It seems that the tides are changing super-fast these days, with the entire industry replacing “growth at all costs” with “path to profitability”. I recently recommended for startups to start measuring efficiency KPIs in conjunction with growth KPIs, but judging by the increase in founders approaching me lately with questions about the subject, it seems that the issue is even more pressing.
The question I am asked most often about how to measure efficiency KPIs with growth KPIs is “How do you actually do it? Do you just cut S&M costs and stop your growth in order to create a path to profitability?”
I believe there are a few measures that can be taken to change the bottom line trajectory without “killing” chances for future growth.
Here are a few suggestions:
1. Invest more in organic marketing
Online advertising campaigns are basically a way of “buying revenue”. While this is a very scalable and legitimate marketing strategy to infuse growth it tends to have a negative cash effect in the short run as it takes around a year to recover these types of costs.
On the other hand, while the ROI of initiatives such as content marketing, thought leadership and SEO improvements may be harder to measure, done right, they tend to have a “ripple” effect in which the investment can yield multiple customers. It’s hard to infinitely scale this strategy, but at times when “cash is king” it might be a good idea to rethink your marketing program’s budget and allocate more (or at least something) towards these types of activities.
2. Leverage your install-base
This may well be the most effective way to reach profitability. Churn reduction is the single most cost-saving step that a company can take, because for every $1 spent on reducing churn, you could save about $6 that would have been needed to spend on sales and marketing to achieve the same MRR (!!). So sometimes, it might make more sense to add another person to your Customer Success management team than to your Sales team.
In addition, you should strive to get your new MRR through expansion activities rather than “cosmetic” tactics like investing in new logos. Think of it this way: A company with 20% negative churn (i.e. 20% net growth from its install base) is a company that theoretically grows 20% YOY, even if it eliminates all of its S&M costs. Obviously I don’t recommend going to that extreme, but as a rule of thumb, focusing on your leveraging your existing customer base will get you on the path to profitability faster than attracting new ones.
3. Go up-market
This is a tricky one as going up-market (i.e. selling to larger organizations) often requires upfront investments, prolonging sales cycles and consequently increasing losses in the short term. However, in the long run, going up-market is going to increase your ASP, ACV and efficiency metrics such as CAC Ratio and LTV, because by securing larger customers you also improve the odds for better stickiness, retention and reduced churn rates.
Obviously every company should assess its cash burn situation and Sales and Marketing goals to develop its own plan, but I believe that even in the short-term, focusing on a sensible go-to-market strategy that’s optimized for growth (using some of the steps I mentioned above, for example), can change the profitability trajectory of your company while still keeping it healthy.