The importance of a testing culture to achieve growth for your venture
In the world of tech startups and scale-ups, growth is the name of the game. The phrase 'Growth Hacker' is bandied about and turned from a mythical position and skillset to becoming standard for any marketer in a tech business.
It's best practice to hire a VP of Marketing before a VP of Sales and this is for good reason. Without the leads there's no one to sell to. The sales team need to know the target audience, ideal messaging and then how the product can help solve that product - all things that a VP of Marketing would bring to the table. Get the lead generation machine working and the sales will come. If you have bulging expenses from sales salaries but they don't have the pipeline coming through, you're burning money. A fine strategy if you're treating this as a sunk cost before the leads come streaming in, a poor strategy if you have no plans to sort out said stream.
So how can you look to achieve higher growth at your venture?
The key to building a successful, long term business, is to achieve sustainable growth. Sustainable growth occurs when the processes are set up and working in a way whereby you are growing whilst ensuring positive unit economics (profits outweighing costs).
Some companies who have raised large amounts of venture funding can run at a loss for several years before eventually turning the corner, spending lots to acquire customers who ultimately become profitable (see Starling Bank and Amazon as examples). This is the classic hockey stick graph outlined in business school textbooks and funding pitch decks worldwide. Most companies who try this approach, fail. As a result, companies should look to have revenue growth outweighing any growth in their costs, particularly if they don't have large sums of money to burn through.
Achieving sustainable growth is simple on the face of it. More revenue, less cost. Rinse and repeat. In reality, it's trickier. What if you need to hire someone who will then bring you a lot of business in in 3 months? Your costs will outweigh the revenue for that particular hire, going against the outlined principle. If they do bring in a lot of revenue from month 3 onwards, all good, we're back in business. What if it's a bad hire? Then it's lots of cost for not a lot of revenue. Here is where the proportion of good decisions vs bad decisions needs to be skewed the right way, otherwise your venture will be in hot water.
Sustainable growth needs commercial rigour, a clear objective, and a good level of risk taking, in order to grow at a good rate in a sustainable way.
In order to get closer to sustainable growth, the key is to establish a testing culture. A marketing budget is agreed and you test out various hypotheses to establish which audiences, channels and messaging resonates best and yields the best return on investment.
The ratio to keep front of mind for your business is Cost of Acquiring a Customer (CAC) and Lifetime Value (LTV). For SaaS businesses you want a 1:3 ratio or higher as a benchmark. This is a company-wide benchmark, so some testing initiatives will fall short of the 1:3 ratio and others higher. This is ultimately the point of the testing. You find out where you should allocate more capital to get more revenue in return.
Work out which channels, messaging and audience gives you the most bang for your buck and double down.
A sample process to test out could be:
Find out your ideal customer profile based on your existing customers.
Target audiences with these characteristics on various social channels to find out which one is most profitable for your business.
A/B test the different messaging, including subject lines, to see which variables resonate best with the target audience.
Track post sign-up metrics to establish which customers are your 'best' customers and revise the ideal customer profile.
Go back to Step 1 - it's an iterative process as markets and audiences change.
Have you ever received really bad paid adverts for something you will never be purchasing? Me too. That's what happens when the company in question does not test enough. They are not being specific enough with their audience and may not know their ideal customer profile. Simply put, they're wasting money.
The Holy Grail
The holy grail of growth is organic growth. The CAC is 0 so you're always on the golden side of the CAC:LTV ratio. Organic growth can be word of mouth due to having a great product and associated customer experience, or it can be engineered.
A good example of it being engineered is Monzo, who created a waiting list for their banking app. When you signed up, you were told of your number in the list. To advance up the list, you could refer friends to the same waiting list. This then saw a network effect and got Monzo 250,000 users in 2 years.
A common tactic here, although it does cost some money, is to give discounts to existing users who refer new users. Investing apps such as Trading212 and Freetrade have used this tactic, as do Uber and other apps. This model is seen more in B2C businesses rather than B2B, as B2C businesses are often needing to land and expand in quick fashion to beat out competitors and become the incumbent.
Another strategy to get great organic growth is to foster a sense of community. Having a strong, active community gives customers something to keep coming back to, and makes them feel part of something bigger. As others will then want to be part of said community, they'll tell others. This then gets a phenomenal organic referral machine for your venture.
Growing your venture is a key component to establish permanence as a player in the market, and to achieve your revenue goals.
If you are earlier stage, then you'll need a generalist or two to test out the various channels and get some growth. After that, you can bring on specific roles (e.g. Community Manager) to help pour more gasoline on the flame and get that organic referral machine firing on all cylinders.