There is a long-running belief that things grow or die. In startups and in business, growth tends to mean more topline revenue.
But growth doesn’t have to mean more topline revenue. Growth can also mean improvement, better; better product, better systems, better processes. Here’s the thing (I always have a thing), better almost always leads to bigger, naturally.
The challenge with focusing exclusively on topline revenue when you want to grow is that problems nearly always scale faster than solutions. When you throw dollars into marketing and sales, without a healthy, underlying business, the top line will grow, giving you false positive feedback, which leads to you to keep spending. However, problems are being created, and are scaling faster than the revenue, and eventually those challenges will consume the company leading to its ultimate demise. For instance, you can’t see that the CAC to LTV ratio no longer works – or maybe it never worked and you figured that by spending more in different niches, it would eventually work. Or maybe you don’t even know what the unit economics actually are, and you’re scaling a business that fundamentally doesn’t work. Or you can’t see that there’s disagreement on the direction of the company at the leadership team level. Or you can’t see that while growth is happening, customer returns/dissatisfaction and churn are happening at a faster rate than before. Or your team spends more time firefighting than driving results, creating incredible inefficiencies and destroying the bottom line (not to mention the employee turnover).
But if you focus on better, the company’s topline revenue often will grow naturally without any additional sales and marketing effort, and often with the same, dare I even say lower, costs – making the business itself healthier in all dimensions.
For instance, a focus on a ‘better user experience’ will ultimately result in:
- Fewer customer support calls
- Fewer bugs
- Happier customers
- Fewer refunds
- Higher lifetime value, more renewals
- Lower churn
- Higher referral rates, increased virality coefficient or network effects
- Happier employees
- All of these items equal less cost, or more revenue, or both.
The better approach indeed takes more time to flow through your company compared to the let’s just throw more marketing/sales dollars at it approach – but it absolutely leads to a healthier, more successful company. And when it’s healthier, it will ultimately lead to bigger top-line revenue.
Now, I’m not saying you shouldn’t spend more on marketing/sales when you want to grow, but I am saying that you should take a hard, long, honest look at the business before you do so.
Before you decide to scale the business:
Understand the unit economics and the levers of the business first. What are your unit economics? $1 spent in sales/marketing = how much in revenue? If you don’t yet know your unit economics or the levers that drive the business, you are not ready for growth. You absolutely need to know these metrics before stepping on the gas, otherwise, you’re just burning cash and praying for a miracle. Not sure how to go about this? Check out the book Levers by my dear friend Amos Schwartzfarb for a crash course.
Look for areas in the business to improve. Here are common ones:
- Product market fit – are you really in the best market for your offering?
- Removing bugs (everyone’s least favorite – but reduces customer support costs and improves customer satisfaction)
- Improving UX, steps, clicks, intuitive workflows, etc
- Become obsessed with reducing the number of customer support calls because customers just get it, and it just works.
- Become obsessed with how much customers love your product. What features can you remove (not add), or what niche can you focus on, to improve the love.
- Removing steps in any process you have internally – this will reduce employee time spent on ‘tasks’
- Removing policies – policy is never a good substitute for holding people accountable for good judgment, and it slows everyone down.
- Identify redundancies in the business and remove them.
- Look for gaps in the business “it’s not my job” and fill them.
- Push reversible and inconsequential decisions down in the business as low as you can get them
- Improve alignment – is everyone incentivized similarly, or by the right things? Make it so.
- Simplify – what areas can you simplify? Org structure, processes, policies, product.
Monitor the unit economics and key levers as you work on areas to improve, you should see movement! Maybe you started at a $1 marketing/sales spend = $3 revenue ($1:$3), and through your efforts it grew to $1:$4. Hell yeah! Be a little patient though, it can take 6-12 months to flow through the system.
Once you decide to increase sales and marketing spend, keep an eye on those levers and metrics – when you see the ratios start to head south, hold or reduce spending, and investigate. Don’t just keep throwing money at it.
The one exception to this is when your company is very early stage, and you have little to no revenue. But then your focus isn’t on ‘growth’, but rather finding out if you have product market fit (PMF). Don’t confuse the two. A doubling of your customer base or revenue doesn’t necessarily mean PMF. The best measure of PMF that I’ve seen is called the Sean Ellis test, whereby >40% of your customers would be ‘very disappointed’ if they couldn’t use the product anymore. Now, you need a customer base large enough to have statistical significance, and in most mathematical circles, that’s >30, however, I recognize if your customer base is large enterprises, that might be challenging. But I digress. If you’re still in PMF mode, do not, I repeat, do not focus on growth. Focus on PMF. Don’t focus on growth until you’re sure you have PMF.
However, there is a play that says “grow at all costs”, and on extraordinarily rare examples, this play works because you can have market effects. Grab as much of the market as possible, which will kill the competition, and then focus on quality later. But for this play to work, you have to be in a winner-take-most market, you have to be extraordinarily well funded, with low-to-reasonable valuations, and very understanding and aggressive investors who commonly invest in the next rounds even if the fundamentals of the business aren’t yet healthy, in a highly stable or growing market cycle. Given all of that is out of your control, you literally cede control of your future and company to fate. Your success lies in the hands of luck, not skill. If it were me, I’d want to stack the odds in my favor by building a healthy business before focusing on growth.
This year, as you’re working on your budgets and strategic plans, consider a focus on quality, a focus on better. Then enjoy bigger happen naturally, with lower costs and headaches, and more pride in what you’ve built.
Nearly Nicole 