Building a business is really hard. It’s not just about having a great idea, finding the right team and financial resources, building partnerships and optimising your operations and financial forecasting. A lot of the success can be attributed to the timing of investment into growth.To grow or not to grow, that is the question Click To Tweet
I find that entrepreneurs will generally fall into 1 of 2 categories. Those that try to scale too early, or those that have the opportunity to push for scale but fail to loosen the purse strings.
I am involved with with growth marketing and coaching entrepreneurs on how to think about scale. Although I am as massive advocate for reducing burn wherever possible, once you have found a repeatable sales model – invest like hell and hold on. David Skok describes 3 phases of a startups’ growth cycle. They are:
- Product Market Fit
This stage is all about building a solution to a problem that actually exists. I would say that most startups never really get out of this stage. As an entrepreneur you can get hooked on an idea to solve a problem that doesn’t really exist in reality, thus inevitably falling. This is a tough time for business, as it’s often pre-revenue, full of knock-backs and the business has to be prepared for pivots.
- Finding repeatable, scalable growth channels
Once you have found Product Market Fit, finding ‘Channel Product Fit’ is equally challenging. You need to find easily repeatable actions that drive leads, and a sales process that is equally scalable. The sales process for a business might include a great onboarding process if it’s a subscription business, or it might be a human sales force if the purchase is of higher value and more complex in nature. Either way, if this does not scale, nor will your business.
This is when your business has to ‘put the pedal to the metal’ and push for scale into that learned marketing and sales process. It will often require investment, but if your unit economics are right this will not be hard to come by. It is not seed money here, but likely more sophisticated investors. You have to be willing to increase your monthly losses in order to push for fast growth later on. This can feel counter-intuitive to many, but if you’ve done your work in those 2 stages above you can do this with confidence. You want to aim for a monopoly as quickly as possible.
It’s important for you to know where your business is in this life cycle, because if you believe it to be in a stage which it’s not, you’ll under or over invest in scaling.
There are many kinds of business model and they all have their own peculiarities. But the ones we are referring to in this post are:
• Platform play
Now we’ve cleared up some basics, what are those 5 key factors that will tell you your business is not ready for scale.
Not all of the points below are relevant to all business models, but if any of these exist in your business you have more work to do before you should think about investing to scale. You should be investing to learn more at this stage, otherwise you are set to waste a lot of money.
1) You don’t really have product market fit.
This has got to be the most common occurrence from my experience. Founders driving for growth before they even have product market fit (note this also applies to service led businesses too)! Don’t do it, as you’ll end up spending so much money pushing something that is nowhere near ready. Here are some indicators that you don’t have product market fit.
• Users think it’s a ‘nice to have’, rather than a ‘must have’
• You find it hard to get press
• Reviews are pretty lukewarm
• You really have to work hard to close sales
• You are not having to scale your server base
• Your sales team are asking for more leads and are not being stretched
If you’re seeing all this in your business, then you have to go back to the drawing board. Are you really solving a real world problem, or does this just exist in your head? Be honest with yourself here. Here are a few activities you should be doing:
• Get out and talk to your customers, ask them questions, get feedback
• Reduce your burn rate
• Think about and be prepared for a pivot.
2) Your CAC is higher than price of a subscription or average transaction
This is a pretty simple one, and very top level but incredibly important.
CAC = Cost to acquire a ‘paying’ customer
If it is costing you more to acquire a new customer than the average first transaction alone you are certainly not ready for scale. If you don’t even know your CAC then you need to get stuck into your analytics strategy and figure it out fast. You should be tracking this periodically so you can see the direction of its movement, preferably down.
If this is you, your focus should be on:
• Reducing CPL (Cost per lead)
• Test more channels, perhaps there are better ones out there for your business
• Increase your conversion rate from lead to sale
However, if you solve this it’s only the beginning. You will likely still have a lot more work to do, as you need to look at deeper more meaningful metrics. Which brings us onto the next point.
3) LTV:CAC ratio is not high enough
For this post we will use a basic calculation for LTV (Customer Lifetime Value), but in more mature situations you will want to include gross profit too.
LTV = average monthly recurring revenue per account / customer churn
If your LTV is not 3 x your CAC then you are not ready for scale. It is basically indicating that you are not making enough profit on the deal, and so you should work on improving that. This is particularly for Saas companies, but you can apply this to most other business models in some way. It’s important to note that the money you spend on acquiring a customer, you have to recoup in payments from the same customer, and you should be able to do this in under 12 months.
Things you can do if this is the case:
• Experiment with pricing
• Improve your retention rate
• Drop high cost CPL and CAC channels.
• Experiment with referral mechanisms to reduce CPL/CAC
4) You are unable to scale out your sales funnel
You might have found a product that people love, and retention rates are high. But unless you have super scalable channels for lead and user acquisition then you are not going to be able to scale just yet. Even if your lead flow has stagnated and remains unchanged you need to experiment and run some Traction Testing. You need to find a highly predictable and repeatable set of marketing and sales channels.
Here are some things to note:
• Repeatable means that you can easily predict your ROI. If you cannot, this is not a scalable channel
• You need to be able to scale the resources to close the deals, such as sales people
If this is you then you can:
• Get out and test marketing and acquisition channels using Traction Testing. Here at Rebel Hack we have over 200 channels that we can test into! You never know where that growth channel is going to come from!
• Identify both the CPL from each channel and the CAC per channel, as some channels have higher customer intent (ie they are actually looking for your product) than others.
• Experiment with attribution modelling, as sometimes it’s the combination of your marketing mix that holds the key.
5) Churn rate is higher than your acquisition rate
Again, this seems to basic you could almost leave it out. However, so many businesses fail to look at, or even consider retention. If you spend all this money to acquire new customers but fail to re-activate your lead list or customer base to either buy again, or remain activated on the product, then you’re in trouble.
Make sure you define retention in a way that is relevant to your business. This could in the form of Monthly Active Users, Customers than buy twice, readers who read more than 2 articles in 2 separate sessions etc. There are many ways to measure retention, and you should find yours and make sure you measure it week on week, or day on day if you can.
If your churn is high then a few things you can do:
• Ask your highly retained customers what it is they love about the product/service and push this to the front when onboarding new customers
• Improve your email retention campaigns with action based notifications
• Award people for coming back to the product, with credit or points
Above are 5 things that you should be looking out for when considering scale, and a few ideas as to what you might be able to do to improve it. But the list of actionable things is far from exhausted, and you will need all the brainstorming you can muster to find your key experiments for testing.
Great CEO’s are able to bring it all together, offer a vision, all the resources to pursue this vision, and pull a team in the same direction. However, they are also masters at timing. They know when to slow down spend and when to crank it up. They are aware of how to calculate all the key metrics relevant to their business, i.e. the metrics that really hurt and not just the vanity metrics.
Don’t get bullied by your investors into chasing silly numbers, simply because they think you have to ‘get in there quick’ and monopolise the space. Timing is key, and as I always remind my customers and those I adviseBe hungry for profit, patient for scale Click To Tweet
Although overall profitability is not required, unit profitability is, and so a keen eye on your unit economics is critical. Only then can you be ready press the button when you have found the right growth engine for your business.