In Romania we have an old saying, “Nu te îmbăta cu apă rece”. It literally means "don’t get drunk on cold water." We use it to remind our friends not to risk their marriages because of a pretty face. We also use it in business, when we're in danger of getting side-tracked by glittering numbers or overnight “great” ideas that, on second thoughts, can be more destructive than helpful.
And “nu te îmbăta cu apă rece” is also useful advice when you're running an experiment that shows a promising start, but doesn’t really help your primary goal in the long run.
The AppFolio Story
This happened to AppFolio, a SaaS company that makes life easy for property managers - enabling them to market and manage their portfolio including stats, application screening for potential tenants, resident communications, a marketplace for vacancy ads and many other features property managers find sexy.
AppFolio is one of those cool companies that constantly dedicate resources to producing new ideas and investing in what AppFolio's Ursula Shekufendeh beautifully calls “internal startups”.
Introducing their "internal startup", RentApp.
The Inflaming Idea
RentApp offered property managers the appealing option of switching rental applications from paper to online - for free! It meant saving time and paperwork for both property manager and prospective tenant. It even had an upsell to screening services, as an intermediary step to AppFolio.
RentApp was designed to attract potential customers who were not (yet) interested in AppFolio’s full product.
RentApp was built with one purpose - to attract potential customers who were not (yet) interested in AppFolio’s full product features. (To all product people, yes, they were probably aiming at a tiered approach.)
The new app was an overnight success, quickly building a strong user base and even reaching #1 on Google for the search term "free online rental applications." The only catch was that it didn’t make money.
RentApp had an impressive increase of free customers, but only 20% were actually fit for upsell.
After some digging, the guys from RentApp discovered the issue. They were attracting the wrong audience, who could never switch to the paid model - the landlords. Only 20% of their entire user base was actually qualified to screen. The other 80%, the landlords, could never become RentApp or Appfolio paying customers, because they didn’t have the necessary paperwork (business license, tax ID, office space and so on). In this business, you need to fulfill certain regulations to be able to access the screening process.
Here’s how the RentApp team looked at it: “Servicing the landlord market meant that we would be ready to divert some development, marketing, support, dollars, and mindshare away from our company’s strategic focus - the professional property management market. When you’re running experiments, losing your strategic focus can be tempting, but you have to consider the opportunity cost.”
Surprising twist, right? Get ready, because what AppFolio did next is even more surprising.
They decided to close down RentApp.
Of course, other marketer's first thought (including ours!) was, "you’re not serious, right?!?"
Rent App was a #1 ranked Google search app, with a healthy segment of the audience, highly engaged, and satisfied! Some people work an entire decade for this. AppFolio did it in two years by putting some valuable resources into the project. Surely something could be done to take advantage of RentApp in some other way?
Ursula: “On the one hand, if we did retire, we would free up resources to dedicate to higher ROI activities for property managers, we would gain company focus, and practice the discipline to trim what isn’t working, and we would also eliminate any internal communication overhead related to RentApp. Last but not least, we could funnel some of those RentApp users and introduce them to AppFolio Property Manager”
Sooner or later, AppFolio would have still ended up targeting two audiences, splitting the effort, the resources and the company focus
The fact is, many things could have been done but sooner or later, AppFolio would have still ended up targeting two audiences, split the effort, the resources and the company focus.
Keeping Focus Is More Important Than Individual Wins
It might not have seemed like the right choice at the time, and it was a bold decision to make but in business you need to stay on track. AppFolio learned (the hard way!) just how difficult this can be sometimes.
So how do you know you’re doing it right? In Ursula’s own words:
“When a strategy works, we tend to remember what was accomplished, not the possibilities that were painfully set aside.” Richard P. Rumelt
Watch Ursula’s full account of the RentApp Experiment at The Lean Startup Conference 2014: