Wednesday, July 20, 2011

Are you a vitamin, a painkiller… or a drug?

It’s become commonplace to describe products as either painkillers (“need to have”) or vitamins (“nice to have”). Painkillers are products that address existing needs/pain points. Companies selling painkillers harvest customer demand; the prospects are already searching for someone to fix their problem and take their money. Vitamins on the other hand don’t really address an immediately apparent need. Instead, the vitamin company must sell a prospect on how their solution will make the prospect’s life better. The problem with vitamins is that it’s hard to get people to pay for them and once you have them as customers, hard to keep them paying. Painkillers on the other hand are sticky. Once you start using it, you’re hooked. For this reason, investors have preferred investing in painkillers over vitamins.  While the vitamin vs. painkiller dichotomy is helpful, I don’t think it properly describes an important small-but-growing group of products: the drug.

While painkillers kill existing pain, drugs kill pain consumers never knew they had.  Like vitamins, drugs must sell a prospect on how their solution will make the prospect’s life better. However, unlike vitamins, drugs become as addictive as painkillers.

I think there are three qualities that distinguish drugs from vitamins:
  • Accruing benefit. The more you use the product, the better it gets. I think this is largely because a consumer adds data to the product, either passively or actively. 
  • Mounting loss. The flipside of the accruing benefit is that the longer you stay with the product, the more you rely on the product and therefore have to lose by leaving the product. Going cold turkey is hard. 
  • Product-market fit. At the core, drugs are vitamins with product-market fit. Drugs pass Sean Ellis’s product-market fit question, “how disappointed would you feel if you could no longer use this product?” with flying colors. 
For example, for me, Evernote is a drug. Sure, it’s a productivity tool (the quintessential definition of a “vitamin”) but I’ve become an addict. Essentially, Evernote’s freemium model was like a drug dealer offering a little “taste”. Now it’s become such an ingrained part of my life; my lifetime value for Evernote is going to be very, very high. Products like Dropbox, Pivotal Tracker, and Sanebox also resemble drugs to me, and I think Bessemer portfolio company BillGuard might have the potential to become one.

Because drugs can't harvest demand in the same way painkillers can, but also because it becomes harder and harder to let go of a drug the longer you use it, drug-like products are perfect for a usage-based freemium model. The barrier to getting a customer hooked on the drug goes down significantly (though not completely) when the initial "taste" is free.  Vitamin-like products, meanwhile, need to extract as much value as possible while the customer is active because their churn rate will be much higher.

(hat tip to greg duffy at dropcam for inspiring this post.)

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