Startups: Why You Shouldn't Compete With 37Signals

October 26, 2006

As a software startup guy, I’ve been intrigued by what the folks over at 37Signals are doing for a long time.  I interviewed Jason Fried (CEO of 37signals) for my graduate paper on software startups earlier this year.  (I’ve written a couple of articles about 37signals in the past, including a couple of things I disagree with them about).

I read somewhere (can’t recall where) that as a startup you ideally want your competition to be big and stupid.  Big, because then your smallness is an advantage and stupid because, well, because it’s useful to be smarter than your competition.  If the competitor is big and smart (like Google), you’ve got a problem.  Big means they have resources, smart means they know how to use them.  However, the scariest kind of competitor for a startup is one that is small and smart.  Like 37signals.

Here’s why I think you don’t want to compete with 37signals:  It’s not about the fact that creating simple, usable software is really, really hard (which it is).  It’s not because they have really bright people (which they do).  It’s because the company is a marketing machine37signals squeeze more marketing value out of every dollar they don’t spend than any company I’ve ever known. They’re getting an immense amount of return on an investment they’re not making.  That’s why it’s really, really hard to compete with them.  This kind of marketing magic is hard to replicate.  I’d argue that for many software startups, the difference between success and failure is now no longer just a matter of “the better product” (if indeed, that was ever the case), but better marketing.

What their marketing savvy buys them is a lower customer acquisition cost than other startups.  This is why VC-backed companies are going to have a tough time going head-to-head with these guys.  If you have the money, you can “buy” customers and market-share (to a degree), but you can’t buy a low customer acquisition cost.  The only way to get there is to really buy a lot of “scale” (and that is very hard to do and often a dangerous strategy).  What I find particularly intriguing about the strategy at 37signals is that they’re able to get this kind of marketing and PR value despite not having a “network externality” or “network effect”.  In most cases where you hear about efficient marketing and customer acquisition, there’s usually some value to customers/users “passing the word around” and getting their friends/colleagues/family to also be customers.  This is what causes the “viral” spread.  37Signals doesn’t really have this.  Just because you use Basecamp doesn’t mean that I’m going to be any more likely to use Basecamp.  

On a related note, I think it’s important to note that 37signals made more money on sales of their “Getting Real” book (which is well worth the read) than most early-stage startups are able to raise in seed round funding after months and months of PowerPoint pitches.  Instead of trying to find investors, they spend their time building stuff, sharing their passion and knowledge and constantly promoting themselves – and the money showed up at their doorstep.  This type of approach really warms my heart.  There is no better form of funding than sales.  It’s like a loan that pays you interest

So, my hat is off to the folks over at 37signals.  It’s great to see a small, immensely passionate group succeed.  If you have thoughts about what you think makes those folks “tick” (that can be inspiration to other startups), please leave a comment.  Will plan to capture these and some of my own thoughts in a future article.  I think there’s a lot to be learned here.  I already have the title of the next article planned out.

Written by Dharmesh Shah


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