7 things to analyze before you throw in the towel and give up.
Building a startup is really hard, especially if you’re a first-time founder. Not only do you wear multiple hats, you’re also ultimately responsible for the life and death of your company. And that stays on your mind 24×7, even when you’re away from the office.
Unless you’re a venture-backed company, your main goal is to get to profitability as quickly as possible. But what if your growth is slower than you’d forecasted and things aren’t quite going to plan?
The easy way out is to give up. Return any left over money to your investors, share the bad news with your team and wind up the company. The alternative is to do an analysis of your business and try to identify, objectively, why things aren’t going as planned.
Startups should really only go under once you’ve exhausted your options and can’t raise any more money. Cash is the lifeblood of a startup that’s pre-profit and so at a macro level you can really focus on two things: getting more customers or lowering your costs.
Here are some things to analyze in the hope of finding the reason for your slower-than-expected growth rate.
It normally takes a few years to really nail product-market fit. Sure you can build something that has “product-market fit-ish” and that’ll get you a few hundred customers if it’s good, but if you want to grow a company to profitability you genuinely need to find strong product-market fit. That means iterating on your product as quickly as possible based on 1) customer feedback and 2) your vision.
Sean Ellis has a good way to think about product-market fit that’s worth reading, but it really comes down to this — what’s your visitor-to-customer conversion rate and how’s your churn rate? Are they trending up every month or are they flat/down? If they’re moving up, you’re doing something right. If they’re flat or down, that’s a 911.
When you don’t convert a lead and also when you lose a customer, are you asking them why? They won’t be able to give you all the answers, but if you can identify patterns across a statistically-relevant group of people that look like your typical customer, you can use their feedback to incrementally improve your product and the experience future customers have.
Onboarding or buying experience
If you’re a SaaS business, onboarding will make or break you. If you’re an e-commerce or retail business, it’s all about your buying experience.
When someone finds your product is it easy for them to get up and running? Do you use sensible defaults for most things and only ask them to do a few things that give them a clear benefit, or do you have a 13 step onboarding process that involves them, the CEO, internal I.T. and a consultant?
Until you nail the onboarding experience, focus most of your R&D efforts there. Features are important, sure, but if people never get to use your product then you can have all the features in the world and it’s irrelevant.
At my company, the first 3 releases of PeopleSpark (check it out if you’re a CEO that cares about your employees and culture) were all about learning and improving our onboarding experience.
We used funnel analysis and A/B testing to get our sign up rate to 38% and we’re still working on that. You’re really never done creating a killer onboarding experience. Sometimes it’s done with just your product, sometimes it’s webinars, sometimes it’s a customer success team.
If you sell stuff online or in stores, how’s the customer service from your staff? If it’s crap, they’ll just leave and buy your product online from Amazon. In retail, you need to know why you’re different and tie that into your buying experience. Are you cheaper? Offer a price match guarantee. Are you better? Offer 365 day returns like Zappos. Are you more exclusive? Have customers apply to purchase your product or join wait list like Hermes does for their Birkin bags.
Most startups get pricing wrong. You look at your closest competitors and copy them. You might be a bit cheaper just to “undercut” them. And that’s fine to get started, but you need to listen to your non-converting leads and paying customers closely to see how they feel about your pricing too.
Increasing your APRU or average selling price, if done correctly, is one of the fastest ways to grow your revenue. Yes you might need to grandfather in your base of customers, but if you get it right you’ll quickly start to boost your APRU or ASP within a few months.
Your price also needs to match the value your product provides and the expectations of the customers you’re selling to. If you’re the same price as a competitor that’s been around 3 years longer but has a product twice as yours, you’re essentially twice as expensive as they are.
Your biggest cost at a startup is always salaries, followed by rent. By analyzing your spend on headcount you might be able to save a good amount of money and therefore reduce your monthly burn rate, giving you a longer runway to get to profitability.
Look at the employees who are critical to improving your product and customer experience and compare them to the “non-critical” employees. Can you outsource, contract or eliminate any non-critical positions? If you did, how much would you save and how far would that stretch the cash you’ve got left in the bank?
If you’re on a short term lease, you can also considering building a distributed team or working from a co-working space like WeWork. We do.
One of the biggest startup traps is to spend the same amount of money on marketing as your more established competitors. They’re spending $20 a click on AdWords, so you should too, right?
Not really. If they’ve been around a few years they’ll have a good understanding of their CAC:LTV ratio, so they’ll know precisely what they can spend to meet their topline forecasted growth. If they’ve raised more money than you, or you’re in a new market, they’ll keep outspending you because it’s a land grab — get the customers now, worry about profitability later. That’s why Uber can raise billions of dollars. Travis knows he’s in a winner-takes-all game against Lyft, Didi Kuaidi and others.
If your APRU is $100 and theirs is $5,000, you’ll never be able to match the effectiveness of their marketing spend, assuming they know what they’re doing. Tracking marketing spend and efficiency by channel and looking at the results regularly is really important. As is testing channels before committing. Taking 30 days and a few thousand dollars to test a marketing channel can save you hundreds of thousands of dollars in inefficient spend down the line — that’s real money you can use to extend your runway and improve your chances of getting to profitability.
Quality of leads
Lead quality matters more than volume. With a good budget and/or some clever contests or content it’s pretty easy to drive thousands of visitors to your site every day, but visit-to-trial (or just visit to paid) rate is the only thing that matters.
As I mentioned above, if you have a $10,000 monthly marketing budget, it makes more sense to run 4 x $2,500 tests to see which marketing channel has the best conversion rate instead of just plowing all of your budget into one specific channel either because your competitors do or because that’s what someone has recommended.
It’s also worth thinking about your payback period on your marketing spend. Are you recouping your fully-loaded CAC (sales and marketing) within 12 months? If not, that’s one hell of an expensive marketing channel to continue investing in if profitability is important in the short term.
What’s your customer NPS? If you don’t know, start asking. A great NPS means organic referrals that will drive new business. Those referred customers will love your product too and refer their friends. And so the viral coefficient begins.
If your NPS is in the toilet, that’s great too. Find out why existing customers are frustrated and fix those things fast. It’s a waste of money to invest in new customers when your exiting customers are frustrated and on the verge of churning. Fix the leaky bucket before pouring in more water.