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.
How do you get out from this zone?
Beware of the death zone
This data is from Nathan Latka’s [list of SaaS companies]
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.
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.
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.
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.
- 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.
- 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.
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