Where things break down
You made it from 1 to 10. What now?
Almost all of our client conversations go something like this:
“We worked so hard to get to $[a number] in revenue. But we don’t know how we’re going to get to $[10x that number]. We can’t spend 10x the time or 10x the money.”
It’s a common story summed up with one of my favorite truisms: what got us here will not get us there. The activities involved in standing up a product or creating a revenue stream are suited to exactly that: incepting a product. Once we have a product in market that people buy and use we run into a big problem: these activities aren’t suited for continual improvement or growth. And the odds are not in our favor: statistically, your startup will fail. Making it into the 10% of companies that succeed requires the foresight and agility to make the shift from the build to the growth phase without skipping a beat.
The Build Phase
Early teams are action-biased: founders go out and sell the product, engineers ship as quickly and as much as possible to build our MVP. We hire people who can pick up new skills as needed since we don’t really need, say, customer support or PR before we have customers who need support or press that needs releasing. Because everything moves so quickly in the beginning, we prioritize features and processes that move us towards product market fit over those that have a less immediate payoff. This primarily looks like building a thing that matches our founder’s vision, selling it, and adjusting and pivoting our thinking until it sticks. This phase is flexible and organic: we are constantly changing our thinking and our work as we understand more about our customer and what they truly need. Most of this work is non-repeatable, and while many frameworks exist to organize thinking around this build phase, the most successful startups are those who are willing to break the rules based on new information.
It’s important to note that this bias towards action is correct in the early days. Founders are encouraged to ship code quickly, find ways to better leverage their time, and do things that don’t scale. I covered this in an earlier post: early product teams should focus on delivering features quickly and not rely on noisy data or expensive tests before we reach critical mass. We will learn the most from speaking with customers and attempting to make sales in new ways and with new pitches. Activities like standing up a marketing stack or creating rich data views for analyzing usage are wasted at this stage; we have more important work to do until the product can sell itself.
The Grow Phase
But as we move past the build phase, the activities required to grow a product shift dramatically. Once users are attracted to our product and we see patterns in who uses it, why, and how much, the game changes. Our MVP product was a translation of our initial product vision; we now need a strategy that enables us to continually improve the product’s ability to acquire and retain customers. At this stage we have outgrown our founding team’s ability to sell the product and need to consider how our growth efforts will scale outside the high-context founding team. It’s here where companies stumble.
In contrast to our build-phase goal, the growth phase is all about the engine that adds and retains customers. Rather than seeking initial customer adoption, we seek repeatable customer acquisition and the ability of the product to scale. In short, we’re identifying the mechanisms that will let us scale. It can be tempting to look at our initial acquisition channels and conclude that because acquisition scales, so too will our growth. Startups with this mindset will throw gas ($$) on the fire and attempt to brute-force the growth phase while continuing to apply the same non-scalable activities as in the build phase. Non-scalable thinking assumes we will make certain tradeoffs in order to reach our goals, which is fine as long as we make the right tradeoffs. Where we previously took shortcuts in favor of getting our product in front of users, we now need to consider shortcuts for getting as many users in front of our product as possible.
Traps
There are two things that tend to go wrong when making this shift: the separation of marketing/sales and product functions, and the de-prioritization of growth platform capabilities. When building growth teams we tend to see specialization as the key to scalability: we hire marketers to do marketing activities, product managers to do product management activities, etc. But who truly owns growth? Similar to the need for centralized product ownership, growth needs a center of gravity. Growth requires empowered teams that can create and refine the customer’s experience of the product before and during its actual use. Separate marketing and product teams are not able to do this, at least not scalably (or perhaps efficiently). Marketing cannot directly build new buttons or place new pixels. Product cannot directly influence messaging or channel utilization. A partnership is required between the two disciplines to effectively build a growth engine that can adapt and improve to suit the needs of the market.
Companies with separate marketing and product teams tend to hold strong biases towards one or the other as the true source of company growth. The chosen function gets more love, more budget, and their platform capabilities expand as a result while the other team’s infrastructure remains static. Think of an ecommerce store with amazing email marketing chops but poor on-site performance, or a SaaS tool with terrible lifecycle marketing. Each team has assumptions about the relative value of their growth options, and each team invests accordingly.
In reality, the investment in one team or the other is simply a downstream decision forced by the unscalable separation of functions. The team tapped to own growth gets significantly more attention and budget, resulting in a lopsided growth engine. What’s worse, leaders see the success of their investments and assume this means their decision to split the functions was justified by the results. This positive feedback loop leads us to scale our activities in our most favored area and declare that our growth is “marketing-led” or “product-led” when in fact we are simply formalizing the bottleneck in our platform capabilities created by our lopsided investment.
The results are predictable: We end up chasing local maxima, fitting our growth strategy around a narrow interpretation of how we deliver value to our customers. We hire, spend, and create processes around the growth channels that got us from zero to one. We develop new features and test them with customers who arrive through these channels, limiting our view of the global maxima our business can support. As our offering matures, we become trapped by our unscalable thinking. Recapturing that early momentum requires a reset and additional time.
In Practice
The following scenarios are real stories of companies that fell into some version of this trap.
The Optimization Engine
The Story: An ecommerce company hits on a market segment that proves to be a cash cow. They build a marketing machine around paid search, social, and email retention. The initial channels return enough cents on the dollar to raise money and occasionally turn a profit. They hire a team to optimize acquisition costs and increase customer lifetime value. Ten years later, the cost of paid search has dramatically increased but their margins have not. New competitors and the ease of jumpstarting lifestyle brands creates noise and reduces customer loyalty to their concept. Their cash cow takes a hit with every market change and grows semi-linearly in the best of times. Competitors out-flank them by diversifying their offerings within the same market segment and driving up acquisition costs even more.
The Trap: Investing in marketing-led growth without investing in platform innovation. A decade after launch, the company is still a set of product pages and a checkout flow. Internal teams understand the characteristics of customer acquisition and retention that drive purchase behavior, but the platform itself lacks the capabilities required to create new measurable customer touch-points. Without the potential for new interactions, our insights are limited to a narrow sliver of the possible value we can deliver.
The Solve: Treat product as growth, and growth as product. Build your revenue growth plan around new platform capabilities and your new platform capabilities around the innovations necessary to capture a broader audience. Product, marketing, and sales should all be considered first-class growth activities.
High Operating Costs
The Story: A SaaS startup finds a unique niche selling critical infrastructure to vendors that cater to small businesses. They are a sales-driven company run by subject matter experts whose product vision comes from decades of industry experience. Most of their clients are acquired through industry events, and activation on the platform is done manually via a customer success/sales engineering process. When it comes time to scale, they notice that adding more sales muscle results in sub-linear growth: they’ve hit a point of diminishing returns with their current strategy. Every dollar in is resulting in fewer dollars out, and in today’s funding climate this puts them at risk of failing to raise their next round. Luckily, the executive team catches this early enough to recognize that sales growth cannot support the company’s revenue goals given the current unit economics. Unfortunately, the product itself is built for a hand-held experience and does not support efficient user acquisition via no-touch or low-touch onboarding. The team sees the challenge clearly, but lacks momentum and institutional knowledge on implementing a solution.
The Trap: Investing in sales-led growth without investing in product-led capabilities. After the first whiff of product market fit, it’s incumbent on founders to determine the most efficient way for the team to add new customers. Doing this requires us to understand how a given sale relates to customer retention and product usage, where our friction points lie in the onboarding process, and what activities we spend time and money on rather than acquiring new customers. Broadly speaking, these are product questions that cannot be answered by the sales team itself.
The Solve: Treat product as growth, and growth as product (are you sensing a trend?). Start by ensuring the team has internal tools that make it easy to service customers and close deals. These can resemble internal-facing onboarding flows, automations for common workflows, integrations with lead tracking tools and usage data. Next, start exposing some of this to customers: allow them to act asynchronously rather than depending on a staff member for help. Over time, these efficiencies allow us to develop insights into how we can scale our sales activities and add low-touch or no-touch options for customer acquisition.
Unscalable Processes
The Story: A web hosting company starts growing by word-of-mouth, leading to a big fundraise. Their first product is a smashing success, leading to capital investments in physical hardware and engineering staff. The team sets out to replicate its early success, building additional capacity for new customers and refining its offering. The surface area of the product is so broad that the team lacks focus, building in multiple directions and continuing to see growth. Customer retention suffers from the ensuing stability issues, and the executive team grows anxious at the continued failure of the product team to identify the next mega-successful product offering. Presented with a workable 5-year product vision, the team spends over a year restructuring their technical architecture down to the bare metal before breaking ground on new customer offerings.
The Trap: Investing in product features without investing in measurable product outcomes. The shotgun approach to feature development attracts customers who are not well-supported by the core product offering. These customers complain, create noise, and impact future feature development. Without tight integration between marketing/sales and product teams, we risk having to support customers and features that don’t actually move the needle.
The Solve: Treat product as growth and growth as product (…predictable, I know). Teams that can identify gaps in an offering and deliver the solution to that gap are much more likely to stay focused on the critical path. These teams are capable of not just deciding what to build, but more critically what not to build. And what is a roadmap if not a plan built by eliminating all the things we shouldn’t do?
Sam Gimbel is a former co-founder of Clark (acquired 2019) and VP of Product at Clover. He consults with startups to make sure they think of growth as a cross-functional practice.