Is your business model working for you or against you?
Having looked back at several recent posts I realized that when strung together these articles may be sending an unintended signal to founders: That the only focus a founder should have is bringing in more customers.
The reason so much time is spent on that is it tends to be the most existential problem facing early-stage companies. Every other problem you have is essentially theoretical if you don't have enough customers coming through the door. That being said, once you start to acquire new customers you cannot let that be your only focus. You also need to consider whether your business model is working for you or against you.
One aspect of your business model to consider is whether you're actually selling the same thing to each customer. Now I get that in the early days sometimes you may have to take on a few custom projects to get cash in the door, but that's not what's in question here. The question is, do you have a standard product offering or not? Some entrepreneurs will take the phrase "sell out of the back of an empty truck" a bit too literally and start selling anything to anyone. If you start to lose focus and consistency in terms of who you are selling to and what you are selling them, you can end up in a spot where you're business suddenly looks like a professional services business. You have hodgepodge of different types of customers all with different custom products. Worse yet, is if you don't treat them like custom products with custom prices, you're now selling professional services at product level prices. If that happens you aren't so much extending your runway as drastically cutting it short.
Let's say you're past that, the next thing to consider is whether your unit economics are in check. Founders very often will start out with pricing that's too low and not recognize how expensive it is to acquire a customer. They may simply fail to do the calculation or perhaps they're so early in implementing their customer acquisition strategy, they don't have enough data to get an accurate CAC number. The latter in and of itself is just a matter of being early in your development. Every company starts somewhere. The problem is when founders then decide to throw all of their money at top of the funnel activities when they don't yet know what the ROI is. So let's run through an example. Let's say you're selling a subscription service at $200 per month. Let's further say you've figured out a lead generation strategy and that if you were able to do the calculation it's actually costing you about $800 per lead. That means it takes 4 months to break even on each customer. If you aren't careful and if you don't have a big pile of cash sitting in your bank account, you can very quickly tie up all of your capital in expensive lead generation and create a really bad cash flow problem. Normally this can be a good reason to raise capital but raise with a plan to improve your unit economics so you can move faster.
The last aspect I'll touch on is sales cycle time. The sales cycle can be a tricky thing to figure out because it's something that can only be refined with practice and in the beginning you're often just trying to get enough shots on goal. The challenge is if you start pushing top of the funnel activities too quickly and too disproportionate to moving customers through the funnel you'll create a huge bottleneck in your sales funnel. This means that:
- Many of those hot leads will drop out because they're tired of waiting. That further means all of the money you spent generating them is wasted and all of the potential revenue that could have been generated from them is never realized.
- You'll have cash flow problems similar to aspect #2. Top of the funnel activities tend to require cash upfront. That means until you close some of the customers that come into your funnel from those activities, the money you spent doing that is being tied up. Spend too much money brining in top of the funnel leads while taking too much time to move them through the rest of your funnel and soon you'll be hurting in a big way.
All together, this is basically an early lesson in attempting to scale to early in your development. Make sure your car is up to the task before stepping on the gas.
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