Idea to Startup: The Four Questions that Kill Bad Differentiators

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This Episode

Most founders don't know what their differentiator is. That's a problem.

Today, we walk through two paths to help you find a differentiator strong enough to anchor a business. We also help you root out bad differentiators - the ones that'll just waste your time. There's also a story about a Rabbi's wisdom, a founder making decaf coffee, and a poison ivy company I'm obsessed with.

Path 1: Let your most excited customers tell you what you're actually good at. Ask them how they recommend you to friends - their language reveals what they really value, not what you think is impressive about your product.

Path 2: Four brutal questions that separate real differentiators from founder fantasies:

• What shouldn't be your differentiator?

• Who's disproportionately impacted by this problem?

• What specific moment in their life are you changing?

• What would someone pay you 3x more for?

Differentiators are both critical and rare. This approach - hopefully - helps you find one.

Pod References

• Tacklebox - start your company before you quit your job

• How to Find Your Wedge

• How to Use Landing Page Tests 

00:30 Differentiator Intro
01:45 Rabbi Joke
05:15 Smooth Jazz
05:45 How to Find Your Differentiator
06:46 Path 1: Letting a Customer Tell You
11:41 Path 2: Four Questions to Pick Your Differentiator
19:32 How to Test Differentiators
21:00 The Reality of Differentiators (Downer)
22:16 The End - Taking Yourself Seriously

Transcript - feel free to read like a long-form article

Today, we’re going to talk about the all important differentiator. If you aren’t able to make it clear to your potential customers in, like, 6 words that you are meaningfully, dramatically different from however they’re solving the problem you’ve chosen to help them solve now, your business will end up like Ruby when she was as a puppy - a bunch of arms and legs flailing wildly and never able to get them all moving the same direction at the same time.

This might sound both intimidating and overblown, but it’s only the first one. Why you’re different is the whole point you build a business, and if customers don’t care about this differentiator or you can’t message it concisely, your business shouldn’t exist.

Differentiators are really interesting at the earliest stages. Before you’ve got a product is the best time to test out the viability of potential differentiators, and, probably most importantly, kill all the phantom differentiators that don’t actually matter to your customer.

A good differentiator will drive all of your customer acquisition. It’ll be easy to describe and obviously different. Those two characteristics will make it travel.

Whenever I talk about differentiators I think about a joke I heard a few years ago, and it’s where we’ll start today.

An old, beloved rabbi is on his deathbed.

All of his students are circled around him, ready to pay their respects and hear his last piece of wisdom - the last thing this wonderfully enlightened man has chosen to say on his way out.

They huddle close as he musters up the last of his energy to speak. Finally, he whispers - “Life… is a river,” and he closes his eyes.

The student closest to the Rabbi relays this profound message to the student next to him, and down the line it goes - “the Rabbi said life is a river, the rabbi said life is a river, the rabbi said life is a river,” until a young student in the back hears it and asks the question everyone else was thinking but too afraid to bring up - “but, what’s that even mean? Life is a river?” The question slowly makes it’s way back up the line to the front, where one of the Rabbi’s favorite students takes a deep breath and asks - “Rabbi, I’m so sorry, but.. what do you mean, life is a river?”

The Rabbi struggles to open his eyes one last time and looks at the student. Then he shrugs, turns up his palms and says “Ok, so it’s not a river.”

I bring up this joke because when I ask founders what their differentiator is, whether they’ve got a product in the market or just an idea, they often throw a bunch of pasta against the wall.

The other day I asked a founder starting a company that makes freeze dried pods of decaf coffee for people who want a coffee in the afternoon without the inevitable 4am doom scroll session that usually follows about her differentiator, and she said:

“Oh, definitely that our coffee is freeze dried. This allows us to brew super high quality coffee and keep it fresh. Way better than a Keurig. Well, actually, our key differentiator is our proprietary method for making the decaf - we brew caffeinated beans and then use co2 extraction to get the caffeine out before we freeze dry it, so it tastes like a regular, pour over coffee. There’s no way to get this quality decaf at home. It’s as good as regular coffee at a nice shop. A barista cup champion tried it and loved it. So it’s probably that.

But we also ship overnight and we offer subscriptions. Wait, who do you want the differentiator for? The person drinking it? Because we’re also really easy for companies to order, like, instead of getting Keurig for their company, we’re cheaper. And we built a tool for re-ordering…”

That’s when I cut her off. There wasn’t any room on the wall for any more pasta and I was dreading the inevitable AI component.

The word differentiator, like the word priority, has become plural. For you to grow, the differentiator has to be singular. And you’ve got to have conviction and a strategy behind it.

That’s why I think of the Rabbi joke. Founders say their differentiator is X, but when a customer or VC or whoever pushes back they’re ready to throw up their palms and change. When I was in venture, we regularly had founders asking us what we thought their differentiator should be. Founders with products and teams and lots of revenue. That… is not a great way to raise money, or build a business. But it just shows how hard this is.

So, if you feel that way, that’s fine. You don’t need to show up to your startup idea with a ready-to-go differentiator. A lot of times it comes after you’ve worked with customers a bit.

But all of that early work should be in search of it. A bunch of tests to see which value prop for which customer described properly will drive disproportionate conversion and growth.

So, today, we’ll talk through the process of picking and testing a differentiator.

We’ve got a framework with two paths and we’ll help our decaf coffee friend along the way. We’ll also introduce a company I found recently that I’m head over heels in love with.

It feels a bit soon for jazz, but the rest of the episode kind of flows well without a break, so, let’s do it. We’ll help you find a differentiator..after…. a little smooth jazz.

Part 2: How to Find Your Differentiator

My grandfather used to say that to be a difference, a difference has to make a difference. And that’s usually where most companies screw up. They pick something that doesn’t actually matter to the customer and lean into it.

I’ve said this a bunch on the pod over the years, but there’s only one reason your business will fail - customer indifference. Every other quote reason - lack of funding, team, competition, whatever - is just a symptom of that core problem. Your customer doesn’t care.

So, the path to finding your differentiator is really the path to figuring out something customers care enough about to overpay for.

The early you can find this out the better.

There are two paths to this Differentiator Enlightenment, and they each work for founders at the idea stage or founders with products and customers.

Here’s the first.

—

Path 1: Letting a Customer Tell You

I literally just told you not to outsource your differentiator decision, but there’s one very important exception - if you’ve already got excited customers.

If you’ve got a product out, this means your best customers. If you’re at the idea stage, this means the potential customers you’ve spoken with who seemed most excited.

You want to speak with the people who saw you throw a bunch of pasta at the wall, then sifted through it to pick out what really mattered to them and assigned that value prop to your company.

There’s a real chance the value they assigned to you is not the value you want to offer, which is something we want to know, too.

Let’s jump back in with our decaf coffee friend to see what this looks like.

After her 3 minute speech on her differentiator, I asked her if she had any rabid early customers that might help us clarify what customers see as her core value. She’d been selling her product for about six months at that point and had some traction.

So, we popped into her Stripe account and pulled out the top 20 customers and emailed them.

In exchange for a 15% off coupon, we asked if they’d recommended the coffee to a friend in the past few weeks. And, if so, exactly what they’d said in that recommendation.

I checked back in after a few days, and only 4 customers had responded. This is fine - response rates for these sorts of things usually hover around 10%. A customer named Kevin had the most helpful response.

He said,

“I’m not sure I understand the question, but I just tell people that I’m a total coffee snob, and that I can’t drink regular coffee at 3pm because it’ll keep me up, and I’ve never been able to do decaf because it’s terrible, but your decaf tastes as good as my regular coffee so I drink it. I’ve recommended it to a few people in the office who see me drinking coffee in the afternoon and say something like ‘wish I could have a coffee but it’ll keep me up,’ then I tell them it’s really tasty decaf. Hope this helps!”

This is the type of cryptic language you tend to get from customers, but if you dig in a bit, the differentiator’s in there.

Our founder saw it immediately. “Yes! That’s our value. you can drink it at 3pm without worrying about being up all night and it tastes like good, pour-over coffee. Delicious coffee at 3pm that won’t keep you up.”

And this is what entrepreneurs miss when they’re thinking about a differentiator. If I go back to the answer this founder gave earlier about what her differentiator was, she started with the fact that the coffee is freeze dried and that allows it to stay super fresh, way fresher than a keurig. She then mentioned the proprietary method of removing the caffeine as the key differentiator. Then she went on to subscriptions and taste tests and all the rest. Her website mimicked this - it mentioned the proprietary process in the H1.

All of us entrepreneurs think the differentiator is about us. Whatever made it really hard for us to build the product or whatever we think is really cool about the product must be the thing that makes this company valuable. But customers don’t care.

That’s why every startup that leads with “we’re an AI driven” whatever is just wasting their customer’s precious attention. No one cares how your product works, they care about how it impacts a specific moment in their life.

And that’s where your differentiator lives. In that moment. Where using what you’ve built is far better than not using it.

The differentiator, to Kevin, is that when he wants a delicious coffee at 3pm each day he can now have one. He doesn’t care how we solve for that moment, just that we do.

When she responded and asked Kevin if he ever mentioned it needing to stay in the freezer or be made with hot water when talking to friends, something she was sure would matter, he said it never really comes up. Quote, “the kitchen in our office has a big freezer and a hot water dispenser for people who drink tea, so it’s not really an issue.”

Well, alright.

If you don’t have a product yet but have a landing page with people on a waiting list or a excel doc with people you’ve interviewed, this works for you, too.

Email people who have signed up or were excited about your idea when you interviewed them and ask who they’d recommend what you’re building to and what they’d say. It’s important to not give any more context. This lets you see what they think you’re building and what problem it actually solves for them.

A real type two fun exercise is to find potential customers in the wild, show them your landing page on your phone, then close out of it and then ask them to pitch your business to whoever they’d think would need it.

The process for picking your differentiator will be customer driven, so Path 1 is a good first step. Unfortunately, lots of times Path 1 gives you a bunch of mush. Customers won’t really have an answer to why you’re different because you haven’t given them something that’s actually, meaningfully different. That’s ok.

That’s where Path 2 comes in. Finding something that matters.

—

Path 2: Four Questions to Pick Your Differentiator

The best differentiators are strategic: They use your unfair advantage in a way that makes it difficult for someone else to compete with you. Leaning into something competitors overlook or fundamentally can’t do, then organizing your business around it.

And this is a good time to introduce one of my favorite companies I’ve stumbled across recently.

As I’ve mentioned in the pod, I now live out in the burbs. Not just the burbs - the Connecticut burbs. The final boss of all Suburbs. Our state flag is a minivan with two car seats a golden retriever and those dumb stickers on the back with the stick figures of all the family members. No offense if you have that on your car. I guess it’s fine. I just miss new york city and I’m lashing out.

Anyway, since we live in a town that only has one quote asian restaurant and it has sushi, pad thai, general tsos and a burger on the menu - ok, I’m done, it’s actually very pleasant here - we also have a lawn and that lawn has poison ivy. This is a problem because the little guy has decided his life calling is wilderness explorer. So, we needed to get it removed.

Our options for that are to pull it out ourselves, which seems ineffective and a near guarantee for the whole house to get poison ivy, to have someone dig it out by the root, which seems both ineffective and wildly expensive, or to spray round up on it which is a nonstarter because of the toxicity. And then someone recommended George.

George runs a business that has a proprietary, non-toxic, all natural spray that kills poison ivy with a two-year guarantee. On the site is this exact quote:

Our founder’s background is uniquely suited to this line of work, combining extensive training in contaminated environments, nuclear biochemical warfare, and landscaping. This expertise allows us to operate with the highest level of safety and precision, ensuring that poison ivy is thoroughly eradicated without harming your property or the environment.

Hell of a venn diagram.

The site goes into detail about who his customer is - if you don’t want poison ivy but you are unwilling to spray anything toxic on your property. It’s far more expensive than the roundup route, but less expensive than pulling from the root.

He came, took care of our Poison Ivy, and told me he’s growing so fast he’s starting a franchise model.

I asked how he came up with the idea - he’d been in the military previously and had another business in a totally different world - and he said he’d worked for a long time in contaminated environments and understood them well. So, he looked across dozens of different types of contaminated environments, eventually finding the poison ivy application. He did some outbound tests and saw the serious positive customer reaction to a safe spray. So, he studied poison ivy and, over the course of a year or two, developed the safe, effective formula.

Hell yeah.

Let’s keep that in mind as we run through the formula for finding your differentiator.

There are four questions that’ll help you narrow in on some ideas to test.

The first question is probably the most useful:

1. What definitely shouldn’t be your differentiator?

This is a technique called inversion. It became famous, at least to me, through Warren Buffett and Charlie Munger, who apparently used it constantly to make all sorts of decisions. Here’s Buffett:

“If my job was to pick a group of 10 stocks in the Dow Jones average that would outperform the average itself, I would probably not start by trying to pick the 10 best. Instead, I would try to pick the 10 or 15 worst performers and take them out of the sample, and work with the residual. It’s an inversion process…Start out with failure, and then engineer its removal.'”

If you’re starting that Poison Ivy service, what doesn’t need to be your differentiator?

We’ll start with customer service. I know this because George, while he did a great job, was kinda tough to work with. He pushed us out a few times and wasn’t super responsive. And you know what? I couldn’t care any less. Because my alternatives to safe spray were so bad I was happy to wait.

A good test for this is to think about overpaying.

What, if you put it on the website as your H1, could you say “we charge more because of X” and your customer will be happy to pay it?

Your margin comes from your differentiator.

So, what are the parts of your business that couldn’t drive margin on their own?

Next,

1. Who is disproportionately impacted by the problem?

Ineffective differentiators are usually just a customer segmentation problem. If you’re trying to service 20 different types of customers, you obviously won’t be able to pick out one thing that’s transformational to each.

So, out of all the customers you’ve spoken with - or all the customers you have - who are disproportionately impacted by the problem?

This is the old Delta 4 framework. What’s the current solution score for each customer - you’ll only be able to build a successful business if you can create a delta 4 improvement in their lives. So, if the current solution is a 7 out of 10, it isn’t great but it doesn’t create a ton of pain or anxiety, you don’t have space to make the solution a delta 4. So, you’re looking for people who have a 3 or 4 out of ten solution now.

We’re looking for people with Hole or Teleporter problems.

Hole problems - where a customer is… literally in a hole and they have no way to get out, or teleporter problems, where a customers has to do something every day or week that they absolutely hate and they’d pay someone to take it off the plate. What we call the Hassle Premium.

For the poison ivy guy, we were in a hole. We simply weren’t going to use toxic spray because of Ruby and the kids. We were considering digging the poison ivy out, but it was crazy expensive. The other option was to just wait until our 2.5 year old got poison ivy or ruby brought it in and gave it to the baby. Our current solutions were probably a 3/10.

Once you pick one super tight customer segment that has specific, unique variables and constraints, a differentiator will be easier to find.

Number 3

1. What moment in your customer’s life are you fundamentally changing?

The moment your customer faces the problem is the moment you need to build your differentiator for. It needs to fit into that process seamlessly.

You want your business to look 95% familiar to your customer and 5% different. That 5% is your differentiator, the reason you exist. It’s where your margin comes from. But it can’t disrupt the customer’s current process too much.

Back to our coffee lady.

Each day, Kevin wanders into the kitchen at 3pm to find some replacement for the coffee craving they’re having. We don’t want Kevin to have to leave the office or make something complicated or remember to bring a snack from home. We want to meet him at that moment, then give him a new option. We want to live entirely in the current process. It’s a tough needle to thread.

The more specific you get on your customer, the easier this gets. The more constraints your customer has, the easier it’ll be for you to stand out. This is where the Poison Ivy guy shines - he knows our constraints around toxicity, and leans into that moment where we’re searching for non-toxic options. It’s peppered all over his website, he shows up on google for that search term, etc. He owns that moment.

The deeper you understand the moment, the better chance you’ll have.

And, finally,

1. What would have to be true for a customer to pay you 3x more for this?

A brutal question that trips most founders up.

What would someone pay you 3x more than the alternatives for?

For Poison Ivy Guy, I did pay more than 3x what I would have for the toxic spray. But would Kevin pay $9 for a decaf coffee at 3pm? Maybe?

Again, this comes back to customer segmentation. The way your business will grow is if you make your very first customers wildly successful. They should be willing to pay multiples more than other options because the other options simply aren’t tenable.

As you grow, you won’t be able to get away with this pricing. But your first customers should be handpicked - they should feel the pain disproportionately and the problem should be so intense and the solutions so limited that they pay it.

—

Part 3: How to test

The natural next question is… how do I test these?

We’ve had a number of episodes on wedges and intent tests and one person landing pages - I’ll link to some in the show notes. These will give you a testing blueprint.

But the big idea here is focus. To isolate the differentiator as clearly as you can, to pick specific customers, and to have a high bar on the call to action.

Here’s an example.

If I were testing the coffee, I’d pick Kevin. I’d message directly to him and to the differentiator with something like:

H1: A 3PM Decaf Coffee for Coffee Snobs

H2: Pour over quality coffee that won’t keep you up at night

Then, maybe a bit more on how it tastes, testimonials, and you can even talk about the process below. But the differentiator is pour over quality decaf coffee you can drink at 3.

The CTA would be to order a subscription - so, one month subscription, one cup every weekday, 20 pods for $180. 9 bucks a cup.

Then, figure out where people like Kevin hang out, digitally and physically, and get it there.

The questions we’re testing are, is this actually that important to Kevin? Are there more people like Kevin? And, can we find them?

The key here is that it’s an iterative process - you’ll want to test a number of differentiators to a number of customers. Because, as we’ll learn in the next section, real differentiators are…rare.

—

Part 4: The Reality of Differentiators - The Downer Part of the Pod

Most of the tactics I just gave you are really good for a thought exercise, but less good practically. Because most of you won’t have, at this moment, a differentiator strong enough to support a business.

That might seem like a bummer. But, it’s really not. It’s just reality.

There aren’t that many differentiators out there that can support big businesses. That’s why they’re so valuable.

So, where does that leave you?

In the customer segmentation game. The tighter you get on customer, the more likely it’ll be you can find a differentiator. Now, that differentiator may not scale to a huge company, but that’s where you have to make the decision - what kind of company do you want to build?

If it’s only venture scale, you’ll be on a seriously tough quest.

If it’s a profitable business with you and a handful of employees, or, even, just you? Much better odds.

Keep ripping through the questions and running tests and getting tighter on customer and their constraints and how they impact the moment you’re targeting and you’ll get there. Probably. Hopefully.

Not all entrepreneurs do, but that’s the game you’re playing.

—

Part 5: The End - Taking Yourself Seriously

The differentiator questions, and the process in general, do something really important. They force you to take yourself seriously.

There are tons of entrepreneurs going after ideas that don’t matter to their customer. It’s easy to go through the motions and listen to podcasts like this and make landing pages and even raise money from unsophisticated investors or friends and family or angels or whoever and, kind of, pretend.

But you’re worth more than that. Your time is worth more than that. You should spend it searching for a differentiator that really matters, that makes a dent in people’s lives. That’ll, one, give you a chance to be successful, but two take your limited time here seriously.

Run tests to ensure your differentiator matters before you sink too much time and effort into a business.

There’s a real chance that the business you’re working on shouldn’t exist. Or, that you don’t have the type of domain experience the poison ivy founder had to build a real differentiator. So, move on, or find someone with the domain experience. Take it seriously.

Because when you do find a differentiator, it’ll change your life.

And speaking of taking things seriously, I thought up a bunch of pun names for the poison ivy company but landed on Rash Decision. It narrowly beat out Scratch the Itch and Jurassic Bark. Not my best. Not my worst.