Dharmesh Shah


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Startup Insights From The Grateful Dead

By Dharmesh Shah on August 3, 2010

The following is a guest post by Brian Halligan, my co-founder at HubSpot.  Brian recently released a new book titled “Marketing Lessons From The Grateful Dead”. The book is a brilliant condensation of some strategic insights that should be useful to startups.  Brian is currently the co-author of 2 of the top 10 marketing books on Amazon (the other one is “Inbound Marketing”). 

The following article is excerpted from one of the chapters of the book.

Create a Unique Business Model

Before the Internet, bands promoted their new albums by scheduling tours across the U.S. and around the world. Fans paid huge bucks to attend sold-out shows where they were treated to pyrotechnics, light shows, and of course the music. Concerts were the same every night and included the bands’ “best of” songs, with cuts from the new album mixed throughout the set. The goal of these concert tours was to sell as many records as possible to ensure your album went gold, platinum or multiplatinum.marketing lessons grateful dead

Fans bought albums at their local record store where they would find the list of top albums for that week taped to the wall next to the cash register. For an album to go to gold in 1975, a band had to sell 500,000 of them and hit $1 million dollars in sales. To be awarded the coveted platinum certification, bands had to sell 1 million albums and hit the $2 million dollar sales mark. 

Doing concert tours to promote these moneymaking albums was the fundamental business model for bands, the record labels and sundry hangers on. The Grateful Dead turned this business model on its ear: rather than focus on selling albums like other bands, they focused on generating revenue from live concerts, and in doing so created a fan “experience” that was unlike any other.  Because the concert tours themselves were the main source of revenue, the Grateful Dead ran their concerts in a very different way from other bands. For example, each show had a unique set of songs and each song was played in a unique way, giving fans a strong incentive to see the show for several nights in a row (or weeks, months or years) because every night you were treated to a different musical experience. This is the exact opposite approach taken by other bands.

Since the concert tour was at the heart of their business model, the Grateful Dead didn’t tour periodically to promote an album; with few exceptions, they were permanently on tour. The Grateful Dead invested heavily in their light show and sound systems, both of which were the best in industry, and in doing made the musical experience much more powerful for their fans. Due to these factors and others, the Grateful Dead developed a following of people who would see show after show. These followers became part of the concert experience, especially as you waded through them in the parking lot where you were exposed to tasty food such as veggie burritos, all sorts of exotic drugs, unique clothing, and all the other crazy stuff that went along with a Dead tour. By changing that one fundamental assumption in a typical band’s business model, the Grateful Dead created a cascading effect of benefits for themselves and their fans. Imagine for a moment if the Grateful Dead had put themselves in the care of a manager focused on selling records and increasing the profits of a record company. If they had conformed to “industry best practices,” the Grateful Dead might be one of the thousands of bands on the dead heap of music history. The concert-as-business-model worked, and the Dead created a passionate fan base that became an underground cult that catapulted the Grateful Dead into the rock and roll stratosphere: the fan base grew from thousands to hundreds of thousands to millions with the Grateful Dead selling out shows around the globe.

It’s much easier to follow what other companies are doing and mimic their business model than it is to innovate. Don’t do it! Watch your competition, but avoid the temptation to follow them with every fiber of your soul.  Today’s big winners typically win because of unique business model assumptions, rather than some new technology or complicated product improvements. A few common examples include Netflix (versus Blockbuster), Zipcar (versus Hertz), eBay (versus yard sale), Google AdWords (versus Yahoo), iPod + iTunes (versus MP3 + downloading), Southwest Airlines (versus driving a long way), and Walmart (versus the country store). Like the Grateful Dead, these companies turned the core assumption of how their industry works on its head to create an unlevel playing field for themselves. Their rejection of core assumptions in their industry allowed them to really stand out from their competition and create a cascade of benefits for their customers.

The Grateful Dead teaches us that business model innovation is just as important, if not more so, than product innovation.

Rue La La Creates Online Buying Destination for Luxury Goods

An exclusive, invitation-only online destination, Rue La La is a website where members can purchase high-end fashion goods at discounted prices. What’s different about Rue La La from a TJ Maxx or other discount retailers is its business model. Rather than offer last year’s items that didn’t sell in the stores at heavily discounted prices, Rue La La developed partnerships with designers and by working closely with them, offers current merchandise and one-of-a-kind items at discounted prices – items which can only be purchased during limited time periods.  Here’s how it works: Each day, Rue La La features a designer boutique, say Villeroy & Boch or St. John, that opens at 11:00 AM Eastern and remains open for 48 hours or until merchandise sells out – with a blinking clock counting down the time. Because merchandise can sell out in a matter of minutes, members often set calendar reminders so that they can be at their computers a few minutes before 11:00 AM. The company sends out email reminders a few days in advance that let people know which designers will be featured on the site.

Since its inception in April 2008, Rue La La has built a passionate fan base of 1.6 million members using viral methods. To become a member, you must receive an invitation from another member. Once a member extends an invitation, he/she receives a $10 credit when each friend places their first order, with no limit placed on the number of credits one can receive. Credits can then be used against any boutique purchase.

You would think that the limited availability of fashion items would frustrate people and turn them away. Instead, the opposite is true: Limited availability of items reduces over-exposure of brand partners and their merchandise as well as customer fatigue at seeing the same brand or fashion items over and over. It also creates a sense of urgency – if shoppers don’t buy something immediately, they’ll lose out and will kick themselves for days after for missing a good deal. This is different from the typical shopping experience where if you’re not sure about an item you can go home and “think about it,” which usually means a no sale for the retailer as your ardor cools and you realize you don’t really “need” the item.

Rue La La helps people make fast purchases with its “Quick! Buy It” feature: a member enters her credit card number and billing / shipping information on the account settings page, and when shopping can click the “Quick! Buy It” button, eliminating clicks for hot purchases.  Members can even shop via smart phone – making it easy to purchase items while on the run. If a member has a problem with any purchase, she can Tweet Rue La La’s Concierge, who responds immediately.

Instead of competing with retail discounters or high-end department stores, Rue La La has created an innovative business model that targets a distinctive demographic. With passionate fans around the world, the company grew from around $25 million in sales in 2008 to $28 million in the 3rd quarter alone for 2009. Their innovative business model “paid off” as the company was purchased by GSI Commerce, Inc. in early 2010 for $350 million.

Create a Remarkable Business Model

Products that are highly differentiated can still win today, but it’s much harder to win if your business model is the same as your competitors’. Your job is to do research about your industry in order to build a killer business model. You want to break free from the competitive landscape and create a cascade of unique benefits for your customers. 

Action: Creating a unique business model is very difficult and no free lunch exists on how to do it. Rather than tell you how to create a unique business model in your industry, we thought we would give you some hard questions to ask yourself that will get your juices flowing on how to create one:

What are you three times better at than you competitors? What are you three times worse at than your competitors? If the answer is “nothing” to both, you are not unique enough to really break out. And “no,” you can’t be better than your competition at all dimensions – you need to rethink the dimensions.

In addition to thinking about your industry competitors, what are the “alternatives” to your product? Can you find ways to erase the traditional “boundaries” of your industry by incorporating or subsuming some of the alternatives? Southwest Airlines, for example didn’t compete with other airlines, they competed with a long car drive.

What new technology is emerging that might enable you to upset your industry’s apple cart? Could the Internet be a new distribution channel? Could an iPad application catapult you past the competition? Could you use Amazon’s mechanical turk system (an online arena that connects those who have relatively small tasks with people who can perform them) to dramatically lower costs or deliver new value?

Are there societal changes happening that you might take advantage of in your industry, such as empty nesters moving back into cities, more people working from home, a shift to outsourcing to rural America than overseas, or increased interest in low carbon footprint lifestyles for companies and families, etc.?

Do you have someone who’s really smart from outside your industry that you can ask to help you with this?  The problem with creating a unique business model in an industry you grew up in is that you naturally get bogged down in the industry assumptions you’re trying to break.

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If you liked this article, you'd also likely enjoy a free upcoming webinar titled "How To Market Your Business Like The Most Iconic Band In History".  You should also buy the book.  It's a quick, easy read.  You'll like it even if you're not a Deadhead (I'm not).

So, what do you think?  Any other examples of companies that you think did this particularly well?

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Startup Culture Lessons From Mad Men

By Dharmesh Shah on July 26, 2010

The following is a guest post by Brian Halligan who is my co-founder and CEO at HubSpot (which means he gets to do most of the really hard work). 

I recently did a lecture at a Babson MBA summer class on Entrepreneurial Leadership.  I got a lot of questions from students about how and why HubSpot won the Boston Business Journal’s #1 place to work award….hmmm….good question.onstartups mad men

At the highest level, we are trying to create a “post-modern culture” (I just came up with that term…too high falutin?).  Believe it or not, this post-modern culture was inspired by the TV show Mad Men.  The show is set in an advertising company 50 years ago and it pokes fun at corporate culture in that era.  For example, almost all of the women in the office are secretaries, many of the married men are sleeping with these secretaries, everyone boozes heavily during work hours, etc.  While watching Mad Men, I couldn’t help but wonder what a show might look like 50 years from today that poked fun at current working conditions and company culture.  That led us to think a bit about what just didn’t make sense anymore given the realities of the Gen Y worker, broadband in the home, constant connectivity via mobile devices, the modern market for hiring exceptional people, etc.

Here are some of the more interesting features of working life at a post-modern company that have come out of that Mad Men inspired thinking.

1.  Vacation Policy = No Policy: In our father’s era where people needed to come to the office to collaborate and do real work, a vacation policy made a lot of sense.  The reality is that today I get emails from HubSpotters at all hours of the night and have a steady flow during the weekend.  No one asks for vacation credit for being on their iPhone while sitting on the beach on the Cape, so why should they have to ask for permission to take vacation during the week.

2.  “We don’t care which 80 hours you work”: In the early days of HubSpot, people used to ask us about working unusual hours or working part of the day at home and Dharmesh and I used to always say, “We don’t care which 80 hours a week you work, so long as you put in your 80.”  The reality is that most of us don’t work 80 hours, but you get the idea…

3.  Extreme Transparency:  Other than salaries, there are few secrets at HubSpot and I wonder whether we should just expose those too.  One manifestation of this extreme transparency is on the wiki where I personally write a new wiki article a couple of times a week about what is on my mind about the future of the company, problems I see that need to be solved, opportunities that I’d like folks to look into, board meeting notes, etc.  The articles are widely commented on and some of our best initiatives get spurred by these discussion threads.  Among my favorite articles written by other HubSpotters have the title “If I Were CEO Of HubSpot, I Would…”

4.  No door policy:  Many companies have an “open door policy,” but we have a “no door policy.”  No HubSpotters have an office – we all sit out in the open next to each other.  I am currently writing this article wedged between two developers, Michael and Andrew, whose work I’ve gotten to know quite well when I otherwise would have been out of touch in a corner office.

5.  Seat rotation:  If have been sitting next to Andrew and Michael for about two months, but we are about to do one of our quarterly seat rotations where we pull numbers from a hat to see who we will be sitting next to.  This ensures folks get to know different people from around the company.  I’m looking forward to seeing whom I’ll be sitting next to next week!

6.  HubSpot Fellows:  We hired Professor Andy McAfee from MIT Sloan to help us start the HubSpot Fellows Program, which is like an MBA for HubSpotters.  Courses offered so far:  Strategy HubSpot Style, Statistics, Learning Leadership From Legends, and Improving Written and Verbal Communications.  The courses are open to any HubSpotter and are taught by Andy and me.  …We did this because we want our employees to learn and we want to attract employees who like to learn.

7.  Free beer: I can’t remember how it got started, but we always have free beer in our fridge.  I’ve noticed folks seem to wander around and drink a beer or two at the end of the day to unwind.  We are up to about 170 people and I’ve yet to see someone do something stupid.  HubSpotters seem to be rewarding the trust we put in them here.

8.  Friday 4pm Happy Hour:  We are certainly not the only ones who do a Happy Hour on Friday, but we have our own unique twist on it.  Every Friday at 4pm ET, we film HubSpot.tv live in our office and encourage employees (and community members) to watch the show, play a little ping-pong or foosball, and hang out.

9.  Games:  We have a west coast style games room where people can play ping-pong, foosball, hang out on the couch, or hit the beer fridge.  We do this because it is a good way for folks to get to know each other and refresh their minds. 

10.  Tournaments:  We have frequent tournaments, including ping-pong, foosball, iron chef, and softball.  All of these are just plain fun and bring folks together across groups.

11.  Dress code = no dress code:  Doesn’t made sense to me to tell people what to wear…we’re not in a boarding school -- we are in a company where we want people to be as productive as possible.

12.  Big Hairy Mission:  Our mission is to “transform the way the world does marketing.”  At least to me, that mission is big enough that I can really get psyched about it and be proud to tell others I’m working on it.  I don’t know for sure that other employees feel the same way, but I suspect it is the case.  Modern workers are more like cathedral builders than brick layers if you give them the right mission.

13.  Social media policy = we trust you:  Any of our employees can post an article on our blog, can tweet, can blog privately, etc.

This last point of “trust” is a common theme that runs throughout a post-modern culture.  If you are hiring exceptional people who have lots of good options, you should trust them to make good decisions that will improve the enterprise value as your interests are strongly aligned.

What aspects of corporate culture do you think are passé?  What creative corporate culture things are you doing at your company that you think we could emulate?

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