As we summarized earlier, there are two kinds of companies: the ones who are searching for product/market fit, and the ones who have it. For companies that have product/market fit, the most important thing is to grow rapidly – 50 to 100% annual growth rate is the typical target (of course there are exceptions).
For a startup in the growth phase, it’s a good idea to constantly evaluate what is the current bottleneck for faster growth. In the big picture, this can be divided into two dimensions: 1) are you getting new customers and 2) are you losing existing customers.
Let’s start by discussing point 1, “are you getting new customers?” A good metric for this is the so-called “pirate metric” (AAARRR) which stands for:
There can be many versions of this funnel, but it’s a good general tool for mapping growth. Startups should continually analyze this funnel and work on the area that is the biggest bottleneck for achieving more sales. Something to acknowledge here is that solving bottlenecks for growth doesn’t only mean further developing marketing and sales. For example, maybe a startup could sell more if the product added a certain feature. Then it’s up to the sales team (or whatever it’s called in a particular startup) to discuss with product development about whether that feature can be implemented.
The first part of the funnel is usually covered through marketing. The purpose of marketing is to increase awareness and, for products with low prices, to also convert customers (and of course get feedback for product development).
The types of marketing can be roughly categorized into advertising, direct marketing, social media, traditional media, influencer marketing and partnerships. Doing any type of marketing probably won’t hurt, but while scaling, startups should have an analytical approach to marketing. You should have a clear picture of what is the best way to create awareness about your startup among relevant people and convert them to the next phase in the pirate metric funnel.
For many B2C companies, optimizing social media marketing by using the right channels and messages is key in the scaling phase. For example, in the games industry, marketing is now done almost entirely through social media. Much of the success of games is based on optimizing Facebook, Instagram and Twitter ads. Solving the CAC-LTV (Customer Acquisition Cost vs. Lifetime Value) equation means having significantly greater lifetime value compared to the cost of user acquisition – and allows for explosive scaling. For example, If a game generates $5 per player and the cost of Facebook advertising is $2 per player, a gaming company is virtually licensed to print money.
For other startups, marketing might include attending conferences or producing content as an expert.
The later part of the pirate metric funnel is in most cases covered by sales. As discussed previously, the way a startup does sales is very dependent on the product, business model and price point.
In many early-stage startups, there are no strict processes for sales and the founders will try to sell the product in any possible way – which is the right way to do it. In the beginning, sales is very business-development focused. However, after reaching product/market fit, a more structured process for sales needs to be created. The sales process should be scalable and at some point the founders should stop or reduce their sales work. It usually starts with hiring a junior salesperson to do routine tasks. Hiring an experienced sales director would of course be great, but in most cases it’s either too expensive or the startup can’t attract senior people yet.
When scaling, a startup can’t approach sales with a business-development attitude. You need to have a clear focus that “this our product and we can’t deviate much from it”. Otherwise the product and operations get too complex when you have made dozens of different promises to customers.
Keeping customers happy
Growth is not only the responsibility of marketing and sales. If a company is acquiring new customers at a great pace, but a high percentage of existing customers are not continuing to buy the product, growing rapidly will be very difficult. Of course, keeping customers happy starts with having a great product, but companies can also stand out with customer service.
How customer service is done depends on the type of the company’s product. Large B2B customers often have a named account or customer success manager (or both) who support them. For lower price-point products, startups might have general call centers to serve customers (not to say that a company with account and success managers can have also a general call center).
These customer care functions are essential for a company’s success. They help you to gather feedback from customers and develop your products. Great customer care can also allow startups to launch products and features earlier. This is true because, even if the product has a few flaws, when customer service quickly takes care of these issues it usually keeps the customers happy.
Additional sales to existing customers is in many cases one of the best ways to grow. So creating clear and great processes for taking care of existing customers is crucial for a startup to grow rapidly.
Most startups start in the home market first, and there are often advantages of having customers close. However, startups should eventually aim to expand to international markets (there are exceptions, for example if the home market is huge like in China). At the latest, while scaling a startup you will have to consider internationalization. There is no point in fine tuning the pirate metric funnel if the current addressable market is simply starting to be too small. Some companies even aim to enter international markets from the start. If the domain a startup works in is very niche, the startup might be forced to work internationally in the very early stages.
Decisions regarding internationalization
There are many internationalization strategies and we are not going to go through all of them. Also, for different types of companies internationalization is very different. For example, low price-point digital products which are sold completely through online funnels can be easier to internationalize compared to hardware products or high price-point B2B offerings. We will discuss a couple of the key dimensions you should consider when expanding outside of the home market:
The first big question is when to start expanding outside of your home market. There is no right answer and you can do it too early or too late. Internationalizing when you haven’t found product/market fit can be very risky as operating in several markets is always more complicated. Of course, there are exceptions and startups who have been successful in this way. On the other hand, some startups have failed by internationalizing too late. This can happen because competitors have already gained too strong of a position or the startup has been in the home market so long that the product is overly-specialized for that market and not appealing in other markets.
2) Which market(s)?
The next key question is which market you should expand in. When considering which market to enter, you first have to study the markets thoroughly: what is the size of the market and trends, are the customer needs similar, who are the competitors, what are the labor costs, and are there regulation differences. To answer these questions, you shouldn’t just read the market reports. It's a smart investment for someone from the core team to use a few weeks to meet potential clients in the market, as well as discuss with entrepreneurs who have entered the market previously. You should study several markets and then make an initial plan about the overall expansion. The startup should also consider the costs and risks of entering each market, which also depends on how the market will be operated.
3) How is the new market operated?
After the most attractive markets have been chosen, a startup should decide if they want to expand to multiple markets simultaneously or one-by-one. The answer to this question largely depends on the operational requirements for the new markets. The more a startup needs to set up new local operations in the market, the more likely it is that expanding one-by-one can be smart.
When a startup sells through online channels only, it can go to multiple markets simultaneously. Still, it’s often smart to focus on certain markets at a time. In these types of settings, the commercial operations are handled from a global Sales & Marketing headquarters which covers all the target markets. The staff might fly in to different countries from time to time, but they can do most of their work from one place. This type of organization can also work if the startup is selling very high-priced products and has only a handful of customers.
If the operational needs are high and a new office and team needs to be established in a new market, then a good rule of thumb is that someone from the founding team should be the one building the new operations. There are many failure stories arising from founders who thought that sending an employee is enough. From an operational point of view, setting up in a new market can be almost like starting from zero – so having someone who has done it before is smart. This is especially true with the first few new markets (when a startup expands to it’s 50th market, it’s a different case). When you hire your first employees in the new country, you should look for people who understand your vision and are committed. Giving the key employees option plans is recommended.
If you are setting up a new office in a new country, you have to also consider founding a new legal entity. For startups, the usual way to go with legal entities is to setup a local subsidiary wholly owned by the parent company. For help with this, it’s smart to find a lawyer who has done it before for the same market.
For some business cases, using channel partners can be a good way to internationalize. Here, the startup has to give a cut to the partner but the risks and costs are low compared to doing everything in-house.
Internationalization is not a walk in the park
We want to emphasize that internationalization is a difficult and broad topic. Once you are at that point with your startup when you should consider it, study the different options and talk to other entrepreneurs who have done it. Internationalization is also in most cases expensive and you should allocate proper resources for it. On the other hand, internationalization might be the thing you’ve been waiting from day one – having a global impact.
Insights from an entrepreneur – Freska
Mari Luukkainen is the former Head of Growth of Freska – a new value-driven cleaning company that takes care of employees at every level. During Mari’s two years at Freska, they scaled from €700,000 to €13 million annual revenue. Today Mari is the Head of Marketing at an early-stage VC fund, Icebreaker.vc. Mari shares her views on growing companies.
What is important for marketing and growth hacking?
“Growth hacking is still very much in the marketing box and many people see it only as A/B testing, when as a matter of fact it can be a leading mechanism for the whole company. Many companies do not even recognize this role.
“The most important thing is to have someone who is in charge of the company’s growth. They have the big picture under control and are aware of bottlenecks. This person, who we can call ‘Head of Growth’, leads a growth pod that consists of a bit of marketing, design, and product development.
“It can be problematic if growth is seen as a separate entity. It can lead to the point where for example marketing and product development are working in their own bubble towards different goals.”
How did you manage growth at Freska?
“As Head of Growth at Freska, I was able to grow revenue from €700,000 to €13 million. Even though I was the Head of Growth, I was also in charge of marketing. That’s how I was able to be part of different activities – for example, once I was able to influence cleaner recruitment as that was one of the growth bottlenecks.
“One of the first things I did as Head of Growth was testing my hypotheses and trying new things with a low budget. For example, I went outside to ask 100 people what keeps them from ordering cleaning services and used the data for marketing. According to my inquiry, many people had the wrong idea about prices. We did an experiment in which we included the price in ads and we saw results in terms of a better conversion rate, so we ended up including the price in all of our marketing materials. I kept the growth loop going: I was constantly analyzing data, talking to potential customers, and testing. That’s how I improved our numbers little by little.
“Even though our operations were very data-driven and you could see it in everything, the key factor in our growth was the company culture: we listened to our target groups, customers and employees very closely. For example, we wanted to have cleaners taking part in brand workshops and their insights ended up being super valuable. Our whole team believed in the mission and every decision was made based on that. We genuinely feel like we’re doing an important job and that drives us towards better results.”
Where should growth thinking start?
“I think it does not matter at which stage your company is in. When you’re just starting up, even your CEO or product developer can be the Head of Growth when looking for product/market fit. The model fits in many stages and many problems can be solved if you just cut the process into smaller pieces.
“One starting point is the so-called pirate metric, AAARRR – Awareness, Acquisition, Activation, Retention, Referral, and Revenue. First comes awareness: what kind of channels to open and who to reach. The next step is acquisition, meaning that we get potential customers in our channels. Customers need to get activated to get to the next part of the marketing funnel – this can be filling out a form where we get a lead for sales or it can be a purchase from a website. These steps hopefully at some point lead to revenue.
“Also, it’s important to prioritize and analyze all the hypotheses: how much effort is needed from product development, marketing, and design, and what are the possibilities to succeed. For example, suppose the plan is to get new customers and you have two ideas: launch a Facebook campaign or go to an expo. Which one is better? You can launch a Facebook campaign while sitting on the couch, but you have to fly to the expo. Less effort is needed for the Facebook campaign, so it’s more effective and faster to test there as well.”
How do you do growth hacking without a dedicated marketer?
“I believe that startups without a marketing professional can do growth hacking. The most important thing is to focus, prioritize, and cut big things into smaller pieces. Anyone can search for people in their target group and send LinkedIn messages. Some startups have an industry expert in the team who knows the target group very well. Problems occur when startups start to scale growth marketing, but at first, nothing is stopping you.
“If you’re thinking about growth, you should already have organic indicators, have talked to customers and done some market research. That means you have data you can use when making decisions.
“One problem that startups face when starting to do growth hacking is that the tasks are too complicated to execute and are left undone. The easiest way is to divide a task into a few smaller ones. For example, if the goal is to start a LinkedIn campaign, it can feel impossible for a CEO with no marketing expertise. However, the CEO can help to formulate the target group by calling five customers and asking what is the size of the company they are working at. It doesn’t take long, but the data is very useful. During the phone calls, the CEO can also ask questions about their biggest pain points. That helps to develop the message for the campaign. After these steps, it’s time to create the actual campaign, and you can find help for that.”