Words Liam Nolan
August 30th 2023 / 8 min read
While founders may dream of the endless possibilities afforded to them by bottomless cash reserves, the reality is quite different. Early stage startups have to operate in a very lean manner—and that’s not even counting the macro economic conditions that might make it harder to fundraise or attract customers.
There has been a lot of talk recently about the need to focus on efficient growth, with most linking this to a focus on unit economics, and choosing between cash and growth. The “growth at all costs” bubble has burst—but we still all want to see that hockey stick. So how can startups become more cash efficient while still showing ambition and hitting the heights they (and their investors) are looking for?
Efficiency runs through startups, and is critical in finding that path to profitability. Prioritising, fast decision making, testing, learning and course-correcting—it’s all about doing more with less, something the best startups do incredibly well.
Here we’ll look at how you can bake efficiency into everything you do.
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In an age of targeting becoming almost impossible and platform algorithms doing a lot of audience definition leg work, you might be tempted to question why you would need to really understand who your customers are. This would be a big mistake. Knowing your customers, their pain points, and speaking their language is as important as ever.
Broad targeting means your creative has to help your audience self-determine relevance. The more tailored your creative is to your target audience, the faster ad platforms will be at understanding who your ads are most relevant to and therefore how to drive the best performance. And in order to be more tailored, you need to know who your target customer is, where they are, and what they’re looking for.
This applies throughout the funnel too. You can have the best ad creative in the world, but if your product is too broad and unspecific, you’re leaving money on the table. This requires really understanding your customers’ mindset at every stage of the buying journey.
So how can you understand your customers, and how do you know if you’re doing it right? Tactics fall into two categories: quantitative and qualitative.
Quantitative methods are useful for fast learning. Desk research can often give you a good picture of the market. Conduct keyword research with tools like SEMRush to understand demand, or run ads to test propositions and positioning.
Qualitative feedback is also essential and often missed. Get out of the building. Talk to your target market. The value is in the nuance, so ask open ended questions and let them speak.
Once you’ve gathered all the data you need, we find it useful to pull it all together into a framework for a clear value proposition. This can then filter through everything you do, from your marketing campaigns to your product.
In practice, this will look like this in your marketing copy:
For [audience] who [pain point], [Company] enables [Emotional benefit].
[Functional benefit] through [feature]
Growing a startup involves more than just marketing, requiring efforts across the full funnel —acquisition, activation, revenue, retention, referral. Every improvement you make from the activation stage onwards makes every penny you spend on acquisition go further.
If you’re looking to reduce your CAC, this doesn’t just mean optimising your paid social creative. Look at the conversion rates throughout your funnel. Often small tweaks on your product can drastically improve conversion rates and therefore your CAC. It might sound obvious, but it’s missed far too often. Increase your conversion rate on site from 1% to 2% and your CAC will half without any ad optimisation.
Efficiency too often focuses on reducing costs. Yes, that’s one important part of the equation, but there’s a reason LTV:CAC ratio is one of the key data points investors look at. The value-add side of the equation is just as important.
Often, improving customer value comes down to product market fit. Is your product/service solving a real problem and is it 10x better than the alternative? If it is, you can be confident in charging a higher price, more often, and for a longer period of time.
Each business is slightly different in how their business model fits together and the relationship between each growth lever. See the below KPI tree and note how many levers there are at the bottom.
Tracking and measuring progress is more important than ever when aiming for increased efficiency. Especially in uncertain times, Business As Usual changes. Propositions, creative, even whole channels that worked before can fall off a cliff very quickly. You need to have a grip on your metrics to understand what’s working, what’s not and (perhaps most importantly) why.
The first step is understanding which metrics are most valuable to track. LTV:CAC ratio is the metric all other KPIs should feed into. Ultimately, if on average each customer you acquire is worth more than you paid for them, you’ve got a viable business. How much more will determine how fast you can reinvest into growth.
Understanding how each metric impacts LTV or CAC is important. You’ll often hear people talk about avoiding vanity metrics. These are essentially metrics that you can’t confidently attribute to impacting either CAC or LTV.
Once you know what to track, the next question is how. It’s no secret that with the iOS14 update and the imminent ‘cookie apocalypse’, tracking and attribution are getting much harder. Businesses are being pushed from deterministic to probabilistic attribution, as the ‘source of truth’ ceases to exist. But the truth is even without these blockers, startups were rarely seeing a full and true picture. A reliance on linear customer journeys and last-click attribution meant they were often flying blind even if they didn’t realise it. Third party attribution tools like Triple Whale have certainly helped with this, but we’re also seeing a big shift back to the days of uplift tests and post-conversion surveys becoming more and more important.
These are the best ways to truly understand potential halo effects and cannibalisation. For example, we often see big upticks in organic search performance from paid campaigns. Conversely, startups often pay for traffic they would have received anyway through things like branded search campaigns. The most public example of this was when Airbnb slashed performance marketing budgets and saw record profits.
Triangulating various data points and systems is the only way to get as accurate a picture as possible now.
Once you know what your levers are and how you’re performing, prioritisation will be the reason you win or lose. You constantly ask yourself if you’re working on the most impactful thing at any one time. Find a framework (there are many out there) that works for you, continuously optimise it for your business, and be rigorous in implementing it.
At Founders Factory, we champion the ICE framework. Implement the thing that will provide the biggest Impact, that you’re most Confident about, and that takes the lowest Effort. The part of this equation that people get wrong most often is confidence. The Confidence scale should skew towards 0 (if it’s just an idea, or a competitor has it) and only move towards 10 when you have real evidence (customers are asking for it, A/B tests have proven demand).
At a time when we’re trying to improve efficiency, this is as important as ever. Shorten testing cycles to improve confidence levels as fast as possible and move your tolerance levels higher to make sure as little time is wasted as possible.
To be clear, this doesn’t mean slow down progression or become paralysed by analysis. If anything it means speed up. Break things down into smaller tasks and keep moving forward, building confidence that you’re working on the correct things given the information you have. Momentum over perfection.
No article on efficient growth would be complete without mentioning the recent huge leaps in technology available to startups. AI and automation are key to scaling efficiently. From copy and design to data analysis, low/no-code, low cost tools are popping up everywhere which promise to automate your manual processes and free up time to focus on higher level strategic work. Increasing your output with limited resources has never been easier.
As has been widely talked about over the past few months, the key with these tools is to use them to amplify your efforts—not replace them. As execution costs trend to 0, the differentiator will be in your creative input and the context you feed these tools. Without this, output will be generic at best. But done well, the potential is incredible.
The best startups will find huge opportunities in the current climate. In order to do so, they’ll need to focus on efficient growth—but that doesn’t simply mean cutting costs. Those that know their customers best, understand the levers they can pull and the metrics they can impact, prioritise rigorously and utilise the increasingly accessible technology available, will come out on top.
Find out more and apply to one of our Accelerator programmes
Liam Nolan is Head of Growth at Founders Factory. Prior to this, he held several growth & marketing roles at JustPark and Zealify, where he was Head of Product Marketing. He also founded his own business in the student accomodation space.
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