“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
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.