"We're losing money but we'll make it up in fast growth" is a mantra that worked for startups until late 2019. Disappointing initial public offerings of money-losing companies like Uber and Lyft contributed to that change in sentiment. However, the 84 percent plunge in the value of WeWork nailed the coffin shot on that mantra.
Cutting price below cost will no longer cut it. According to The Wall Street Journal, meal-delivery service Postmates which offers coupons for $100 off delivery fees, is a case in point. Felicis"...Subsidies often lead to disaster for startups that rely on them."
If your investors tell you to get profitable before they'll invest more money, consider taking these four long-strides on the path to profitability.
1. Learn Why Customers Buy
It's obvious to me that if you have to cut price below your costs to win customers, then your company is not creating enough value for them. So they will only buy your product if you sell it below its cost. You need to find out why.
The first step is to take what will probably be an ego-deflating step: listen to at least 50 of your customers -- and make sure that plenty of them are not thrilled with your company's performance. Ask them questions such as:
- What factors -- such as price, product quality, selection, or service -- do you use to decide whether to purchase from our company or our competitors?
- How do customers rank these factors -- I call them customer purchase criteria (CPC) -- in their importance to their decision?
Based on their answers to these questions, you may be pained to learn that customers do not care as much about price as you thought. Perhaps what matters most to them is how well a product speeds up their operations or how little time it takes you to deliver what they ordered.
2. Evaluate How Your Company Stacks Up to Competitors
The next step could be even more painful -- asking customers how well your company is doing compared to the competition. You may be able to get an inkling of this if you track whether companies are boosting or slashing how much they spend on your products.
However, what you really need to know is why customers are spending more or less with your company and how that compares to your competition. To find out, ask customers
- How would you score our company compared to competitors on your ranked CPC?
- For criteria where we are in the lead, who are we beating and how are we doing it?
- For criteria in which we lag the competition, who is ahead of us? What are these leaders doing differently that gives them an advantage? What new initiatives are they taking that will put them further ahead?
- What do you think we should be doing differently to get back in the lead on CPC where we currently lag our competition?
These responses are likely to be painful -- but also open your ideas to ways that you need to change how you operate your company to become more effective for your customers. Unless you take action, you will lose the edge that allows you to grow faster.
3. Cut Costs And Streamline Operations
Investors are not just demanding growth now, they want you to do so profitably. As I wrote in Scaling Your Startup, to get there you must start by rethinking how you operate.
More specifically, could your company cut out time- and cost-consuming steps from key activities like sales, marketing, product development, manufacturing, delivery, and customer service?
Lew Cirne, CEO of application monitoring service provider, New Relic, about whom I wrote in December 2016, did this when he started the company. At his previous company, Wyly Technologies, he was frustrated with how much it cost to hire and train sales people to achieve his growth goals.
At New Relic, he turned customers into sales people by giving them a great free version that others were eager to use. Once its product became popular, the customer realized it needed a better version so they called New Relic and placed an order.
Rethinking your processes along these lines can help you lower your costs, speed up your operations, and make your operations more profitable.
4. Invest In New Products And Skills
That will free up money you can invest in new products and skills to reverse any weaknesses you discover during your customer interviews. As I wrote in June 2019, Zoom Technologies, is a role model for listening to customers and delivering innovation they value which has helped them double revenues in a highly competitive industry.
Take these four steps, and you will be on the path to profitable growth in 2020.