What to focus on:
(1) Product-Market Fit
(2) Be the best on what you do
(3) Increase Sales and Marketing Spend
What not to focus on:
(3) Size of Market
(4) Sales and Marketing Efficiency
Gross LTV – CAC = Net LTV
If the Net LTV is >70% of Gross LTV, then this business has a huge potential to make significant profit down the road.
The factors that impact Net LTV are (1) decreasing CAC and (2) increasing LT of LTV or lowering of Churn Rate.
However, for early stage companies
- not enough time has passed to see the real Churn Rate
- not enough customers have been acquired to show any reliable trend of CAC
- Therefore, LTV is not reliably measurable for early stage companies
For early stage companies, users engagement and expansion of number of users inside the same account are good metrics to use to demonstrate potential LTV.
In another words, product-market fit is the most important thing to show as success measurement.
Even if the product-market fit is only true to a very limited number of customers or market, that is still the most important major success milestone for early stage companies.
Until there is proven product-market fit, worrying about size of market is totally moot. What can you do with a big market without proven product-market fit?
The next step after showing product-market fit is to show that this early stage company can close >75% of opportunities in the same scenario.
That is, this startup, has not only demonstrated product-market fit but that they are the best at what they do.
This is very important and lucrative when swimming in a niche market.
After the early stage companies have demonstrate product-market fit and be the best at what they do (closing >75% of opportunities), then they are ready to look into scaling up Sales and Marketing. Money spent before this point to scale Sales and Marketing is 100% wasteful driven by bad executive decisions.
At this point, investment can be scaled up to increase Marketing and Sales.
But, that does not mean Sales and Marketing will become efficient.
Sales and Marketing efficiency is not important yet at this stage.
Demonstrating that increasing of Sales and Marketing spend can lead to increase in ARR is critical at this stage.
It will take longer than anybody’s plan to get ARR up as spend in Sales and Marketing goes up.
Until the upward trend of ARR is consistent and predictable with increase in Sales and Marketing spend, there is no reason to look into spend efficiency.