Marketing in crypto, the 10th circle of hell.
Why web3 is an all or nothing game
Most startups don’t fail because they run out of cash. Most startups don’t fail because of difficult team dynamics (although this is common). Most startups fail because they fail to find product-market fit. They either don’t produce a product that the market needs or they don’t find the customer that needs their product.
In crypto, I’m seeing that the process of finding customers who want your product is 10x harder than it is in Web2. People will tell you otherwise, that the ownership incentives baked into crypto mean you always have an army of evangelists, doing the organic marketing of your product, this belief, for the most part, is false.
In this article, we’ll explore the unique challenges that Web3 startups face vs their Web2 cousins. We’ll highlight the differences in marketing approaches and discuss some strategies that may help crypto projects suceed.
Web2 Marketing, a Primer
In Web2, you broadly have two branches of marketing: organic and paid. Organic marketing is a form of marketing that drives users to your site without surfacing ads. A great article or video that goes viral, baked in product virality (Dropbox) or word of mouth (great restaurants) are examples of organic marketing.
Some people mistakenly think that organic marketing is free, which is not the case. Organic marketing costs cash just like all other forms of marketing, it’s just that this cash is not given to a third party ad platform. Viral videos cost time and money to produce, clever viral products cost engineering and design resources and word of mouth is generally a by-product of excellent customer service and a great product, both things that cost capital to do right.
Paid marketing is much simpler to define. If you are paying a third-party service such as Facebook or Google to run ads for your product, it’s coming from your paid marketing budget.
An Aside on Product-Market Fit
Product market fit is notoriously difficult to quantify. Therefore it’s natural that different people have varying definitions.
Those with a data-led mentality will try and quantify product-market fit as being when over 40% of your customers would answer ‘very disappointed to the question ‘how disappointed would you be if you could no longer use this product’. Others would classify it as more of an inflexion point, where instead of focusing on how to acquire customers, you have more customers than you can satisfy. Imagine demand for your service rolling in, and you struggling to keep up with the demand. Oh wouldn’t that be nice.
Product-market fit is notoriously difficult to achieve, to get there will either require a genius insight, marketing, or a long bloody slog iterating your value prop and waiting for the right upward trend to come along that you can piggyback off.
Because product-market fit takes so long to get to (and usually costs significant resources) companies need to find a way to survive before reaching it. Thankfully there is a way to survive, a way to even make a reasonable business without achieving product-market fit, a goal many companies may be better aimng towards. This goal is product-channel fit
Product-channel Fit
Product-market fit is the elusive treasure, the search for the fountain of youth. Product-channel fit is a little easier to achieve, more akin to mining for gold. Sure you’ll need some equipment, you’ll need a permit and a good team, but it’s definitely do-able if you follow a set process and keep getting better every week.
Product:Channel fit isn’t predicated on achieving viral growth or reaching an inflexion point for exponential network effects to kick in; it’s based on something much simpler: finding a marketing channel where you can bring in more revenue than you spend.
For most brands in Web2, finding product-channel fit is comparatively simple, provided you have a decent product and know where your audience lives. If you have a digital course on Finance, you just need to create a funnel that converts, position an ad on a platform like Facebook, and target people who are interested in your product. You then just need to make sure that what you are spending on ads is less than what you are bringing in. There are two ways to measure this, one is to use Cost of Acquisition versus Lifetime Value (CAC vs LTV). Ideally, you want your CAC to be 1/5th of the Lifetime Value your customer brings in. This means you will spend around 20% of your budget on marketing, which is pretty sensible.
If your brand is less established and you don’t yet know what your LTV is, you can use a much simpler rule: make sure the profit that the average customer brings in on their first purchase is higher than the cost of the ad that bought them there.
Once you’ve found the channel that fits this criteria, it’s just a case of optimising it and exploiting it until it doesn’t work anymore before finding a new channel.
I’m not trying to trivialise getting product: channel fit — the point I’m trying to make is that it can be solved through iterative thinking and that it can get a lot of businesses to a good scale. It is also a great way to stay afloat while a startup is iterating towards product-market fit, and the effortless flywheel kicks in.
As we’ll explore later, there’s a case to be made that currently in crypto, product-channel fit is not possible—the only way firms can scale their business (at least in a normal market) is through the much more elusive product-market fit.
Web3 — is All Growth Organic?
There is the idea in Web3 that paid marketing is redundant. Because everyone is bought into and owns the protocol, they will ‘shill’ their own bags. Effectively you weaponise your ‘nodes’, bringing on more nodes to create a free marketing engine.
Under scrutiny though, this argument quickly breaks down. Firstly, the point of reference for this argument is a bull market. Sure, when you have speculators coming into a protocol, whether that’s through staking Ethereum or yield farming APY in the Anchor protocol, they are incentivised to pump their own bags, by showing their returns to friends etc. and getting them in on the action. FOMO is one of the easiest ways to incentivise new users onto your platform. When we are in a bear market, however, and the returns are far from guaranteed, when there is fear, uncertainty and doubt, it’s far more tricky to make the case that you should join a protocol for immediate financial upside.
An Aside on Speculative Investors v End Users
This is where we must clarify the two types of customer crypto projects appeal to — the speculative investor and the end-user. Both customers achieve the same end goal of purchasing a project's tokens, but one is not sustainable. If you are a crypto project bringing in customers purely for an expected increase in the price of the token, you are doomed to fail, you are a Ponzi scheme
At heart, most crypto companies are decentralised versions of companies; companies exist to create value. Ponzi schemes do not create value.
As a crypto project, if you want sustainability, you must target customers who will use your protocol. For games, this means putting hours in and playing the game, for social media platforms — posting and commenting, for DeFi protocols, they must be using the core functionality of the platform (executing swaps, investing in projects etc.) End users can always pull in speculative investors, but the reverse is not true. Appealing to speculators can be useful at the start of a project when you are bootstrapping capital. But this is not a long-term strategy for success. Eventually, it will become clear that the emperor has no clothes, your projects’ lack of utility and usage will be realised, and the speculators will exit as quickly as they entered.
The problem most crypto companies face? There is no proven way to find, target, and convert end users. This makes finding product-channel fit for end-users nearly impossible. Companies make the mistake of thinking they are attracting end-users because people are buying their tokens. I’m personally invested in many P2E projects I have no intention of playing, I’m purely speculating they will do well.
Unless crypto companies can solve this problem, unless they can find the end-users of their platform, create an engine that activates them onto their platform, an engine that is repeatable, an engine where $x can be put in to put out $y in value, they will struggle to scale.
Paid Marketing in Web3
Web3 companies face two fundamental issues when it comes to paid marketing, access and attribution.
The access problem is perhaps easiest to unpack. Most web3 companies simply can’t advertise on traditional platforms. They can’t reach the people who would be interested in their product. Facebook and Google both have strict policies when it comes to crypto projects. At Lithium, we’ve found it impossible to run ads on these platforms. If you can’t easily reach your audience if you can’t gain some eyeballs at the places where they hang out, how are you going to convert them?
Imagine a world in which either Facebook started allowing crypto ads, or a new (hopefully web3) platform came along that had billions of eyeballs on it a day and had no beef with web3. Even in this case, crypto companies would still face massive issues in creating product-channel fit, the reason — is attribution.
Attribution is what facilitates the scientific method of creating product-channel fit. Without knowing which users saw your ads, and which ended up purchasing your product, it’s impossible to gauge the efficacy of your conversion funnel, its impossible to A/B test different variations and therefore incredibly difficult to make sure you are spending less money on ads than you are making through revenue.
The problem with web3 is that it is inherently anon. In web2 you have tracking identifiers, that have admittedly become less effective since Apple made x-device tracking impossible. These identifiers mean you can attribute a user seeing your ad to a sale. In web3 no such thing exists, this is no way (yet) for you to assign user on Facebook someone purchasing your tokens through a DEX, this is not a bug, but a feature.
This problem is compounded by the fact that many projects have multiple revenue sources. The LTV of a customer on Lithium for example is not just the % of shares he buys and how that affects the development wallet, but also how much they invest in raises. The calculation for LTV is more involved, but this is a solvable problem, providing again you have the attribution from the ads themselves.
A low tech way to get around the attribution is to use referral codes. You see this in non-digital advertising methods such as putting a promo code on a tube add, these codes exist to solve the attribution problem. But this is far from perfect, some people abuse the code (share online) or just forget to use the code.
Alternative to paid marketing channels
Crypto companies have a few alternatives to traditional paid marketing channels.
Brand marketing
Because of the lack of paid marketing options with direct attribution, most crypto companies resort to brand advertising to spend. Twitter is a good example of this. Twitter's main ad strategy is brand advertising — raising awareness of your project. Some companies will advertise this way. Lithium has tried this kind of brand advertising but generally found it to be quite ineffective.
Giveaways and collaborations are other common examples of crypto brands attempting to spend marketing wallet coffers to acquire users. From our point of view, while these techniques can raise awareness, their efficacy in driving users is still questionable. Often giveaways appeal to the lowest common denominator, or simply bots. Sure they help with exposure, but whether they lead to real users, is a separate topic.
Influencer marketing
Influencer marketing is one way of marketing that can drive traffic, but only if used correctly, which from our experience, rarely is.
Look at channels of Alex Becker, Sheldon Evans, JRNY crypto etc. If one of these guys picked up your project, you would 100% see a huge pump. BUT THIS IS NOT SUSTAINABLE. These influencers are talking about the future of your project, their audience are speculators who are fickle and purely want to see returns. As we mentioned before, you need to differentiate this from users who wants the utility of your project.
A better approach to influencer marketing would be to use influencers whose audience will use your product, gaming companies target gaming streamers by getting them to play your game showcase it and drive users that way. For certain protocols this is much harder, if you are an infrastructure /tooling protocol for example, your sales process looks much more like b2b than b2c, you be better off skipping influencer marketing in this case.
Bake in virality
The hardest kind of marketing to do is to bake virality into the product. There’s a free and paid variation of this approach. An example of ‘free’ virality (technically nothing is free, you still have the engineering costs to build the product) is Facebook. Facebook grew exponentially because the product was inherently viral, the more people that used it, the more valuable the network got, driving more users.
Paid examples of virality are typically referral schemes, arguably this isn’t ‘baked’ into the product, but having an effortless referral scheme that minimises friction for the adoption of new users can supercharge growth. Uber's ‘get $10 off if you refer a friend is a good example of a referral scheme that made it completely effortless to get a friend to adopt the platform while you saw some upside.
Again web3 complicates things, referral schemes that involve buying tokens are often open to abuse without enforcing KYC on customers. Having KYC as a mandatory step to either sign up or give out a referral code is a source of friction that would likely impact the conversion rate. Marketers in web3 also need to be careful about what they reward in referral schemes. As we discussed earlier, incentivising people to just buy your token is probably not enough, you want to create a path that encourages users to actually participate in your protocol.
The issue with all the above approaches, brand marketing, influencer marketing and the baking in of virality is that, except perhaps referral schemes, they are not repeatable, predictable processes. In order to forecast any kind of growth in your startup, you need to understand the fundamental marketing engine, how can you turn cash reserves into revenue? I have yet to speak to a crypto company that has this basic fundamental of business figured out. Until as crypto companies we can figure out repeatable ways to bring people into our protocols, all those that don’t find product-market fit will fail. Product channel fit, as a way for smaller businesses to grow and mature, and provide enough runway to find product-market fit, will no longer be an option and many potentially great products will fail.
This whole article may come across as bit of a rant. Web3 has limited options, it’s product-market fit, it’s viral growth and infinite flywheels, or nothing. I’m optimistic though, there are no fundamental laws saying that unlocking product channel fit is impossible in crypto. It’s going to require a combination of the right tooling, mainly wallet attribution tools, and web3 friendly advertising platforms, (meta where you at). If crypto marketers get these two things, the prospects for early crypto become orders of magnitude better.
