Why Startups Should Make Marketing a Priority
December 13, 2020
Getting a new business off the ground is hard. It’s so hard that 90% of them fail in the first year and only half make it to five years. The operational demands and financial constraints that start-ups face often push marketing far down a long list of priorities for founders who are struggling to turn their business dreams into reality. When researchers Ofer Mintz and Gary Lilien interviewed founders about their marketing efforts, the usual response was, “Marketing? We don’t do any real marketing. We have much more important issues to focus on.”
But marketing shouldn’t be an afterthought. In their latest study, “The Effect of Systematic Marketing on Start-up Firm Valuation,” Mintz and Lilien show how a well-planned, well-executed marketing strategy helps early-stage B2B and late-stage B2C start-ups. Systematic marketing efforts give strong signals to investors about the quality of the start-up, which can help funnel more capital into the enterprise.
In their study, the scholars developed a conceptual model that they tested using a large dataset from Equidam, a start-up firm valuation platform. They confirmed the results when they analyzed a separate sample of 377 fledgling firms. “We hope that our results (and their robustness) provide insights for the stakeholders of the many start-ups that develop each year and encouragement for other researchers to further study the appropriate role of marketing to help start-up firms succeed,” the authors wrote in their paper.
Mintz is associate head and senior lecturer of marketing at the University of Technology Sydney (UTS) Business School in Australia. Lilien is distinguished research professor at Penn State University’s Smeal College of Business and an MSI Academic Fellow. MSI asked the scholars some questions about their study. Their answers appear below.
MSI: What inspired this research, and what questions were you trying to answer?
Ofer Mintz: Prior to my academic career, I worked for a start-up. I also have family involved with start-ups and friends involved with start-ups, and I very much enjoy teaching students who are involved with start-ups. So, start-ups have always interested me. At the same time, in most of my interactions with start-ups, the role of marketing always appeared as a mystery. In addition, I noticed the marketing literature on start-ups typically focused on atypically successful firms, such as those very few that attain an IPO or are backed by venture capitalists, but not what the vast majority of start-ups are doing. This inspired us to take a greater look at marketing’s role in start-up firms.
From this, we realized that many start-ups basically are saying that marketing may be a waste of resources, so they are not doing any marketing. For example, when we asked founders, “How much of an investment would you spend on marketing for your start-up?” a surprising typical response was an emphatic, “None!” We realized this was a bigger problem than we had initially thought, so we thought it would be important to identify (a) which, if any, start-up firms conduct systematic marketing, (b) what causes the start-up firms that conduct systematic marketing to do so, and (c) what benefits, if any, those start-up firms that conduct systematic marketing derive from that investment.
Gary Lilien: I was a visiting professor at UTS and, through casual conversation with Ofer, became interested in the issue. I have worked on marketing spending and allocation decisions throughout my academic career, but had never before thought about marketing investment decisions for start-ups.
MSI: What do you mean by systematic marketing?
Mintz: Our simplest explanation is there are start-ups that regularly conduct planned marketing, and there are start-up firms that don’t do any marketing, don’t consider doing any marketing, or only do unplanned or ad hoc marketing. The reason for this blunt categorization is our research showed clear-cut differences between start-up firms reporting that they do not conduct any marketing or do only ad hoc marketing from the firms reporting systematic marketing.
We found these differences existed across the entire marketing mix, including which types of marketing (the 4 P’s: price, product, promotion and place), whether they had any marketing employees, the extent of marketing capabilities, the level of organizational involvement, and even the desire to outsource various components of marketing. Thus, systematic marketing differentiates start-up firms that are attempting to regularly implement planned organizational processes to create, communicate and deliver value to customers in ways that benefit the organization and its stakeholders from those not conducting such activities or only conducting such activities on an ad hoc basis.
Lilien: Another way to think about it is that systematic marketing is planned and proactive, a part of the firm’s DNA and viewed as an investment, while nonsystematic marketing is done on an as-needed basis and is viewed as an expense.
MSI: You found that systematic marketing is beneficial for early-stage B2B and late-stage B2C. What accounts for this difference?
Mintz: For late-stage B2C start-ups, a constant message we heard from founders, investors and consultants … was the importance for such firms to “scale up” so that they could grow their customer base exponentially. And a main tactic start-up firms employ to scale up is to conduct regular and ongoing marketing.
Lilien: Early-stage B2B start-up firms face a different situation. They typically rely on their personal and professional connections to target and acquire a limited number of customers. Consequently, founders explained that they feared breaking the personal level of trust and commitment required between themselves and their potential customers. So, their systematic marketing relies on organizational commitment and buy-in by the top management team — consisting of their personal involvement in talking to, learning about and improving how to align their products with the needs of current and prospective customers, and market them as such.
MSI: You also determined that early-stage B2B firms reap more benefit from systematic marketing than any other start-up category, but they are the least likely to do it. Is that surprising?
Mintz: Yes and no. Of course, we were a bit surprised that these firms reap the most benefit, but are the least likely to conduct such marketing. However, we weren’t as surprised at their hesitancy to conduct such marketing. The main reason is that systematic marketing requires a great deal of effort from the founders of early-stage B2B start-ups. They have to be personally involved in marketing and must make the connections with their personal and professional networks. In addition, B2B firms, in general, think systematic marketing is not as critical to their business with its relatively small number of potential customers.
Lilien: I’ve worked with B2B firms of all sizes throughout my academic career, so I was less surprised than Ofer. I just hope our work gets that message across to the founders, directors and investors of start-ups; it has not really gotten through to top management in large B2B firms, who largely view marketing as an expense and not an investment.
MSI: Based on your findings, are there some start-ups or situations that would not benefit from systematic marketing?
Mintz: We find that conducting systematic marketing is associated with worse financial outcomes for early-stage B2C start-up firms. There are two main reasons. First, early-stage B2C start-up firms are typically conducting impersonal systematic marketing campaigns to an uninformed customer base, trying to assess the quality of an unknown brand — an uphill battle. One investor described the likelihood of success for early-stage B2C start-up firms based on conducting marketing as “very difficult to achieve unless you hit on something viral.”
Second, the quality of marketing for many early-stage B2C start-up firms is poor. Many founders view themselves as surrogate customers, reducing their understanding of their actual customers’ wants and needs. Most of these founders then conduct poorly-run marketing mix campaigns. As a consultant described in our interviews, “They often do a Facebook ad (of poor quality) and give up after seeing no results.”
MSI: How can founders put your findings into practice, especially if they have limited resources or little experience with marketing?
Mintz: With start-up firms, everything is a trade-off. With their limited financial and attentional resources, they should focus on where they can get the “most bang for their buck.” So, for early-stage B2C start-ups, if they possess greater resources or better skills at conducting marketing than the average early-stage B2C firm, they should then conduct systematic marketing. Otherwise, they should focus their marketing efforts on trying to better understand their customers through talking with potential customers and conducting market research so that they can produce products that better match these customers’ unfulfilled wants and needs.
Lilien: Let me put it more simply: Our research shows that the average B2B start-up is disinclined to invest in systematic marketing. They could do better in terms of their valuation if they do invest. In contrast, the average early B2C start-up is positively inclined to spend money on systematic marketing. Our research shows that such spending is a waste of money as it actually lowers their valuation.
MSI: What’s next for this line of research?
Mintz: We believe it is important to continue researching marketing’s role in start-up firms, as there is so much that remains unknown. For example, I have an MSI working paper with Peter Lenk and Yitong Wang on how start-up firms with a co-founder who has a marketing or sales background are more likely to obtain an investment than start-up firms with founders from other functional backgrounds. However, a significant barrier to conducting this research is in obtaining sufficient data. We are working with various industry and governmental organizations in Australia, Israel, and the U.S. to help build a database of start-up firms and their various marketing and other tactical efforts. From these databases, we hope to provide a lot more insights on marketing’s role in start-ups over the next couple years.
Lilien: Let me take a broader perspective. Most research (and business press) in marketing focuses on large, visible firms, whether they are well-established firms or the unicorns of the universe of start-ups (Uber, Airbnb and the like). Yet such large firms are a tiny fraction of all the firms out there.
As an analogy, suppose we limited our study of the universe to those stars visible to the naked eye. There are roughly 5,000 of those. Those 5,000 stars represent roughly 0.000000000000000000001% of all the known stars. And if all these 5,000 visible stars were start-ups, only three and 50 of these stars would attain an IPO or have VC funding backing, respectively. This multitude of other stars — visible or not — require different, more complex instruments to study them. We feel that developing those instruments is worthwhile, both in astronomy and in the study of marketing investment, and we hope many others will agree.