At PSL, we kill nine out of ten ideas that we test. We haven’t talked much about these publicly before, but we wanted to share what it looks like when we make a “kill” decision. Our goal in publishing this is to help other founders think about how to do early validation the way that we do inside the studio.
The idea we tested was Xylo, which solved a problem that millions of parents in the U.S. experience: finding great teachers for music lessons. Our proposed solution was an online platform to connect these teachers with students for remote (or in-person) lessons with a great user experience. Sounds like a great idea, right? Let’s dive in!
This email was sent by Peter Denton, our validation lead, to our whole team.
——————– From: Peter Denton Date: Friday, January 10 2020 Subject: Xylo investigation To: PSL Team
I have been looking into Xylo this week and wanted to share my findings with you. To cut to the chase, I am recommending we kill this idea, but of course want to share my methodology and see if anyone wants to keep going.
I am working under the assumption this is marketplace business where we take a cut of the revenue in a booking.
If we just start at the raw demand generation around this, according to Google, over the next quarter, for the entire United States, we could get 36,000 clicks for $84,591 in marketing spend. I would look at this as the entire world of actionable intent-driven demand.
We ran tests on both Google and Facebook to get real, in-the-wild numbers, which proved to be worse than Google’s estimated models. (As I discuss later, it’s probably due to high levels of competition both paid and organic).
For Facebook tests, the best CTR was 0.68% and the CPC was high with an average CPC of $3.75. That is really expensive, likely due to the holiday increase in competition and base CPM going up to reach consumers/parents.
For Google, targeting the similar value props (affordable, convenient, tech-enabled, and exclusive) we are currently seeing just a 0.65% CTR.
We saw the following funnel, using a blend of Google’s model and our own CTR:
3% CTR (of 900,000 searches) == 27,360 visitors
and 20% conversion (for people “signing up” on the landing page) – 5,400 registrations. (Note: we saw 10%, and optimistically assumed we could double on-page conversion rate by optimizing over time, which we have seen with other companies)
and 10% of those paying == ~600 total possible customers in Q1.
We are looking at 600 customers (which would cost around $80K to acquire). If those 600 customers took 3 lessons each, at $60 an hour, and we took a 20% commission, we are looking at only $21,600 of revenue.
As for market size, the best estimates from MakeMusic (a leading resource for music instructors), put the number of music educators in the US at about 100,000. I got to a similar number (154,000) building a bottoms-up estimate by running Google searches by market and taking the sum. (Also, many people believe there is a lot of under-the-table neighborhood activity going on, so the number is likely higher, but not sure that is actually addressable for us).
First off, there are a ton of enabled small businesses competing in this space and I’m not sure there needs to be a middle man. For example, I get 4 ads from businesses in Seattle offering lessons for guitar on Google. Thus, they know how to market and get customers, they are offering free first lessons, and have availability. So I am unsure/doubt there is any real consumer problem.
TakeLessons is the largest VC-backed lessons marketplace and has raised ~20MM over 3 rounds. TakeLessons charges 40% commission and has expanded out into “all things lessons”, which is likely an indicator that music lessons were too small to keep growing in.
There is also Yousician, which is an entirely tech-based way to teach you music. Think: guitar hero for music lessons. They have about 100 employees, so it’s a sizeable tech team to keep building.
And lastly there is YouTube, where thousands of guitar instructors teach people a wide array of music-based education. While not the same as a 1:1 lesson this is completely for free for the consumer.
I do think there is a healthy demand for this – 1MM people are looking for it every quarter.
However, the supply side is mobilized and there is a TON of competition, which is going to continually drive up costs perpetually. With 70% of consumers skipping AdWords, this means very limited early traffic.
It was not clear that you could create intent outside of Google, so you would need some unique differentiator in GTM to get real market share.
Lastly, I can’t imagine that tech won’t win here with non-human based teaching. It’s affordable, convenient, and scalable to any genre, language, right from home on many platforms.
Please feel free to contest that, and I mean it. This is just my summary after a week of looking at the opportunity as if it were my company. I wouldn’t proceed with it, but would love alternate opinions.