You had a brilliant idea, which inspired you to take action. Quit your 9-to-5 job, and start your own company. After a bunch of pitches, you also managed to get some venture capital funding. However, after growing your company to pass the seven-figure mark, you find yourself close to the death zone.
That is a place where the lifetime value of your customer is barely sufficient to cover for your cost of acquisition. Therefore, bringing in an additional customer is a painful process. Where the company’s growth is in jeopardy, and you still didn’t manage to master the proper organizational structure to scale further.
There is a place where no startup wants to be. However, many do fall into that. That’s the death zone. More blindly that happens when a company never reaches that sweet spot between growth, profitability, and cash flows to enable it to build a sustainable business model.
Indeed, if we look at some of the primary reasons startups fail; some of them can be traced back to no market need, running out of cash, pricing/cost issues, and a product without a business model.
As highlighted in the infographic above, successful enterprise companies, from Hootsuite to Qualtrics have mastered three things that those in the death zone might have not:
they understood their key customer.
They mastered the pricing strategy that maximized the company’s growth and profitability.
They structured their sales, marketing and engineering teams around their key customers.
Tuning the customer segments
One of the biggest mistakes most companies make is to choose and pick the wrong customer. That might sound trivial.
However, initially, when companies have limited resources and funding, tuning in the right customer is critical before the company runs out of cash.
Among the biggest mistakes, startups’ founders might make is to want to serve pretty much anyone in that industry.
Instead, proper distribution and sales strategy should identify right away the kind of customer to target. And I don’t mean it in a generic way. You need to be very specific.
For that matter, a tool like a customer/problem quadrant by Ash Maurya might help you focus right away to the customers you can serve when wanting to solve a specific problem.
Therefore, rather than starting from the solution you have in mind. Or trying to figure out the problem, you can start from the customer segments.
You need to be very specific and be able to identify the early adopters. Or those customers that might want to buy your product even if it is not perfect yet. However, it promises to solve a specific problem.
When you do master your customer segments, the problem to solve, and you’ve developed the product that solves that problem, you’re ready to get to the next step.
Raise prices, don’t look for more customers
The mantra of serving more customers wants that successful entrepreneurs need to serve as many customers as possible. This is extremely dangerous, especially in the initial stage of growth.
Indeed, that stage requires a deep understanding of the customers to serve. A strategic assessment of the market. And a deliberate execution. Therefore, it is a great exercise at that stage to understand the least customers you can serve by raising prices as much as possible.
That might sound counterintuitive, as the first examples that are readily available to our minds are those of large tech companies like Facebook and Google; which became successful by serving masses of free users, with an asymmetric business model, financed by businesses and marketers bidding for attention on those platforms.
Those cases, of companies built on a massive and distributed customer base, are more an isolated phenomenon, rather than the rule of thumb. That is why, as a founder or CEO, you might want to look at those few customers to serve, which can make a difference to your business.
For instance, if we look at companies like Algolia (a search engine for websites), it is interesting to notice how of the over six thousand customers, about three hundred might make up around 80% of the company’s overall revenues.
That doesn’t mean you should ignore the other potential customers in the long-run. If your customer acquisition for segments that are less valuable for your business (for instance, because they have a higher churn rate and lower lifetime value) is low, then you might still want to exploit those opportunities.
However, often, those same opportunities come when you already have an established brand and a scalable business model. In most other cases, focusing on the customer segment, which is not in line with the business might be too risky.
Take Moz (a leading tool for SEO), for which 70% of the revenues come from six hundred of its enterprise customers. The company still focuses on SMEs as Moz has an extremely low acquisition cost for those customers. In short, Moz is able to create short term liquidity and cash flows for its business by investing minimum resources on the SMEs segment, even though that is not the primary driver of the company’s revenues.
Once again, Moz is the most established brand in the SEO industry, and it can leverage its brand and business model to execute this sort of strategy.
Beware of the wallet
In the business world, often things might get confusing. That is because we like to generate useless complexity when we can get along with simple heuristics. For instance, we create many categories for companies, like differences between B2B, B2C, B2B2C, and more.
However, we’ve seen how in building up a successful company, once you’ve picked up the proper customer segment, you’ve understood what the highest price you can charge for that segment (based on the value provided) is. A third and critical point is about the organizational structure.
In short, are you going to leverage marketing, sales, or both? Are you going to hire more engineers to add features to your product? And what’s the proper balance between marketing and sales?
Rather than looking at complicated things, I want you to focus on a single idea: the wallet.
For such I mean:
how big is that wallet (the value of the contract)?
Who is going to make the purchasing decision (a person or a group of people)?
What motivates that person or group of people to make such a purchase?
And what motivates that person or group of people to keep your product in the long-run?
In short, usually the larger the wallet value, the more you’ll need salespeople able to interact and meet with the person or people in charge of that wallet. This will imply an organization that leverages on a very specialized salesforce.
Also, it is critical to understand the motivation of the key customers you’re serving. For that matter, you need to look at where’s the wallet, who’s in charge of it (so if it is a person of a group of people) and what motivates that person or group of people to make the purchase.
For instance, if your key customer base is willing to purchase your product because it trusts your brand. Then you know you need to organize your company around content marketing.
Thus your organizational structure will highly focus on hiring marketers and engineers.
Also, you need to understand what makes the wallet holder keep paying for your product.
Therefore, if the key customers are willing to stay with you longer because they know you will keep adding key features to the product, you’ll need to hire more engineers.
At the same time, if your wallet is in the hand of a group of people with mixed motivations, that relationship becomes too complex to be left to marketing and branding alone.
Thus, you will need a specialized, high touch sales team able to understand conflicting motivations among the group of people in charge of the wallet.
And at the same time, those salespeople will need to be able to reassess by time to time how those motivations change, converge or conflict with your offering.
In that case, your organization will be primarily comprised of outside salespeople (those that meet the client face to face regularly) and engineers able to swiftly change the product features and specifics based on the feedback of the sales team.
Key takeaways
There is a death zone that as founder or CEO of a company you want to avoid at all cost.
Often that death zone comes from a misunderstanding of the proper customer segment. The lack of focus on the key customer. The wrong pricing. Or The misalignment of the organizational structure to the key customer.
For that matter, founders and CEO should focus on understanding the key customer. Look for the price point and the acquisition costs that make the most sense to build a viable business. And understand how big, who and what motivates the wallet keeper.
With those things in mind, the founder and CEO can finally build a viable company that leverages on taking care of the key customers. While having a satisfying pricing structure. And an organization structure aligned with its key customers.
Key Insights
Tune Customer Segments: Identify and target the right customer segments that align with your product’s value proposition. Focus on early adopters who are willing to buy your product despite its imperfections because it solves a specific problem they face.
Raise Prices: Instead of trying to serve as many customers as possible, raise your prices to maximize revenue from the most valuable customer segments. This approach allows you to focus on quality over quantity and ensures that you have enough resources to support your growth.
Understand the Wallet: Understand the size and motivations of the customer’s “wallet” – the budget or decision-making authority of your target customers. Tailor your sales and marketing efforts accordingly, whether it involves content marketing, high-touch sales, or regular product updates based on customer feedback.
Organizational Alignment: Align your organizational structure with your key customers’ needs and preferences. Invest in the right sales, marketing, and engineering teams to effectively meet customer demands and ensure customer success.
Continuous Evaluation: Continuously evaluate your customer segments, pricing, and organizational structure. Be prepared to make adjustments as market conditions and customer preferences evolve.
Customer Value Focus: Prioritize the lifetime value of your customers over the cost of acquisition. If the lifetime value exceeds the acquisition cost, you can invest in acquiring more customers with confidence.
Strategic Partnerships: Explore strategic partnerships and collaborations that can help expand your customer base and reach. Partnering with other businesses can open up new opportunities for growth.
Innovation and Product Development: Keep innovating and improving your product to stay ahead of competitors and maintain customer satisfaction. Customer feedback and market insights should drive product development efforts.
Financial Management: Be vigilant about financial management and monitor cash flow closely. Prioritize profitability and seek ways to reduce unnecessary expenses.
Customer Retention and Loyalty: Focus on customer retention and building long-term loyalty. Satisfied and loyal customers are more likely to provide repeat business and refer others to your company.
Business development comprises a set of strategies and actions to grow a business via a mixture of sales, marketing, and distribution. While marketing usually relies on automation to reach a wider audience, and sales typically leverage a one-to-one approach. The business development’s role is that of generating distribution.
Market development is a growth-centric strategy that businesses use to identify or develop new market segments for existing products. Companies utilize the market development strategy to discover new potential buyers of their products or services.
Growth engineering is a systematic, technical approach to the improvement of conversion and the user experience. Combined with business engineering it helps business people build valuable companies from scratch.
Growth marketing is a process of rapid experimentation, which in a way has to be “scientific” by keeping in mind that it is used by startups to grow, quickly. Thus, the “scientific” here is not meant in the academic sense. Growth marketing is expected to unlock growth, quickly and with an often limited budget.
fixed mindset believes their intelligence and talents are fixed traits that cannot be developed. The two mindsets were developed by American psychologist Carol Dweck while studying human motivation.
Both mindsets are comprised of conscious and subconscious thought patterns established at a very young age. In adult life, they have profound implications for personal and professional success.
Individuals with a growth mindset devote more time and effort to achieving difficult goals and by extension, are less concerned with the opinions or abilities of others. Individuals with a fixed mindset are sensitive to criticism and may be preoccupied with proving their talents to others.
The more you move from consumers to enterprise clients, the more you’ll need a sales force able to manage complex sales. As a rule of thumb, a more expensive product, in B2B or Enterprise, will require an organizational structure around sales. An inexpensive product to be offered to consumers will leverage on marketing.
STP marketing simplifies the market segmentation process and is one of the most commonly used approaches in modern marketing. The core focus of STP marketing is commercial effectiveness. Marketers use the approach to select the most valuable segments from a target audience and develop a product positioning strategy and marketing mix for each.
The sales funnel is a model used in marketing to represent an ideal, potential journey that potential customers go through before becoming actual customers. As a representation, it is also often an approximation, that helps marketing and sales teams structure their processes at scale, thus building repeatable sales and marketing tactics to convert customers.
Venture capitalist, Dave McClure, coined the acronym AARRR which is a simplified model that enables to understand what metrics and channels to look at, at each stage for the users’ path toward becoming customers and referrers of a brand.
The general concept of Bootstrapping connects to “a self-starting process that is supposed to proceed without external input.” In business, Bootstrapping means financing the growth of the company from the available cash flows produced by a viable business model. Bootstrapping requires the mastery of the key customers driving growth.
A sales cycle is the process that your company takes to sell your services and products. In simple words, it’s a series of steps that your sales reps need to go through with prospects that lead up to a closed sale.
Distribution represents the set of tactics, deals, and strategies that enable a company to make a product and service easily reachable and reached by its potential customers. It also serves as the bridge between product and marketing to create a controlled journey of how potential customers perceive a product before buying it.
Zero to One is a book by Peter Thiel. But it also represents a business mindset, more typical of tech, where building something wholly new is the default mode, rather than building something incrementally better. The core premise of Zero to One then is that it’s much more valuable to create a whole new market/product rather than starting from existing markets.
A digital channel is a marketing channel, part of a distributionstrategy, helping an organization to reach its potential customers via electronic means. There are several digital marketing channels, usually divided into organic and paid channels. Some organic channels are SEO, SMO, email marketing. And some paid channels comprise SEM, SMM, and display advertising.
RevOps – short for Revenue Operations – is a framework that aims to maximize the revenue potential of an organization. RevOps seeks to align these departments by giving them access to the same data and tools. With shared information, each then understands their role in the sales funnel and can work collaboratively to increase revenue.
In a logrolling negotiation, one party offers a concession on one issue to gain ground on another issue. In logrolling, there is no desire by either party to advertise the extent of their power, rights, or entitlements. This makes it a particularly effective strategy in complex negotiations where partial or complete impasses exist.
Win-win negotiations first rose to prominence during the 1980s, thanks in part to books like Roger Fisher, William Ury, and Bruce Patton’s bestseller Getting to Yes: Negotiating Agreement Without Giving In. Having said that, there was also a shifting mindset at the time as negotiators saw win-win negotiations as preferable to the then-dominant win-lose approach. A win-win negotiation is a negotiation outcome resulting in a mutually acceptable and beneficial deal for all involved parties.
In negotiation theory, BATNA stands for “Best Alternative To a Negotiated Agreement,” and it’s one of the key tenets of negotiation theory. Indeed, it describes the best course of action a party can take if negotiations fail to reach an agreement. This simple strategy can help improve the negotiation as each party is (in theory) willing to take the best course of action, as otherwise, an agreement won’t be reached.
In negotiation, WATNA stands for “worst alternative to a negotiated agreement,” representing one of several alternative options if a resolution cannot be reached. This is a useful technique to help understand what might be a negotiation outcome, that even if negative is still better than a WATNA, making the deal still feasible.
The ZOPA (zone of possible agreement) describes an area in which two negotiation parties may find common ground. Indeed, ZOPA is critical to explore the deals where the parties get a mutually beneficial outcome to prevent the risk of a win-lose, or lose-win scenario. And therefore get to the point of a win-win negotiation outcome.
Revenue modeling is a process of incorporating a sustainable financial model for revenue generation within a business model design. Revenue modeling can help to understand what options make more sense in creating a digital business from scratch; alternatively, it can help in analyzing existing digital businesses and reverse engineer them.
Customer experience maps are visual representations of every encounter a customer has with a brand. On a customer experience map, interactions called touchpoints visually denote each interaction that a business has with its consumers. Typically, these include every interaction from the first contact to marketing, branding, sales, and customer support.
AIDA stands for attention, interest, desire, and action. That is a model that is used in marketing to describe the potential journey a customer might go through before purchasing a product or service. The AIDA model helps organizations focus their efforts when optimizing their marketing activities based on the customers’ journeys.
Social selling is a process of developing trust, rapport, and a relationship with a prospect to enhance the sales cycle. It usually happens through tech platforms (like LinkedIn, Twitter, Facebook, and more), which enable salespeople to engage with potential prospects before closing the sale, thus becoming more effective.
The CHAMP methodology is an iteration of the BANT sales process for modern B2B applications. While budget, authority, need, and timing are important aspects of qualifying sales leads, the CHAMP methodology was developed after sales reps questioned the order in which the BANT process is followed.
The BANT process was conceived at IBM in the 1950s as a way to quickly identify prospects most likely to make a purchase. Despite its introduction around 70 years ago, the BANT process remains relevant today and was formally adopted into IBM’s Business Agility Solution Identification Guide.
The MEDDIC sales process was developed in 1996 by Dick Dunkel at software company Parametric Technology Corporation (PTC). The MEDDIC sales process is a framework used by B2B sales teams to foster predictable and efficient growth.
The virtuous cycle is a positive loop or a set of positive loops that trigger a non-linear growth. Indeed, in the context of digital platforms, virtuous cycles – also defined as flywheel models – help companies capture more market shares by accelerating growth. The classic example is Amazon’s lower prices driving more consumers, driving more sellers, thus improving variety and convenience, thus accelerating growth.
Business storytelling is a critical part of developing a business model. Indeed, the way you frame the story of your organization will influence its brand in the long-term. That’s because your brand story is tied to your brand identity, and it enables people to identify with a company.
Enterprise sales describes the procurement of large contracts that tend to be characterized by multiple decision-makers, complicated implementation, higher risk levels, or longer sales cycles.
Outside sales occur when a salesperson meets with prospects or customers in the field. This sort of sales function is critical to acquire larger accounts, like enterprise customers, for which the acquisition process is usually longer, more complex and it requires the understanding of the target organization. Thus the outside sales will cut through the noise to acquire a large enterprise account for the organization.
A freeterprise is a combination of free and enterprise where free professional accounts are driven into the funnel through the free product. As the opportunity is identified the company assigns the free account to a salesperson within the organization (inside sales or fields sales) to convert that into a B2B/enterprise account.
Palantir is a software company offering intelligence services from governments and institutions to large commercial organizations. The company’s two main platforms Gotham and Foundry, are integrated at enterprise-level. Its business model follows three phases: Acquire, Expand, and Scale. The company bears the pilot costs in the acquire and expand phases, and it runs at a loss. Where in the scale phase, the customers’ contribution margins become positive.
Consultative selling is a sales approach favoring relationship building and open dialogue to adequately meet the needs of a prospective customer. By building trust quickly a consultative selling approach can help the customer better meet her/his expectations and the salesperson hit her/his targets more effectively.
A unique selling proposition (USP) enables a business to differentiate itself from its competitors. Importantly, a USP enables a business to stand for something that they, in turn, become known among consumers. A strong and recognizable USP is crucial to operating successfully in competitive markets.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
