There are many sales and marketing tools out there for small and medium businesses to go from start-up to scale-up. Simon Philips, CEO and founder of ScaleUp Capital, offers eight simple steps on how to manage growth and how to shape the packaging, pricing, delivery and sale of the product or service so that the revenues are recurring by nature.
It isn’t easy starting a new business. Taking a concept from idea to inception is an exciting process, but it comes with high risks and uncertainties that can deter many. We, however, need start-ups. They create and develop new products and services, as well as new markets. They are forward-thinking, innovative and are the backbone to economies across the globe.
Taking a start-up to scale-up is the next stage for those that have overcome the initial challenges. The next stage of growth is where the metric for success is accelerating and maintaining profitable revenue growth. The risks and challenges change. It isn’t about the success of the launch anymore; it is about creating a sustainable and scalable model throughout your business.
Scaling up are the adolescent years when a business will go through more change than at any other time. At the end of the scale-up phase, you will have a business that is robust and resilient, growing fast enough to reach escape velocity and with enough critical mass to be profitable.
The name we give to businesses that are entering this scale-up phase is ‘scalers’. Our experience has been with digital B2B businesses, but many of these lessons are applicable to businesses in other sectors.
Small window of opportunity to become a ‘role model scaler’
A role model scaler has a simple pitch that convinces large numbers of customers to buy their killer product or service which solves a big and painful problem and keeps these customers for the long term.
Role model scalers will have the metrics to prove it. They will have attractive unit economics with a Customer Lifetime Value (LTV)/Customer Acquisition Cost (CAC) well more than 3x. The very best are >10, and some real stars can be >25 or even >100. They will have a scalable model for both customer acquisition and product/service deployment, meaning they can readily crank the handle to do both in much higher volumes. There will be enough customers in their addressable market (TAM) to enable them to build a big business. Enough of these target customers will be greenfield, meaning they will not have a comparable competitive solution already. Preferably comparable competitors will be few and far between, or at least not too far ahead. In ideal situations, the TAM is way larger than the actual current market size, indicating that current market penetration is very low, and the bulk of the market is unaddressed greenfield.
The scale-up phase is a window of opportunity to shape your business to be as close as possible to this role model while you are still small enough to be agile and nimble. Once the business infrastructure is in place, it is much harder and more costly to pivot and reshape it so it’s important to get this right early on.
We have witnessed business after business take on their scaling ambitions. But to do it right, and to ensure that role model status, there are eight simple steps we recommend in the process, they include:
- Ensure you have a deep and accurate understanding of customers and the market because you will be making your big bets and investments on the back of it. Start-ups are often characterised by a trial and error exploratory hunt for business and you may have stumbled across different target customers and user cases. List these out and profile them very clearly and specifically. If you don’t have all the information, then conduct customer and market research to plug the gaps.
- Focus on the best user cases where you are solving big and painful problems that deliver outcomes for customers that are far more valuable than the cost. Check there are enough customers out there with these user cases for you to build a large enough business. Ensure the market isn’t overcrowded with competitors and has sufficient greenfield opportunity. This is the sweet spot to laser in on.
- Develop and build out your product or service to be the best in the market, at least in a few crucial ways that enough of these target customers really care about.
- Shape the packaging, pricing, delivery and sale of the product or service so that the revenues are recurring by nature – subscription, SAAS, managed services, long-term contracts, high switching costs. Otherwise, ensure it is an ad-hoc purchase which is inherently designed to encourage customers to come back time and time again.
- Refine the elevator pitch until it is simple to the point where anyone can pitch it and immediately understand it.
- Build a small customer acquisition machine to make the pitch in large enough volumes to people with the right user cases. You are unlikely to get this right first time so prepare for trial and error, focusing on pace and rigour. Measure the effectiveness of each iteration of the machine by calculating the LTV and the CAC and the underlying KPIs which drive these. Be scientific. Keep refining until it is optimised. This will avoid wasted time and money further down the track.
- Once optimised, build up the customer acquisition machine. Hire more salespeople. Add more partners. Spend more on lead generation. Build the machine and keep measuring your metrics to ensure they remain strong. If you haven’t successfully completed earlier steps, then you may see a drop in the LTV/CAC as you try to scale things up. If it drops too far then you will need to circle back to repeat some of those initial steps before going any further. If not, then keep cranking up the handle and enjoy the ride as you accelerate towards escape velocity!
- Beyond customer acquisition, increasing the lifetime value of a customer is the holy grail. You want to charge more year on year, increasing the average order value and customer retention rates. Get into a virtuous circle by reinvesting enough cash flows into targeted improvements to your product or service so that you get better as you become bigger and more valuable to your customer.
Don’t forget the important role people play in scaling the business
At the start of the scale-up phase, founders or a few key managers are usually pulling all the levers, doing many jobs at once. This isn’t scalable. New skills and new people are needed to build out the management team which can implement the systems, processes and governance to enable the business to change gear.
Don’t undercook the management team to save a few pounds. Strong talent makes all the difference. Equally, don’t overcook the team or recruit too far ahead of the curve. Bringing in big guns from big companies too early on usually fails. Founders often hold the magic sauce so keep them at the heart of things even if they aren’t running the business during the scale-up phase.
At the end of the scale-up phase, you want to have a strong, skilled management team and the right people in the right roles doing the right things across the business. You want everyone to know what they are doing and why, individually and collectively.
This is how you scale-up
There is always potential for growth as long as a business has enough of the fundamental qualities required to be a scaler. With the right raw material and quality product or service, the rest is all about implementation.
There is a recognised model to scaling a business. It includes breaking down the different phases and workstreams, with a focus on product-market fit, customer acquisition, customer lifetime value and talent, all governed with a KPI and data-driven approach. Underpinning this execution should be a culture where your people are highly focused, engaged and driven by a common purpose to create the best and most successful business in the market.Click below to share this article