Why You May Be The One Thing Holding Your Company Back (From Growth)
You should have these two goals when spending marketing dollars: selling and experimentation. Are you using the right mixture of each to ensure the growth that you need?
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Marketing dollars can often be the lifeline to your company's growth and scaling ability. But the challenges for founders in today's startup environment are the many ways of spending those marketing dollars.
The two most important things your marketing budget can help improve are sales and experimentation. The first is obvious, but the second is one that we see many early-stage startups miss. The result -- they don't have as much control over their ability to scale.
When you take control of your ability to scale, you take control of your business.
Sales vs Experimentation
Assuming that we all have limited capital and time, your company's ability to drive sales and experiment are in natural tension with each other. We see many entrepreneurs make the mistake of focusing too much on milking current channels (selling) and not enough on identifying their next channels (experimentation).
It's a very easy trap to fall into, because finding a productive sales channel is hard, and when you find one, you want to maximize it. However, the world changes fast these days and you never know when your best-performing channel is going to be disrupted.
The equation that works for us is spending at least 20 percent of our marketing budget on experimentation (even if we think we've already found a gold mine).
Finding your end goal.
Are you trying to create the next Snap Inc., with its massive IPO? Or maybe you are looking for supplemental income to fund your kids' college education?
Have you defined your end goal? Or are you just running as fast as you can, hoping to get traction, then deciding on the finish line? When understanding how to best scale your business, it is important to keep your end goals in mind.
Look at one of the companies from our TV show, Hatched, that we were impressed by: Wild Zora, which offers paleo products, gluten-free meat, and vegetable snacks.
The company is run by a husband-and-wife team who originally set out to pass along the company to their children, not grow a massive business to sell.
With this clear end goal in mind, they're less focused on getting into every outlet and scaling and are more about creating a sustainable business that can support them over time. As a result, they don't want to take VC money and are funding their growth through their profits. If your motivation is not a large financial payoff, not scaling is just fine.
But if your end goal is to have a huge payday, it is likely that you will need to scale. And that means planning your frictionless scaling right off the bat.
Frictionless scaling happens when you create a product or service that will allow you to reach the size you want as easily as possible. It takes a delicate balance between marketing and experimentation to achieve successful scaling with low to no friction.
A company we've recently invested in, partially because of its ability to scale quickly with limited friction, is ClassPass, the online marketplace that connects fitness classes and gyms with consumers.
With ClassPass, consumers pay a monthly subscription and can attend a certain number of fitness classes each month. Currently valued at more than $400 million, ClassPass requires very little additional infrastructure to expand into a new city.
ClassPass is a great example of a company that used experimentation to discover their frictionless scalability. Cofounder Payal Kadakia had attempted twice before to build a business that connected people to fitness classes.
Her first project, Classtivity, was like OpenTable for classes. The problem was that people used it to scout classes, so although Classtivity received tons of page views, it was paid only if people booked through the site. Then she tried selling users ten new classes at a studio. That didn't work either because, as she discovered, once users found a class they liked, they kept returning to that class rather than trying new ones.
She took everything she learned about what customers wanted and launched ClassPass, which is now available in thirty-four cities and four countries.
That's a classic example of nailing it before scaling it.
Notice how they invested not only in sales but also in experimentation to find the right formula.
Why we did not achieve frictionless scaling with VEEV.
ClassPass's frictionless growth stands in stark contrast with our experience with VEEV. We sold VEEV when we did because we eventually hit a sales plateau. We learned that the spirits business was one of the most difficult industries in which to scale. There was too much friction, and we realized that in order to grow significantly, we would need a lot more salespeople.
Scaling the right way for your end goals.
People used to ask us all the time why we didn't expand VEEV to other countries. We had requests every week from people in other countries who wanted to buy VEEV--including the owner of 50 palaces in Kazakhstan. Despite such opportunities, it would have been an unprofitable investment of time to attempt building the infrastructure necessary to ship alcohol overseas.
There are different legal documents, packaging and labeling requirements, and size of bottle requirements, not to mention hiring salespeople and finding distributors in other countries. In the end, it made more sense to sell to a global company that already had the necessary infrastructure in place to scale.
After our experiences hitting such roadblocks in growing and scaling our business, we're now obsessed with frictionless scaling.
Ask yourself, "What happens in my operation when I don't show up?"
If the answer is "Not a lot," you don't have systems in place that are ready to scale beyond you.
If a restaurant would lose its touch without its maitre d', for instance, it would likely not make a good franchise.
Here are key questions to ask yourself to discover what growth you are currently set up for:
Is my business prepared for the next step?
If my sales volume tripled, could I fulfill my orders?
Would I need to hire more employees or change any technology in order to accommodate a sudden increase in demand?
Is there anything I could put in place now that would make growth as scale easier?
One simple thing you can do no matter your size that really helps with scaling is to document all processes in writing. That way you won't lose as much momentum as staff come and go. You will have a playbook ready to share that will make you less dependent on any one individual.
Implement scalable systems and processes.
From the very beginning, create systems that will work when you change from nailing to scaling. Ensure that you have expandable supply chain and call center support, and server capacity, so that when you figure out the levers that propel growth, everything will be in place for takeoff. Today you might only have ten calls a day, but you want to be assured that when you have a thousand, you'll be well prepared.
We're strong advocates of outsourcing everything except your core business. That way, you'll be connected to the capacity you need when you need it, rather than building unneeded capacity now.
For example, with Amazon Web Services, you buy bandwidth based on what you need. When you're at one million dollars, you need only a little bit. When you run a Super Bowl commercial and demand goes through the roof, you buy more.
When you think of processes to support frictionless scaling, don't forget to look at all of your processes to make sure that you set up to be repeatable. For instance, don't just interview someone yourself. Bring in a junior associate, so that he/she can see how you interview someone. This way he/she can learn from you and eventually do it herself.
Take time to systemize the tasks people do routinely. This is so easy to get wrong. In the heat of the moment, it's easier just to do the task again or do a workaround, rather than putting in the extra time to systematize a fix that will avoid the problem in the future. This is a crucial mistake that, if perpetuated, leads to big scaling problems down the road.
The real lesson is to know where you want to go as a first step to getting there. You have to nail it before you scale it. Many entrepreneurs try to simply google "how do I start a business" and expect to find all the answers.
If only it were that easy.
But, don't get discouraged. There are groups that you can join with other entrepreneurs who are going through what you are going through. And there are complete blueprints for startup success, if you look carefully.
What are other factors that have helped you to nail it before you scale it? Please share as comments.