I wish I had a virtual reality app for founders that offered the best revenue model for startups, or a 3-D view of their revenue. We would put on our gear and go for an immersive deep dive to uncover which dollars were profitable, predictable and scalable – and then only scale those dollars.
No such app exists (yet), but there is a process that every founder can follow to uncover each of the three dimensions of revenue. It’s called market development, and it’s distinct from sales.
Market development is the pursuit of revenue for the purpose of learning.
Sales is the pursuit of profitable, predictable and scalable revenue.
Here’s how it plays out every week for us at GrowthX, our seed-stage venture capital fund. Invariably during the pitch we learn that startup X has Y dollars of revenue. Nowadays, with the cost and complexity of technology low, and product talent plentiful, the amount of revenue is often impressive even at the seed stage. But, we rarely fail to stump the founders during their pitch when we figuratively pull one of the revenue dollars out of the stack and ask how profitable it is or how predictably the team can generate more of the same type of revenue.
If you don’t know which of your revenue dollars are profitable, predictable and scalable, then which dollars are you planning to scale?
Having a strong team of developers and shipping your product remains critically important. There is also a massive need for smart, driven people who have the skills and experience to help innovators get their products into the hands of customers in a profitable, predictable and scalable way.
The foundation of 3-D revenue is data-informed focus. This is why we believe it’s the best revenue model for startups. Here’s how we approach this foundational element in our online go-to-market platform – the Google Maps of Go to Market – MXP Online:
Be Data Informed
In the early days of a startup, learning is more important than revenue. Customer interactions yield value – regardless of whether they result in a closed-win or closed-loss – only if you are collecting, sorting, and analyzing data. The goal is to identify patterns, the foundation of predictability. For example, what types of people (B2C) or which roles or titles inside of a company (B2B) seem most receptive, or which method of outreach or initial messaging seems to result in the highest open rate and/or response rate?
Be intentional and methodical about how you collect and store data. Take the time to define and map out your marketing and sales funnel and the exit criteria at each stage of the funnel. Carefully identify and implement a marketing and sales technology stack (e.g., CRM, email outreach, and other marketing and sales automation tools) that fits your current workflow (e.g., Propeller CRM seamlessly integrates into Gmail). Most importantly, verify that the systems and tools that you have implemented are tracking and reporting the unit economics of every step of the customer journey, and form the habits to enter the data, regularly analyze it and react to what you learn from it.
Before you ever ship your initial viable product, make sure to have the tools and habits in place to collect, analyze and react to the data that you will generate from your market interactions.
Focus, Focus, Focus
As you begin to generate data, it’s likely that you will uncover potential new customer types and revenue opportunities. If you mistakenly believe that volume is the only revenue metric that matters, then it’s easy to be allured by (and start pitching VC’s) with this new information. Resist the temptation, and instead use the data to find focus and identify the most efficient path to break-even.
One important element to focus on is your ideal customer profile. What patterns emerge from the data that point towards one or a few customer profile(s) that most closely align with the situation that you are addressing or the problem you are solving. Equally as important, what are the customer profiles that are ready, willing and able to realize and enjoy the value that you currently offer. They must buy your product, not your product roadmap.
This is critical because you are in a race against time and money as your hustle towards break-even. Not all revenue is created equally, so focus on the profile(s) that offer the most bang for the buck. Your goal at this stage is not to just win customers. Your early customers must also become enthusiastic promoters of your product.
This is because the only people that do business with startups are early adopters, and that’s a relatively small percentage of your total addressable market. Most people want to hear from satisfied customers before they will become buyers and before your company can cross the chasm, as famously explained by Geoffrey Moore.
Here are a few important next steps you can (and should) now take with data-informed focus and your ICP(s) defined:
- Look at unit economics and develop a rational hypothesis about your business and pricing model. Unit economics will help you determine what customer acquisition model(s) should be tested during initial market outreach.
- Review your data and, if necessary, conduct interviews with current customers, to understand why they bought from you and how you were different from their other options.
- Define your Unique Selling Proposition (i.e., what you do) and Unique Value Proposition (i.e., what you do for them) for each ICP.
- Develop short-form messaging designed solely to get the right person’s attention and generate interest and a desire to learn more.
As you begin to reliably generate pre-qualified leads in a cost effective way (as related to the hypothesized lifetime value), source prospect data modeled on your ICP(s) and create a process to keep your funnel full!
A VR app to discover 3-D revenue would be nice, but market development can be learned and it’s something that every founding team needs to identify and practice as a priority.