needed to have the session upfront to get the buy -in to be able to do that. then once the system is working pretty well and we've identified two or three channels now that are working on customer acquisition. And again, those channels are going to be super dependent on our ability to convert, monetize, and retain customers. Then I can start figuring out, what's the long -term way to scale and optimize this business? Not scale optimize, but just systematize the scaling of this business. that's when I start to transition to a long -term head of growth and helping with the plugging that person in.  What are the monitoring reports to seeing what's working? How do we continue to run testing across each of the key levers of growth? But really a lot of it starts to lean more on the manage and scale the marketing side of things, but that is going to sit in the marketing team.

Pablo Srugo (40:48) 

The last thing I wanted to touch on, because for me, when it comes to growth and marketing, like I could be wrong, but for me, like the most powerful thing is if you could get word of mouth, like consistent word of mouth marketing is just, it's just an amazing thing. And a lot of that is kind of these referrals or to the extent that the company's trying to get that word of mouth to go- a lot of it is kind of this focus on referrals. What tactics have you seen that work? Because a lot of times, just talking to founders, okay, we need- we get some referrals that we just need to get more. And there's almost like this wall you hit on like, I mean, there's the stupid things you can do. I'll give them a coupon. If you're a customer, I'll give you one three, like these kinds of trades. But I don't know, that always feels like frankly,I rarely see that really work and take off. So I'm just curious, like what are the sort of things that you've seen that actually can have a meaningful impact on referrals?

Sean Ellis (41:37)

So it's kind of like the earlier conversation that you and I were having where you talked about revenue is a function of doing a whole bunch of other things, right? Or even compared that to happiness, you can't aim for happiness. Happiness happens when you do everything else right. In this case, really like the best way to drive retention and referrals is a great first time user experience. so every company that I've ever worked on, by far the biggest driver of new customer acquisition is referrals from satisfied customers. But they're doing that because they're having a great experience with the product initially. so that, yeah, for a long time, I thought that was kind of the only way to do it. At LogMeIn, and interestingly, I mentioned that we got to that point where we 10x’d the number of people that are reaching the usage of the product. Before doing that, I could only spend $10 ,000 a month on marketing, and I was just stuck. There was no profitable way to scale beyond that. 

Pablo Srugo (42:44) 

Because your LTV was too low or your cap was too high. 

Sean Ellis (42:46)

Yeah, the economics didn't support. A lot of channels were not viable. But after those changes, I went back and tried the exact same things. Now they scale to over a million dollars a month with a three month payback on marketing dollars invested. that whole thing only accounted for 20 % of the new users we acquired. 80 % were coming in through word of mouth because so many people were having a great experience with the product. And so that just shows like we had no word of mouth. Our obsession on getting people to actually having a great first experience with the product unlocked all of this word of mouth. So I was afraid to be honest, I spent another five years at LogMeIn and was afraid to do anything tactically to try to accelerate that word of mouth because I thought I might break it and it was such an important part of our growth. When I got to Dropbox, we were early enough that I thought, yeah, it's worth the risk. It's risky, right? Yeah. But we already had really strong word of mouth at Dropbox before we introduced the incentives for sharing Dropbox. But once we added the referral program where both sides, the referrer and the person getting referred would get 250 additional gigabytes of space, we saw a significant increase in the referral rate in the product. I think you can do tactical things to accelerate referrals, but I think most people are jumping straight to the tactical. It's like the same thing on the tactical things to reduce churn. By the time you're doing those tactical things, you're dealing with people who've given up on the product. Activation is the thing that is most likely to lead to long -term retention on customers and also most likely to lead to referral on customers. That's again, a big part of the reason why I focus on activation. But I do think like there are some things like best practices of having a double -sided referral incentive can be effective, but I don't think it will, would improve referral rate on a product that has almost no referrals. Like there's something wrong in that case and you can't solve that tactically.

Pablo Srugo (45:08) 

That makes sense. So look, we'll stop it there. I'll ask just the one final question, which is if you're talking to an early stage founder who has product market fit or getting really close to product market fit. What do you find is your most common piece of advice around growth? What do you find yourself saying to founder after founder after founder? 

Sean Ellis (45:31) 

Yeah. It's really digging in and deeply understanding that product market fit. Just getting there is not enough. If you don't actually understand it, then you can't hook into that. so on my podcast, the Breakout Growth Podcast, one of the things that we're really studying is these super fast growing companies and all the things that lead to that growth. And not surprisingly, it always comes back to strong product market fit. That is the one common element between every fast growing company. But just having that is going to lead to some growth. But if you can deeply understand it, get the right customers to experience the product in the right way, be really creative about reaching those right customers, reducing the friction of getting the people to experience it in the right way, getting them to experience it more often. Then you build that wave that ultimately leads to really strong word of mouth, long -term retained customers, great monetization, and builds that strong business. so driving all those improvements is going to require kind of that test -learn process. But the test learn process without kind of a deep foundation of having product market fit and understanding that product market fit means that you're probably just being a little too tactical on the test learn process where instead it's like every test you're running should be helping you better hook into that product market fit. 

Pablo Srugo (47:02) 

Perfect. Well, Sean, this has been amazing. Thanks so much for taking the time. 

Sean Ellis (47:06) 

Absolutely. Thanks for having me on, Pablo.

 

People on this episode