After Minimum Viable Product (MVP)

When you have a prod­uct that works, it solves the cus­tomers’ prob­lems, and the cus­tomers are hap­py, con­grat­u­la­tions, you’ve just achieved prod­uct-mar­ket fit.

The ques­tion is: What’s next?

The obvi­ous but slight­ly sim­plis­tic answer is to gen­er­ate sales.

While this is cer­tain­ly true, how you gen­er­ate sales makes an enor­mous dif­fer­ence in whether you’ll be yet anoth­er SaaS com­pa­ny that lan­guish­es in low sin­gle-dig­it mil­lions of ARR or become a growth sto­ry that sur­pass­es the \$10M ARR mark and beyond.

Here’s why this mat­ters.

The growth equi­ty and pri­vate equi­ty worlds have invest­ment thresh­old points.

In the SaaS world, this means the vast major­i­ty of the invest­ment com­mu­ni­ty will not look at financ­ing you until it’s abun­dant­ly clear you will cross $10M in ARR with­in a quar­ter or two.

The issue is one of sales…

Repeata­bil­i­ty

Can you not only gen­er­ate rev­enues but do so in ways that are repeat­able?

Repeat­able process­es scale. All oth­ers do not.

The first $1M to $3M in sales typ­i­cal­ly come from the lead sales­per­son (often the founder) who hus­tles and cob­bles togeth­er the first mile­stone of sales.

Ear­ly cus­tomers might come from per­son­al con­tacts in the indus­try. The next round of sales usu­al­ly comes from cus­tomer referrals/word of mouth (proof of prod­uct-mar­ket fit) with­in a small base of cus­tomers…. and then, some­thing ter­ri­ble often hap­pens:

Noth­ing

Word of mouth in a small base of cus­tomers is good, but growth can be slow.

What needs to hap­pen next is a repeat­able sales process that is nowhere close to hit­ting a ceil­ing.

A repeat­able process is one that can be cloned and repli­cat­ed. Hav­ing a repeat­able process isn’t enough. You need one that hasn’t yet hit its nat­ur­al ceil­ing or sat­u­ra­tion point. If you have that, you have a process that is both repeat­able and scal­able.

This is where most mod­est­ly suc­cess­ful SaaS com­pa­nies stall or slow down enough to be con­sid­ered low-growth com­pa­nies.

Here’s the key insight:

Many sales chan­nels have a dynam­ic, not sta­t­ic, sat­u­ra­tion point.

For exam­ple, get­ting leads via paid adver­tis­ing is a com­mon­ly used lead gen­er­a­tion chan­nel.

It’s a very good one. You want to gen­er­ate leads through paid ads until the point when it’s no longer prof­itable to do so.

This point of “unprof­itabil­i­ty” is depen­dent on your cus­tomer LTV (life­time val­ue).

If your customer’s LTV is $20,000 when your competitor’s cus­tomer LTV is $10,000, you can afford to out­spend them in adver­tis­ing to get a cus­tomer.

Most paid adver­tis­ing chan­nels work on an auc­tion sys­tem.

If you buy Google Ads, the more you bid, the high­er your ad ranks. The high­er your ad ranks, the clos­er to the top of the Google search results page you appear.

The clos­er to the top of the page you appear, the more qual­i­fied traf­fic you get. The more traf­fic you get, the more prospects and cus­tomers you get too.

So in the end, the com­pa­ny with the high­est LTV has the oppor­tu­ni­ty to dom­i­nate because they can afford to spend the most on their cus­tomer acqui­si­tion cost (CAC).

If you have the high­est LTV, you can afford to…

• Cre­ate a web­site with 1,000 pages of con­tent for SEO pur­pos­es, where­as the one with the low­est LTV can only afford a 20-page site.
• Bid on sec­ond-tier pay-per-click key­words that aren’t prof­itable for oth­ers but still are for you.
• Staff an out­bound tele­sales team to call lit­er­al­ly every prospect in your ver­ti­cal mar­ket every 60 days, for­ev­er, where­as oth­ers can only afford to call on 20% of the ver­ti­cal once per year.
• Com­pen­sate go-to-mar­ket part­ners with no-cost ser­vices or a greater degree of cash com­pen­sa­tion than oth­ers.
• Pay your sales­peo­ple a high­er com­mis­sion rate than com­peti­tors and grab all of the best tal­ent in the indus­try.

The rea­son why most mod­er­ate­ly suc­cess­ful SaaS com­pa­nies stall or hit slow growth is that they nev­er devel­op a sales process that is both repeat­able and scal­able.

Some­times, the process is avail­able and fea­si­ble with­in the company’s unit eco­nom­ics (a.k.a. LTV vs. CAC), but the founder hasn’t yet iter­at­ed enough to find the right channel/repeatable process.

Or, they found a sales process that is repeat­able and scal­able, but they don’t real­ize it and don’t actu­al­ly scale it up.

(This hap­pens a lot and has been true of many of my clients when they first found me. These are the same clients who would go on to sus­tain triple-dig­it growth rates short­ly there­after. There is a time and place to go big. And that time is when you have good unit eco­nom­ics and a repeat­able sales process and a sales process that can be scaled. That is when you scale it.)

Oth­er times, their unit eco­nom­ics are mediocre. If your unit eco­nom­ics aren’t great (mean­ing your LTV doesn’t exceed your CAC by at least dou­ble), you do not want to scale.

You want to go work on your unit eco­nom­ics. This is usu­al­ly a sign of “whole prod­uct” to mar­ket fit issues.

The whole prod­uct is the total­i­ty of your cus­tomers’ expe­ri­ences.

If your tech is good but there is no user train­ing avail­able, you have a gap in your whole prod­uct or user-expe­ri­ence ecosys­tem.

If your prod­uct is good, but your cus­tomers can’t inte­grate your prod­uct with their oth­er sys­tems, you have a whole product/ecosystem prob­lem.

[I am con­stant­ly on my client and port­fo­lio com­pa­ny CEOs to replace the word “prod­uct” (such as prod­uct team, prod­uct man­age­ment, prod­uct devel­op­ment) with the term “whole prod­uct” (from Geof­frey Moore’s sem­i­nal work Cross­ing the Chasm) or “prod­uct ecosys­tem.”

So, some­one isn’t in charge of “prod­uct man­age­ment,” they are in charge of “prod­uct ecosys­tem man­age­ment.”

It has a total­ly dif­fer­ent con­no­ta­tion that gets you and your employ­ees to see the world through your cus­tomers’ eyes.]

In addi­tion to poor LTV to CAC ratio being a sign of poor unit eco­nom­ics, let’s look at the com­po­nents of LTV that are often eas­i­er to track and more obvi­ous to notice.

To slight­ly over­sim­pli­fy, life­time val­ue is cal­cu­lat­ed by:

Num­ber of Months Charged * Month­ly Fee

The warn­ing signs to look for are:

1. High churn
2. Low prices

When the aver­age lifes­pan of a cus­tomer is low (due to high churn) and your prices are low, your LTV is going to be too low. Your unit eco­nom­ics will be too poor to scale.

(This is why growth equi­ty and pri­vate equi­ty firms look at unit eco­nom­ics. If they are crap­py, they don’t want to finance crap­py eco­nom­ics. It’s a good way to destroy cash with no return.)

The abil­i­ty to charge high­er prices is a mea­sure of val­ue cre­ation for cus­tomers. It’s a sign of how impor­tant the prob­lem you solve is to a cus­tomer.

Cus­tomer reten­tion is a mea­sure of how indis­pens­able your offer­ing is to the cus­tomer.

The opti­mal sit­u­a­tion is both high prices and high reten­tion.

If cus­tomers are will­ing to pay a lot for your prod­uct, and they nev­er churn, you are in a high­ly advan­ta­geous eco­nom­ic sit­u­a­tion.

If this is true for you, call me. I’m seri­ous.

This means you have achieved the most dif­fi­cult to achieve pre-req­ui­site to scal­ing: bru­tal­ly favor­able unit eco­nom­ics.

In the right hands, a com­pa­ny with incred­i­ble unit eco­nom­ics can scale up big and dom­i­nate… with com­par­a­tive­ly very low risk.

[Note: There is an excep­tion to this rule of thumb. For some prod­uct cat­e­gories, it can make sense to use prod­uct-led growth using a freemi­um pric­ing mod­el.

Some users pay noth­ing. A sub­set pays fees for a pre­mi­um ver­sion of the prod­uct.

This approach can make sense to use where there is some kind of viral mar­ket­ing aspect to using the prod­uct.

How­ev­er, even in this sce­nario, the reten­tion rate and active uti­liza­tion of the prod­uct are very high. Crap­py prod­ucts that nobody likes and they refuse to use don’t go viral (a.k.a. crap does not scale).

The dif­fer­ence here is that the free users are the repeat­able and scal­able sales process to find the cus­tomers who pay… you guessed it… high-pre­mi­um prices. (Hence the term “freemi­um pric­ing mod­el.”)]

So, these are your two paths after you’ve achieved the min­i­mum viable prod­uct:

1. If you have good unit eco­nom­ics, find the repeat­able, scal­able sales process, and invest in it heav­i­ly.
2. If you have poor unit eco­nom­ics, shift from the min­i­mum viable prod­uct men­tal­i­ty to the whole product/complete prod­uct ecosys­tem men­tal­i­ty to improve the prod­uct-mar­ket fit and unit eco­nom­ics. The two go hand in hand.