This article is a crosspost with Nuwait.
If you’re spending too much at your company and still not growing at the same rate, you should go back to the drawing board and slash some costs.
The charts below reflect the growth stages at two given companies. Chart one reflects an exponentially growing startup, what one might call a venture-friendly investment. Chart two is a rather alarming illustration of a company not growing at a stable, exponential rate.
For those new to the entrepreneurship world, these are two important definitions:
Burn rate: how much money you are spending every month to run your company.
Exponential growth: a rapid increase in one metric. In our case, revenues.
These two charts show two very different startup growth stories - one is the ideal, the other less so. (Images via Nuwait)
Growth and unit economics
The first question a startup owner needs to ask himself is: what’s my company’s economics of one unit (EOU)? It’s a less fashionable term nowadays, but one of great importance.
EOU is how much you spend to gain a certain amount of dollars per unit of service or product.
As an example, if your company is selling a specific SEO service, your EOU is calculated by money gained from selling one service minus the money spent on providing that service.
Suppose you have an EOU of $3. The next question is growth strategy: how much more can that $3 per unit grow? Well, it depends on the size of the market. Look back at the charts above.
In the first chart the CEO knows exactly the EOU of his business, and is trying his best to grow the number of units he can sell. At about period 28, the company starts to break even with its burn rate, which means they are getting all their unit costs, plus their operation costs from their sales numbers.
In the second chart, the CEO keeps adding expenses that are not relevant to his company’s service unit. The burn rate is going up semi-exponentially, but revenues are struggling to climb. There are mainly two reasons for that:
There is no product/market-fit yet.
The CEO hasn’t figured out what expenses contribute to selling one unit of service.
If your business is in the second situation, what should you do?
If you look back at period 11, you’ll see a nice small curve upward in revenues, up until about period 14, where it starts to go back down. You’ll see something similar at periods 22 to 27.
What happened in those two periods? Was it a special promotion? Did you use a different sales channel? Is your product being used by people that you didn’t target before?
There is definitely a reason behind those peaks: you have to be customer-centric and put yourself in your customers’ shoes.
Next you have to gather your team, dig into the numbers and look for possible trends or behaviors that contributed to the rising revenues.
Try to generalize the situations: if you’ve used a promotion, try to think of the promotion’s details. Did you give away free mugs? Did you have a referral reward? Write down those specifics, and try to generalize them.
Then think of how you can redo those growth techniques using the generalizations.
Another possibility is that somehow your service or product has reached a market segment that you didn’t target before. Your best bet in this situation is to call your customers and ask them for feedback. Target the ones that spent money on your product during those peaks.
If you find out that they were total strangers, and not in the segment that you targeted before, then you’ve just found your customers. The ones you targeted probably weren’t your customers before. Keep them happy, and try to surround yourself with as many customers of this segment as possible.
Are you spending too much?
This will depend on your EOU and your total burn rate. If you have a positive EOU, but are not making profit, then the answer will depend on how much more you can milk the market. If your EOU is negative, then most it’s likely you are spending too much.
Try to think of your product or service as one unit, and specify exactly how much it costs you to produce one unit of your product/service
Get your selling price, and subtract the costs you find in step 1, and you’ll get your Economics of One Unit (EOU).
If your EOU is positive, keep growing
If you have a negative EOU, plot your weekly revenues and your burn rate. Look for any peaks
Gather your team, analyze the peaks, and look for trends
Generalize the trends and keep iterating on them to see which one goes through the furthest.
Keep a personal touch in your product, and initiate long lasting relationships with your customers.