Scaling the business and growth plans

There are various options for a startup to scale its business and plan for growth. For a start, it is important to find out how effective the business is in securing new customers and how engaged the customers are with the product. This helps identify how easy or difficult it is to scale and whether the product is being used as expected. If these findings are not up to its expectations, the startup may tweak its product offering or choose to focus on a different use case or user group. 

If the startup finds that it is on the right track, it may set growth targets in terms of, for example, revenue or number of users and devise a strategy to achieve them. Building this into its financial projections, it will realise whether funding is required and if so, the amount required. 

User acquisition and engagement

As explained in Scaling Lean: Mastering the Key Metrics for Startup Growth by Ash Mourya, a startup should understand its customer funnel which tracks how an interested visitor turns into a potential sales lead and eventually into a paying customer. For instance, when the company advertises online, the click-through-rate - the proportion of visitors that clicks on the ad - gives it a gauge of how well initial visitors convert into leads. Subsequently, it can study how these leads that arrive on its homepage or initiates contact eventually end up as paying customers. 

By looking at these conversion rates, the startup will have an idea of how costly it is to secure new customers. This is known as the cost of customer acquisition. We can then compare this to the total revenue that such customers bring to have an idea of scalability and the effectiveness of different marketing efforts.

Many startups tend to focus excessively on user acquisition in various stages of its lifecycle. However, it is also important to concentrate on user engagement and the stickiness element, especially early on in the lifecycle. 

Before spending more time and capital to secure new users, a startup should look at the engagement levels of current users. Understand the proportion of registered users that use the product on a daily, weekly or monthly basis and their behaviour. How much time is spent on using the product and on which product feature? Also, have a look at the number of users that drop off or become inactive after having used the product once or twice. This is known as churn and it needs to be managed together with user growth.

Besides user engagement, it is useful to measure how effective current users are in inviting new users or recommending the product to people they know. This is known as the virality factor and it helps drive user acquisition and reduce customer acquisition costs.

As highlighted in Lean Analytics: Use Data to Build a Better Startup Faster by Alistair Croll and Benjamin Yoskovitz, the startup should ask the question - Are users using the product as expected? If not, perhaps it should target a different use case, market or customer segment. Are users getting value from it and willing to pay for their use at the price offered? If they are not, one may not have much of a market. This also goes to show whether there is product-market fit ie whether there is a market worth serving. 

Growth plans      

As the company understands more about how it is scaling and gaining traction currently, it should set a revenue target it intends to achieve in 2 or 3 years’ time. From this, it would then work out the number of users and revenue per user it needs to achieve that. As explained previously, the startup could look at its customer funnel to estimate the number of leads it needs to generate in order to get a number of eventual paying users. Given the current conversion rates, stickiness and churn, the startup may assess whether the number of users it aspires to achieve is realistic.

Apart from managing the customer funnel, there are other ways to achieve growth and scale including:

·      Entering into strategic alliances, JVs and partnerships 

·      Tapping additional income streams or market segments

·      Expanding vertically - upstream or downstream

·      Improving efficiency of operational processes

In coming up with a plan for growth, the company should look at its financial projections and review the key assumptions on growth rates, margins, capital expenditure, revenue streams, etc. . From these financial projections, the startup will know whether fundraising is required for the growth plan and if so, the amount that needs to be raised. The next step would be to consider the options available to raise capital and the preferred investor type to work with.

Chee Leong