Startups: Why You Shouldn't Compete With 37Signals

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Startups: Why You Shouldn't Compete With 37Signals

 


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.


Posted by Dharmesh Shah on Thu, Oct 26, 2006

COMMENTS

Your feedburner passthrough does not seem to be working. Just FYI.

posted on Thursday, October 26, 2006 at 11:47 AM by Berkay Mollamustafaoglu


Interesting and informative post Dharmesh!

I'm going to begin tracking 37Signals immediately. More specifically I'm going to research and evaluate regarding their marketing initiatives.

Here's a question... Are they making a profit?

BTW although I check your blog daily (typically early morning) I enjoy getting Gmail notices from you regarding new Onstartups posts... Thank you for including this useful functionality.

posted on Thursday, October 26, 2006 at 12:18 PM by Sheamus


Thanks for the kind comments, Dharmesh.

Sheamus, 37signals has been profitable since its inception in 1999.

posted on Thursday, October 26, 2006 at 12:26 PM by DHH


I'm not sure why startups, venture funded or not, should be particularly interested in competing 37Signals. Is their market now hot?

posted on Thursday, October 26, 2006 at 12:44 PM by Dan Howard


I also admire what 37signals have managed to accomplish with their approach, thinking and products.

It doesn't seem quite right, however, to not compete with them - there was a time when Altavista (or some other such search engine) was considered the be all and end all - where would we be if that hadn't have been competed with?

I think the imminent competition towards 37signals will only drive better performance from everyone involved - 37signals set an admirable precedent, but it's likely someone will come along and beat them at their own game; excelling by surpassing the standards laid down by the 37' guys.

We could all have them to thank for a soon to be seen influx of simple, usable & powerful platforms which are bound to be just around the corner!

(Not a dig at anyone, just an opinion - I use Basecamp to manage some of my stuff and love it)

posted on Thursday, October 26, 2006 at 2:09 PM by kester


I've always regretted never taking advantage of their services when they were still just a web design firm, rather than "a software company".

But I must admit my jaw drops admiringly that they've made an art form out of selling nothing - when feature requests are often refused (and occasionally ridiculed) with a response along the lines of "it's a fantastic, wonderful thing that we DON'T have feature X, and we did an amazing job not putting it in, it's all about simplicity...(etc.)" - it's mind boggling. I never even considered that I could actually sell non-features.

posted on Thursday, October 26, 2006 at 2:11 PM by aird


> I read somewhere (can’t recall where) that as a startup you ideally want your competition to be big and stupid.

http://software.ericsink.com/Choose_Your_Competition.html

posted on Thursday, October 26, 2006 at 3:04 PM by Dennis


I know I must be daft... What do they sell?

Is there project management THAT much better than anything else? There IM is that much better than AIM?

I'm at a loss to understand the compelling element of what it is there selling.

posted on Thursday, October 26, 2006 at 4:45 PM by thelonecabbage


"So, my hat is off to the folks over at 37signals. "
So please dont compete with my HubSpot.com ;-)

posted on Thursday, October 26, 2006 at 4:58 PM by Can not


Startups should not compete with cults. Period.

posted on Thursday, October 26, 2006 at 6:12 PM by Dimitar Vesselinov


I happen to be reading their book right now in another browser window. Being a small "boot strapped" startup, I find their approach is perfect for what I am doing.

Clearly they have mastered the art of delivering clean, simple web applications that are quite usable and profitable. I just started using Basecamp and I am impressed by it's power and simplicity.

I agree, you should not compete with them, but use their model to build your own business...

posted on Thursday, October 26, 2006 at 6:56 PM by Greg Harrus


Huh? Wha?

37signals is like joelonsoftware. They are NOT a startup. Apples and Oranges. Why would anyone in their right mind want to compete with them?? That;s like saying "Don't compete with Paul Graham".

Yeah they're profitable but so are most consultants I know. These guys fit into the same category. Not that there's anything wrong with that.


posted on Thursday, October 26, 2006 at 7:34 PM by 37what


I read all of your articles and find them very informative. This one though, left me asking for more. (I also read all of svn and loudthinking as well so seeing the two combining here with a post from DHH is interesting).

I agree with your point Dharmesh, that 37 signals has almost inimitable marketing magic. I have lots of ideas on what makes it work for them and will shoot them out in another post. I wanted to first ask a clarifying question:

Don't compete with 37signals sounds like practical business advice. Yet I am left asking what is a 37signals competitor?

37signals offers
- a book about web-based development
- project collaboration, group chat, organization, collaborative writing, to-do list and CRM software
- a "less is more" approach problems
- web-based, subscription-based software
- an awesome web framework (Rails!)

I don't think you are saying no one should ever try to do these things again though. So we find ourselves in a middle ground. While I would not recommend a company positions themselves as "buy from us, not 37signals" or "even *less* than 37signals :)", I don't think it's healthy for an industry to say that one company has it all figured out.

posted on Thursday, October 26, 2006 at 10:18 PM by Scott Meade


As someone who runs a website that directly competes with some aspects of basecamp, I have to disagree that you can't compete.

FIirst of all, they charge their users a monthly fee so you can always compete on price or even free. Second, they already have an established userbase along with expectations on what their software does and how it will continue to work in the future. The web equivalent of 'backwards compatibility.' This prevents them from straying too far from their existing functionality, which keeps their users happy, but also restricts them from trying radical new ideas. Lastly, the world is big enough for many, many 37signals. If you step back a little, you can make the same argument for google against 37signals.

posted on Friday, October 27, 2006 at 7:45 AM by rick james


What 37signals is tapping into is the screaming need for simple tools that work well in our ever-complex world. Good for them - and while competing with them is none too bright, taking the same approach makes very good sense for micro-ISVs.

posted on Monday, October 30, 2006 at 12:04 PM by Bob Walsh


I think 37 signals is going to have a lot of competitors now who are following the same principles as 37 signals.

posted on Wednesday, November 01, 2006 at 4:10 PM by Amr Malik


One most important thing pointed by jason fried in his talk at ITConversation was about hiring people.
"Hire curious people. Even if they don’t have the exact skill set you want, curious, passionate people can learn anything."
I think this is very important for startups because their success relies on people not process.

competing with 37Signals is not really required but

posted on Wednesday, November 15, 2006 at 1:23 AM by jigar shah


Consulting firms do have divisions that sell software. It is not the most natural thing for consulting firms to do. I was a 37 Signals fan from when they were just a web design firm.

On the low cost of sales, there are many software companies that really don't understand how to capture their increasing return. They market to their existing customers at the same cost that they market to new customers. They use the same comission structure for sales to existing customers and new customers. They let their sales reps throw away existing customers, because they can't make substantial commissions from them. They decide to shoot themselves in the foot.

So while selling to new customers is done cheaply enough by 37 signals, other companies can make more money on subsequent sales by taking the actions necessary to ensure that the 90%-60% upside on sales to existing customers is actually captured, rather than wasted.

37 signals is selling software to the late market masses. Most geeks sell software to themselves, so you end up with feature bloat. When companies finally reach the late market, they would make more money if they arrived with a refactored application, so the view and controller components of their applications could be replaced with something that fits the market. Customers don't know and won't ask. Those customers are usually going to be early market customers, so asking them won't help.

posted on Sunday, November 19, 2006 at 7:03 PM by David Locke


Competition drives new innovative and simpler solutions, which is exactly what 37 signals stands for. Simple, elegant solutions. Competing with them is incredibly difficult, but adopting their strategies in your own arena is beneficial. It's worked beautifully for us.

posted on Friday, March 16, 2007 at 3:18 PM by Josh Walsh


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