Why timing growth is important
Different stages in your company require different focus and a different strategy.
Scaling too fast will burn you, scaling too slow will leave opportunities on the table.
Common mistakes in timing growth
- Setting a growth goal before Go-to-Market fit is achieved
- Setting a scalability goal before Product-Market fit is achieved
- Adopting strategies that are suitable for one phase in a different phase
- Taking what you learnt and worked very well in a previous experience and applying it without thinking whether the circumstances are the same
Understanding in which phase the company is is not trivial. A data-driven approach should be adopted as much as possible.
From Zero to Product-Market Fit
Ways to product-market fit
Companies that are able to reach product-market fit follow different paths and detours.
To achieve product-market fit you must be able to win and retain customers.
To win customers, you must develop a compelling product and business vision, generating buzz in the market. However, this alone does not guarantee product-market fit, because you may fail to deliver concrete value and retain customers.
To retain customers, you must engage with them and listen to their priorities, requirements, and concerns, rather than only considering your own ideas. However, this alone does not guarantee product-market fit, because you may be blindly implementing custom solutions that won’t help you sell to more and different customers.
In their journey to achieve product-market fit, companies experiment and improve on both these dimensions, making compromises and adjusting routes as they go.
Evaluating product-market-fit
Quantitative definitions mainly revolve around two widely used metrics:
- Annual Customer Retention: (#Customers-at-start-of-year - Customer churn) / #Customers-at-start-of-year
- Annual Revenue Retention: (ARR-at-start-of-year - Churn + Upgrades) / ARR-at-start-of-year
Typical criterium to assume product-market-fit is Annual Customer Retention is > 90%.
Problem: this is a lagging indicator of PMF: it can be evaluated only at the end of each period.
This delays your decisions by precious months.
In order to act in a timely matter, you should define and refine over time a leading indicator of Customer retention (and hence of product-market-fit).
- You define product metrics that intuitively correlate to customer retention
- If “The customer does XYZ within T days” then I assume the customer will not churn
- You measure these metrics and the related customer retention over time
- You adjust those metrics until they are proven to correlate to customer retention
- Your product metric really is proven to correlate with retention, AND
- Your retention target X% of customers achieves it
- X% of customers does XYZ within T days
Examples:
- Slack: I have product-market-fit if 70% of Customers send 2000+ team messages in the first 30 days
- Dropbox: I have product-market-fit if 85% of Customers upload 1 file in 1 folder on 1 device within 1 hour
- HubSpot: I have product-market-fit if 80% of customers use 5 out of 25 features in the first 60 days
In order to accelerate your decision even further, you can perform cohort analysis for every new customer and assume product market fit even before your target % is reached, if the trend is positive.
Before product-market-fit, focus on customer retention
This may seem counter-intuitive. In early stages, customers are what you need the most and is paramount.
However, in this phase, thinking “customer retention first” will force you to learn and fix what’s required for Product-Market Fit. Most startups obsess with customer acquisition and try to force their way to product-market fit by acquiring as many customers as possible. In the SAAS era, adopting a solution is easy, but abandoning it is as easy. A customer acquired at high cost and not retained will slow down, not accelerate your growth.
For this reason, I find this piece of advice extremely helpful to adjust behavior for the best.
At this stage:
- With no repeatability, customer acquisition costs are extremely high. With a not-yet-fitting product, customers are lost very easily. Every hour spent on avoiding churn yields higher returns compared to customer acquisition.
- Customer management costs are equally high. Winning fewer customers who are more likely to stick with you yields higher returns compared to winning many customers who will quickly churn.
- Prospects are almost as valuable as customers. They don’t provide revenue, but do provide feedback on product, messaging, processes. Having retention-focused roles (i.e. customer success) engaged with prospects will secure more wins and prepare those people for customer retention.
Focusing on retention does not mean not acquiring customers. It means obsessing with customer retention as you acquire them. Specifically:
Team | What focusing on retention looks like | What focusing on acquisition may look like |
Sales & Marketing | Founders (or consultative, product-centered sales reps) win those customers who will likely stick with you. | Coin-operated sales reps toss as many customers as possible over the fence. |
Product | Concrete user feedback validates roadmap and features, converging to PMF. | Priorities are all over the place in an attempt to satisfy as many prospects as possible. |
From Product-Market Fit to Go-to-Market Fit
The typical quantitative definitions that are used to measure scalability are Unit Economics: CAC, LTV/CAC, “The magic number”.
- LTV:CAC > 3:1
- At least half of sales reps achieve full quota and three quarters achieve three quarters of their quota
Problem: these are once again lagging indicators.
To try and have a more leading indicator, you can decompose them into the factors that lead to those results.
- LTV = ACV * Gross Margin % / Annual Churn %
- CAC = Demand Generation CAC + Salesperson CAC
- Demand Generation CAC = Cost per SQL / SQL-to-Customer%
- Salesperson CAC = Salesperson Monthly Cost / Customers Acquired per Month per Salesperson
From Go-to-Market Fit to Scaling
Once you validated you have both product market fit and GTM fit, scale progressively, observe your leading indicators for both and make sure they stay good as you scale.
Multi-product and multi-market: segmenting your strategy
As you scale, you will likely introduce additional product lines, targeting additional ICPs, and more. Your go-to-market will become more complex.
Your product-market fit and go-to-market fit will be different for each of these. So should your strategies, as one size does not fit all.
Maintaining clearly distinct evaluations and strategies will help you be effective across all go-to-market segments.
