6 Ways to Drive Sustainable Growth
When it comes to startups, growth is the oxygen that fuels a company. However, just because your company is growing, survival is not a given. There are plenty of examples of companies who grew quickly, attracted tons of capital, but ultimately failed to build a sustainable business. Bottom line — not all growth is “good.”
Complicating matters, the stakes are high when it comes to growth. Investors are drawn to it (and often demand it). Vendors, agencies and media companies are also quite happy to take your money. However, companies that grow too quickly and ultimately fail, may have once had potential, but ultimately experienced the wrong kind of growth. Everything might have looked peachy from the outside — creating the illusion of a true product-market-fit — but the tactics used to grow didn’t support a sustainable business. At early stage startups, aggressive growth marketing can hide a true product-market-fit, fooling operators into believing a product resonates with consumers. This is a problem that continues to persist. To counteract these challenges, here are 6 critical ways to drive sustainable growth.
1. It’s all about the product.
Good growth begins with building a great product. In a capital-starved startup, dollars that go towards perfecting the product, will provide infinitely more ROI than Facebook ads. High quality products lead to a better customer experience, improved retention and often higher rates of referral. While operating our subscription business at NatureBox, we had a mantra: a customer saved was a customer acquired.
The compounding effect of higher customer retention is a powerful force in a consumer business.
In most companies, month-over-month retention generally increases with a customer’s tenure. In effect, keeping a customer in their sixth month can be much more valuable than one in their first. Building a great product isn’t easy, but it pays off in time — this, as opposed to scaling growth with an average product.
2. Conversion is only part of the story.
Companies often tout their conversion rate as a key success indicator, but this metric only relays part of the story. Focusing on one part of the funnel misses the bigger picture. Take for example a company that spends $50 to drive 100 customers to their site with a 1% conversion rate. The $50 spent acquired exactly one customer. Is the conversion rate too low, or is the issue further up the funnel? Perhaps the wrong kind of traffic is being driven to the website. Perhaps ad dollars are being wasted driving customers who would never convert in the first place.
The conversion rate doesn’t always offer the full picture. In addition to considering the rest of your funnel, you should track important metrics like AOV (average order value) and discounts to assess the quality of the customer along with the conversion.
Discounts can be illusory — fooling you into believing you’ve found product-market-fit, when in reality you’ve simply found a way to sell a $1 item for 90 cents. Companies often overlook the importance of great messaging. Allbirds is a perfect example of a company that understands their value proposition and has distilled it down to, “the world’s most comfortable shoe.” Their goal was to understand why the customer was buying, and then boil this down to the most important element — making the brand synonymous with it. A talented brand marketer can be critical to crafting such a message; don’t underweight the importance of ‘brand’!
3. Resist investor pressure to diversify your marketing mix too early.
Most venture investors will squirm if your marketing eggs are all in one basket (i.e. Facebook/Instagram). The reality for early stage companies, however, is that the ceiling attainable via one large channel is much higher than you could reach in the first few years. Continuing to focus and optimize one large channel is often the best way to spend your limited bandwidth. In addition, many companies tend to focus on the top of the funnel — starving the resources needed to optimize on-site conversion or retention. By narrowing your focus to one top-of-funnel channel, you gain more time to optimize further down the funnel and stretch your dollars. While there is some risk, the return may be worth it.
4. Measurement matters.
As John Doerr writes in his book, “We must realize — and act on the realization — that if we try to focus on everything, we focus on nothing.” In early stage companies, focus is a requirement that extends not only to what you do, but to what you measure. Before investing significant time or capital into driving growth, make sure to set up a system of measurement. Deciding what to track is a huge part of the puzzle. Aside from obvious metrics such as CAC or retention, if you have identified other critical behaviors that lead to high retention, make sure to place those front-and-center. A perfect example of this is Facebook’s 7 friends in 10 days (its aha moment).
And, when setting up your measurement system, realize its limitations. During the early days, you may not be able to accurately understand the impact multiple channels have on attribution. Or, you may lack significant retention data to predict what LTV might be. This is typical and many companies solve this problem by finding shortcuts. Take for example LTV, a lagging indicator in most cases. Without ample data, it’s hard to predict, but many companies look for directional signals including first order value or 7-day retention to guide their day-to-day execution. As many of us know: perfect is the enemy of good (or good enough!).
5. Payback can be a critical metric.
Payback is the length of time required for profit generated from a customer to equal the acquisition cost.
The faster a company is able to payback, the easier it is to scale organically and the less outside capital you’ll need to grow.
This metric can be heavily influenced by the company’s growth stage. It’s helpful to use benchmarks and understand your payback goal relative to your ability to finance the company. If your cost of capital is low, perhaps you can justify a longer payback period. In different cycles, companies usually push and pull the levers associated with payback in order to reduce their capital requirements. One word of caution: in the early days when data is still building, be careful not to “drink your own kool-aid.” Once data builds and the model can be actualized, adjustments may be needed.
6. Build a process and culture around efficient growth.
Driving efficient growth requires the right mindset. As a founder, you set the tone for the organization and how much you prioritize growth (at any cost) over profitability. Creating a culture focused mainly on growth can result in a weaker product. On the flip side, startups that don’t post strong growth but are profitable, rarely have high valuations. Determine your true north and how you define “good growth.” Once you’ve settled on the right direction, align your teams to track their progress.
Driving productive growth requires efficient processes. Think about creating an internal communications system and growth model based on metrics and prioritization of testing and feature development. Lastly, think about managing customer issues relative to marketing priorities. Customers might complain about ads, offers, or a landing page that converts a little too well. You may need to adjust your pace according to how quickly you can serve your base. These are all tactical issues made easier by having a firm set of guiding principles.
At M13, we are a collection of operators and investors. I’ve seen first-hand the uncertainty and stress that come with driving growth. I strongly believe in operators paying it forward. If I can help with any issues, please drop me a line at: email@example.com