Product Design: The Traction Treadmill | by Dhananjay Garg | Sep, 2021

Scaling a product with a dubious product-market fit

  • E-commerce startup XXX raises $2.5 million funding.
  • Hong Kong’s XXX Raises $28 Million in New Round of Funding.
  • XXX Chain Closes $25 Million in Series A Funding.
  • XXX Chain Closes $25 Million in Series A Funding.
  • XXX Investments raises $7 million in maiden institutional funding.
  • XXX raises $10.8 million in Series-A funding led by YYY.
  • EV infra startup XXX bags $4 million in funding.
  • Malaysia’s XXX reaches $1.3 Billion Valuation In Funding Round From YYY And Others.

Today professional networks like LinkedIn and tech news apps are filled with fascinating stories like this. Today more than ever, startup founders can raise big bucks from renowned investors from China and the US. But some of these companies won’t be able to survive the treadmill war. According to Investopedia, in 2019, the failure rate of startups was around 90%. The research concludes 21.5% of startups fail in the first year, 30% in the second year, 50% in the fifth year, and 70% in their 10th year.

One of the reasons companies are dying is that many of these companies had started building their product with a dubious product-market fit. With millions of $$ of funding in the picture, they are dangerously trying to scale their products via ad revenue. This phenomenon is called the traction treadmill.

Let’s dive into why the traction treadmill is killing thousands of companies every year. This has nothing to do with poor design, product management, or a specific tech domain in general.

It all starts with an OK product idea. A startup founder decides that they should build a product — a good but not a great product. This product might begin with a few sign-ups here and there, and some were churning out of users for various reasons.

The early signs of this product show data with a leaky bucket of users. Meaning more user start leaving the app as compared to the rate at which they join-in.

The product founder bootstraps the startup and hires a few good folks in the product team — especially in the growth team. Thinking they can iterate on the product flows and increase the overall user count.

The product, growth, and marketing teams do what they do best. Being too close to the product, they become optimistic about its development and start adding more users to the funnel instead of increasing the product’s stickiness. Viola! It works. You can add more users to the horn and achieve spiky numbers in your analytics tracking tool with some money in the bank. Can accomplish this primarily by spending on ad revenue aggressively. Later, once the user is in the system, the product teams offer various cashback schemes to perform trivial low-skilled tasks.

If the app’s churn is at 50%, then the marketing teams need to double or triple the ad revenue. Once the teams see the model working, the formula is repeated again and again.

While the marketing, growth, and product teams are directed to find more ways to add users to the app, the leaky bucket continues to help users churn out of the app. So as the users move out, the founders decide to spend more money through’ ads and rewards schemes to attract more users to the funnel and make users who are already in the system stay back for longer and continue enjoying the free benefits. At the same time, the burn rate of the company goes up.

Although this time, the company ends up burning 2x of the money they spent the last time. Because the company has to make up for the churned-off users and spend the other half acquiring & retaining almost a similar percentage of users.

The company raises a big round of funding from one or more investors. Userbase keeps growing and churning off from the other side of the funnel. This time, the execs think that an extensive TV campaign will help them to stabilize a substantial market holding number after the initial growth spike dies.

Infinity traction treadmill

This right here is the trickiest place for most flashy startups. With the TVC or print campaign, you can regain the number of lost users again and again. But the more numbers of users lost in the conversion will never back to the product because they have already experienced it and couldn’t find value in it. So the company/product ends up in a hamster wheel situation or a traction treadmill.

Even though the company increases the budget and hires actors and actresses to lure users, the treadmill never ceases to disappear. Because the base layer of the product was not carefully designed to solve the core user pain point.

It is easy to iterate on a product when the product and the team behind it are small. You can move swiftly, solve problems in a fortnight, and still gain a sizeable ground while slowly increasing the product’s stickiness.

With team and product scale, it becomes harder for the team to iterate across all the major product funnels to impact the user and business positively. Hence the stickiness of the product suffers as it becomes too slow and complex to execute anything on top of the legacy code/product/methods.

As the product traction dies off in the next few months or even years, metric and initial excitement flatten off. With this, eventually, the morale of fellow team members becomes a problem that is hard to solve. This leads to old and new employees leaving the company. Naturally, the founders become sour of the folks who decide to go, but the trend continues.

Usually, at the end of this, either the company dies off completely after burning the investor’s money to the ground, or they kill/sell the faulty product to a near competitor and rise all over again from the ashes. Either way, the wrong development and design win the battle. A product built without a proper product-market fit is often unfixable at scale.

I hope this write up helped you to understand how an unknown percentage of the 90% startups today die (eventually).

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