Editor’s note: Joe Procopio is the founder of teachingstartup.com. His columns appear on Tuesdays. Joe has a long entrepreneurial history in the Triangle that includes Spiffy, Automated Insights, and ExitEvent. More info at joeprocopio.com.
DURHAM – When should a startup begin planning for growth? The answer is now.
The unconventional truth is that a startup should very rarely be acting out of survival — living from one sale to the next or from one month to the next. In fact, survival mode should only be reserved for those periods when uncontrollable external forces conspire to create a substantial impact to business as usual.
You know, like a global pandemic that threatens to take down entire economies.
But I’ll save how to do survival mode for another post. Because even when external circumstances dictate that a startup go into survival mode, every day that startup remains in survival mode brings it another day closer to failure.
If a startup isn’t growing, it’s dying. So you should be thinking, planning, and acting in growth mode all the time. Here’s how to transition your company up and out of the muck.
The moment of truth is CAC and LTV
It’s said that if you want to create a successful business, find something you do well at low costs and high margins and repeat it over and over until something stops your progress. This is true. This is much easier said than done. And it’s nothing that you can just luck or viral your way into.
One of the companies I’m advising hit their growth moment of truth last week. It was a moment we had been chasing for the better part of six months, and it came to fruition when they put real numbers for Cost to Acquire a Customer (CAC) and initial Lifetime Value (LTV) into a spreadsheet.
This is the first step on the path to growth mode.
Their CAC data covered every part of addressing their market, from various marketing channels to conversions to onboarding. They had rows and rows of data for each path to closing the sale — from optimal and desirable paths to costly and clunky paths — and the true costs associated with each.
Their LTV data addressed each of their tiers of service, their churn, and what they could project moving forward. They threw out all the outliers — the freemiums, the VIPs, the beta testers — until they were working with real, defendable dollar figures.
I should mention that those numbers sucked. High CAC, low LTV. But that’s fine. It’s like stepping on a scale for the first time in a long time. Those first few pounds are the easiest to lose.
The growth levers are found between CAC and LTV
The reason that CAC and LTV spreadsheet was a watershed moment is because now the company is no longer throwing darts. Instead of having to randomly decide which features and initiatives to prioritize, they can now create levers to reduce CAC and increase LTV.
So imagine they put CAC on the left of a whiteboard and LTV on the right. Those levers are going to be created in that white space in the middle. And they’re going to be created by providing the kind of value that minimizes CAC for those customers with the highest LTV.
Low cost, high margins, repeat.
Now, if I could tell you exactly what features and initiatives you need to build to do that, I’d be your CEO. However, I can give you the guidelines that you should be building those features and initiatives around.
Get to the levers
The first step is to connect CAC to LTV, and that’s going to require some assumptions and some research.
For example, your cheapest-to-acquire customers might not be your best customers. They may be costly to onboard and maintain, they may not value your product or service, and all that in turn may dramatically lower their LTV.
Time to acquire is also a factor. For example, viral and word-of-mouth customers may be super cheap to acquire, but reaching a critical mass of these customers is the kind of time-based math that a lot of would-be entrepreneurs never consider. A company has to maintain an infrastructure to serve its customers and also needs to be able to take advantage of economies of scale. So there’s a natural break-even point of customers-over-time for the business.
Draw lines from CAC paths to a unique LTV for each path, then break that LTV out annually or even monthly, and multiply it by the number of those customers you can close in a month. Then target the most profitable customers you can acquire the quickest.
Pull the growth levers by delivering consistent, lasting value quickly
Now that you’ve targeted your initial market, to need to serve their needs, so you start with this question:
How quickly can we deliver consistent value that is lasting?
Every choice you make from your feature set down to your customer messaging should answer that question. These are your levers.
- Quickly: The first thing we did after connecting CAC to LTV was throw out all the metrics that didn’t impact either of those things. The next thing we did was start tracking the time it took to get to each step on those paths.
- Consistent: We started tracking functional areas of the product to determine where the most customers spent the most time, in terms of frequency. If there was a function the customers kept coming back to, that function became a priority, because there was value.
- Lasting: For those areas that saw repeat visits, we measured how long in between visits and over how much time. The functions that the customers came back to regularly over long periods became a top priority, because there was lasting value.
Minimize CAC, Maximize LTV, then expand
Something will always stop your progress, even if that something is just saturation of the initial market. So you always need to prepare for what’s next.
If you’ve minimized CAC, maximized LTV, and found those paths to deliver consistent, lasting value to customers quickly, you should have received plenty of clues along the way of where your next best market might be.
There are many ways you can expand your market, but usually that expansion will run along one of these axes:
- Tier: From the product out, you can dive deeper into certain functions or add new, related functions. Getting more money out of existing customers is always a good idea, even if the results may be limited. Less market share, more revenue per customer.
- Market: Expand the definition of your customer to the next closest type. Instead of tweaking to give the same customers more functionality, you’re tweaking to serve more customers with the same functionality.
- Location: For some types of business, especially services, you can essentially double your customers by bringing the same value to a different local or regional market.
The important thing to remember when expanding is to crawl before you walk before you run. A lot of successful startups derail themselves by diving headfirst into a new market and not anticipating that every single market will be slightly to drastically different from the market they’re dominating.
Dip a toe in first, check the temperature, then land and expand.