“What Changes to Make After Finding Product-Market Fit (Part 4)”
The behavior and focus of a startup need to change in several ways after it reaches product-market fit. The use of marketing is one of the biggest challenges during this time. It’s critical that marketing be used effectively and in pursuit of the right goal following product-market fit. During this time, a startup’s marketing efforts should aim to reduce customer acquisition costs and payback time. This will help to speed up growth while ultimately creating more cash to re-invest in future sales and marketing efforts.
In the latest episode of the Midstage Startup Momentum Podcast, startup coach Roland Siebelink hosts a workshop on driving down payback time for customer acquisition. He explains how this can be accomplished by using the company’s marketing efforts the right way.
- Why you’re in a race for product-market dominance after finding product-market fit.
- Benchmarks for how quickly your flywheel should reduce payback for customer acquisition costs.
- How marketing can play a role in reducing customer acquisition costs and accelerating growth.
- Behavior from marketers you should be aware of when hiring in that department.
- Why it’s important to avoid using too many marketing tactics at the same time.
This is the sixth module of our workshop. Five changes startups must make after reaching product-market fit. In the past, we’ve already talked about verifying if you’ve really reached product-market fit yet, and if you have, then go into our five changes that you should make. We define your mission around product-market dominance, capture latent demand, design your product for automatic upgrades, ensure healthy gross margins. And the fifth is what we will discuss today, drive down the payback time for your customer acquisition.
What does that mean? It means that you should position your marketing efforts on driving down the costs of the sales and marketing together - customer acquisition cost - and how much time it takes to earn that back. Remember that you’re in a race for product-market dominance. The key question investors are looking to answer about your business at this stage is will you conquer the market before your competitors can. That is why they want you to optimize so much for growth and for conquering that market, for getting as many customers on board as fast as you can.
The resources that you get for that do come from investors in the beginning. But ultimately, it does require a flywheel effect. Initial investments in sales and marketing should not be a bottomless pit. They should earn themselves back over time. Just because you acquire customers with them, these customers are going to pay you. And if they pay you for a long enough time, then you get that money back so that you can reinvest in even more sales and marketing. That’s what we call the customer acquisition flywheel. Of course, it matters a lot how long it takes before that flywheel turns around. Does it take five months? Does it take 10 months? Or does it take two years? That is what you want to optimize in this stage of growing your market as fast as possible.
This is where marketing comes in as an addition to the typical sales job. Take B2B companies here as an example, where the sales function is very separate from marketing typically. In a B2C customer company, it’s going to be a little bit different. But most of the people following this workshop will be in B2B situations - that’s why we talk about it in this way.
In the beginning, B2B companies will typically have a few salespeople. These salespeople work through the funnel end-to-end. And then they start realizing that the cost per sale for the sales time that the sales person spends is enormous. Often, there’s a payback period of 18 months, maybe 24 months. Marketing can be your tool to actually drive down the costs that the salesperson has to spend. Why? Because it’s essentially preparing customers at scale. It’s a higher marketing investment. But that could result in less time qualifying prospects, a shorter sales cycle, and a higher average revenue per contract, all leading to a shorter payback.
Mastering distribution, which is the key challenge in this stage right after product-market fit, is to master payback time. Here are some benchmarks for BSB, SaaS companies. Typically, bad is 18 months, and anything over that is too risky. We question when they’ve reached a payback time of 12 months. Okay is nine months. And if you get to six months, then we start to think of it as really good. I think some of the best average five months, four and a half months of payback time. You don’t get there from the beginning. But it’s a target to strive for. Especially a target you want to have reached by the time you’re ready to raise your series B. Good marketing, as I mentioned, should prepare sales at scale. Move these targets customers from completely unaware through the interested - maybe desiring stage - so that the salesperson can hit the ground running. Marketing’s job is, one, to make target customers aware of the problem, then establish that problem as a real pain point so that they have an interest in solving the problem, offer your products as a solution so that there’s some desire to try the product, and then hand it over - whether it’s to salespeople or to a product-led growth process, where they can sign up as a free user and you take it from there.
The anti-pattern is that many marketers do not actually like that lead generation part all that much. They like the cool aspect of marketing. Something to be aware of when you hire first marketers is the tendency that many of them have to spend time outside of driving sales. Too much time spent on branding, corporate identity, new business cards, organizing events and conferences that don’t actually lead to many new leads, helping the CEO be in the press for brand advertising that looks very cool and sexy but that that does not actually lead to a sizable reduction in the payback time are all things to watch out for. They can have their place, especially in a later time of the evolution of the business. But at this stage, marketing should be focused first and foremost only on driving down that payback time for your new customers.
The best practice is not to invest in too many marketing tactics at the same time. I like to think of it as a champion tactic and a challenger. You have a base campaign running that you know performs. And then all the other ideas that people have are going to be tried out one by one to see if they can get to the same level as the base campaign. If they don’t, or if the effect is not as big, then don’t keep doing them just for the sake of it but try something else instead.
That’s where I see in the Midstage Institute that focusing marketing efforts should be first and foremost driving down the payback time for your customer acquisition. And that’s the fifth habit that you need to change after reaching product-market fit. For more tips about what to do in this niche stage, go and visit www.midstage.org for the Midstage Institute.
Roland Siebelink talks all things tech startup and bring you interviews with tech cofounders across the world.