Monday, December 22, 2014

How Grow Can You Go?

More than ever, a company's growth rate drives its ability to raise money, at least when the company is an early to mid-stage tech company.  In the SaaS world, a growth rate below 50% means it will be virtually impossible to raise money.  At above 150% investors will practically fall over themselves to give you money. 

Because growth is so important, the ability to forecast a company's growth is critical.  A good growth model sets expectations and drives the company's strategy. Yet, this forecasting is often done with a wing and a prayer and perhaps a little bit of historical data (which often is barely relevant when looking forward). A better way to forecast growth is to look at your baseline growth rate and then think about the major things that could impact that growth.  The main drivers of the model typically are:
  • Baseline growth rate.  If you shut off all your paid marketing and left everything status quo, what would happen to your business?  This usually is a good measure of your virality minus your churn.  In other words, how many customers do you get from word of mouth minus how many do you naturally lose through attrition each year?  If you have ever had a period where you didn't spend a lot on marketing, you may have come close to this baseline growth rate.
  •  Change in revenue in per user (aka ARPU).  This can include raising prices, selling customers a higher quantity if applicable, up-selling customers on higher cost products, and cross-selling customers on other product lines.  Raising prices is always a little difficult for early to mid-stage companies, but up-selling and cross-selling are often very viable strategies for this stage company, especially if you can regularly create new products.
  • Improving the conversion / close rate.  In a B2C environment you should be regularly running A/B experiments to improve your conversion rates.  In a B2B environment that involves sales reps, you can make tweaks to your sales process to improve your close rate.  Your success in these areas will often depend a lot on how far you are down the road.  For example, at TeamSnap we have run thousands of A/B tests.  As such, improvements in conversion rates are much harder to find at this point.
  • Increase your paid marketing / sales team.  If you know your cost to acquire a new customer (CAC), you can always see how many extra customers you can acquire if you up your marketing budget or increase your sales team.  However, there are diminishing returns to this strategy.  CAC can grow as you ramp up spend, so it is best to plan for CAC to rise with spend.
  • Increase virality.  If you can increase your virality through enhancements to your product, this can be one of the most powerful ways to jumpstart growth at minimal cost.  For a lot of companies there are a lot of things they can do to increase virality.  However, forecasting how much virality will increase is not an easy task.
  • Reduce churn.  Growing your business with a high churn rate is like putting out a fire with a leaky bucket.  In the early days this is an area that can bear a lot of fruit.
  • M&A.  Do you plan to acquire any companies this year?  Acquisitions can increase traffic, your customer base and/or revenues.
While some of these drivers of growth are harder to forecast than others, the most important part is to take a stab.  Having growth targets for each of the above drivers will help you set your strategic priorities. If most of your growth is going to come from one or two drivers above, you need to make sure your team is focused on those items and that you are closely measuring your success in those areas.