Over the years, I’ve met many early-stage startups with a fabulous vision that includes dreams of a large and growing customer base. The pitch usually starts with a long discussion of the product and its capabilities, then transitions into how the product represents an innovation that is sure to become the way of the future.
But what about the customers, I ask, trying to inject a question 10 minutes into the rapid-fire monologue. What do they think of your product? To which I get an enthusiastic affirmation that “they really like what we’re doing”. But when I probe, the lack of traction and spotty understanding of the customer situation becomes very evident. To make matters worse, the entrepreneur plans to hire a salesperson to figure it out for them. Sadly, there are no magic wands and these startups will falter without a major change in their approach.
Many startup business plans include a “hockey stick” revenue forecast, but the mathematics behind that non-linear curve demands a deep understanding of the customer and impeccable execution.
Startups need to practice logarithmic sales – or put another way, they need to crawl before they walk before they run before they sprint – collecting evidence, learning, adapting and evolving at each stage.
So what do you focus on in each stage of logarithmic sales to set yourself up for success?
The objectives, tactics and key business metrics are different for each stage, so be cognizant of which stage you’re in and what you need to focus on executing well today. Of course, knowing what to focus on and when, allows you to be more efficient with your time and resources, further improving your likelihood of success.
Let’s break down these stages and ask yourself if you have truly nailed your current stage before advancing to the next. Skipping or short-changing a stage will inevitably come back to bite you, so ignore this advice at your own peril. Your advisor/mentor or the Evidology Group can be a good sounding board to challenge your assumptions.
The following graph serves as a summary of the stages and a commensurate boost in your business valuation. Although the graph was designed for a B2B SaaS business, the parallels to other B2B businesses should be apparent.
Stage 0 = Log (1) is about learning and planning
Stage 0 is designed to collect evidence to prove that customers have an important problem that needs to be solved. It is intended to help give credibility to your strategic plan and financial model. This stage can be low cost and yet have the biggest payoff for the investment as it’s more about learning and planning rather than building and executing. In fact, no expensive product development or fundraising is required at this stage. Much of the Evidology Group best practices are focused on getting this stage right because it builds a solid foundation and evidence-based culture for future stages.
In this stage you:
- Conduct a comprehensive customer discovery process as we’ve outlined in our previous blog How Do You Know If You’re On The Right Path?
- Establish credibility that can lead to early-stage partnerships based on two-way sharing of the customer’s real-world situation and your understanding of the art-of-the-possible as we described in our previous blog: Do You Sell or Partner?
- Collect customer stories for investors and employees to clearly explain the problem you’re solving and how it will help customers improve their business
- Three business metrics that matter: Number, quality and consistency of customer discussions.
Stage 1 = Log (10) is about signing a handful of early-adopter, referenceable customers
Stage 1 is designed to verify the accuracy of evidence collected in Stage 0 and prove you have solved an important customer problem. Note that at this stage, it’s less relevant how much the customer pays. What’s more relevant is that the product works and the customer is getting economic value in return for providing essential feedback and acting as a reference.
In this stage:
- It is the responsibility of the Founders to find the lead customer(s) and to own the customer relationship
- The Founders need to build a deep understanding of the customer’s problems, environment, and solution requirements
- You need to collect evidence to prove your product works effectively and that you are delivering the intended economic value
- Marketing needs to be able to package and communicate customer stories
- Three business metrics that matter: customer usage, customer economic value and customer satisfaction as well as the Stage 0 metrics.
Stage 2 = Log (100) is about getting to 100 customers
Stage 2 is designed to show product/market fit and ensure each sale is low-friction and profitable.
In this stage:
- A professional salesperson takes over responsibility for closing new business while the Founder remains in an executive sponsor role, supporting the sales process and ongoing customer satisfaction
- Building on reference customers, Marketing takes responsibility for amplifying customer stories and generating qualified leads
- Based on established best practices, a repeatable sales model is documented in a sales playbook to streamline the onboarding of new salespeople
- Three business metrics that matter: revenue, customer Annual Recurring Revenue (ARR) and churn, as well as the Stage 1 metrics.
Stage 3 = Log (1,000) is about getting to 1,000 customers.
Stage 3 is designed to prove you can scale the business with a sustainable, repeatable sales process.
In this stage you:
- Hire salespeople and build a repeatable sales process. This will bridge stage 2 and 3
- Build a customer-centric sales process
- Focus on shortening the sales cycle, minimizing churn and accelerating customer success
- Three business metrics that matter: LTV > 3x CAC, sales growth (bookings), sales cycle duration, as well as the Stage 2 metrics.
When you evaluate your stage, are there gaps you need to address? Are there some initiatives you can defer to a later stage?
If you follow a step-wise “logarithmic” approach to your startup with a focus on execution excellence appropriate for your stage, you can dramatically increase the potential for exponential growth and realize that legendary “hockey stick”.
Contact the Evidology Group to see how we can help set your business up for success. And as an added bonus for those who are at Stage 2, here’s a link to a video presentation from David Skok at Matrix Partners who is highly regarded as the thought leader in SaaS metrics and best practices. Whether or not you’re a SaaS business there are lots of great learning points in this video and his website.
