Lesson: Revenue Relationships with Steve Blank

Step #5 Grow: Grow customers by maximizing their value

So the next step in this funnel, because remember we just talked about getting customers, lets talk about keeping customers. This is what I call the, "You should be so lucky to have this problem" part of the funnel. That's how you grow the customers you have.

When you think about growing customers, nothing magic, you've now sold these customers way back here under purchase and you've kept them around with loyalty programs and products updates. But really what you'd like to do understanding now that it's a lot cheaper to sell existing customers more stuff than it is getting new customers, is let's go try to sell them some stuff and how can we do that?

But the first thing you might want to think about is can I unbundle some of the stuff in my startup that I try to package all at once? One of the mistakes that early stage ventures make, that as new companies is thinking that you have to stick every possible feature in the product and sell it for the one price. It might be possible once you understand more and more about your customers to know that, you know what, most people just kind of want the base product. Or you might have a freemium strategy which just says, I'll give them base product for free but really understanding what they're going to want some percentages, these other things.

Unbundling is just a fancy word for saying, "Can I somehow decompose the product into separate pieces giving some for free" or if you're lucky charging for every one of them. I used to do this all the time to actually increase the average selling price by unbundling the product.

The next thing to think about is can I upsell the product? A retailer in the United States called Sears had a line of tools that they sold to people who made things and their product line always had three types of products; good, better and best. What they would try to get you to do is get you into the store looking at the price of the good product, but then when you got there you said, "Well I deserve better. Then someday I can aspire to the best." So, that was kind of upselling in the same product line.
In fact in the United States from the 1920s to the 1960s, the master of upselling was General Motors when they had separate brands. Each had a fixed price point. You started buying a car with a Chevrolet then you moved up to a Buick and a Pontiac then an Oldsmobile then eventually you can aspire to a Cadillac. These were all kind of upselling based on aspirations. The quality and features of the products increased as well. You might want to think about creating an upsell strategy.

Cross sell, well that's also kind of simple. Gee if you're buying one product, are there any accessories or companion products that you ought to just figure out to make sure that your customers are aware of or on the pricing page or on a price list say, "Gee when you buy these product, we'll give you a 20% discount off of this other one," which most consumers would realize, I'd like to have that too. So, thinking about what adjacent products, what products next to the one you're already selling, customers can buy is a cross selling strategy.

Finally the last piece is referrals and that's another growth strategy. Now referrals basically generates this outer viral loop. Remember what we were trying to do in the initial purchase or get your new customers to start telling their friends about your products, you want to do the same thing after you've had those customers for a while. Maybe now you want to give them discounts on future purchases, you want to say thank you for doing this. By the way $100 off or $5 off or the next purchase when you bring in the next new customers, banks now think that's a popular strategy. This referral program just helps your customers hopefully who are satisfied, sell more of your product for you. So that's get, keep and now grow customers.

By the way this grow funnel just like in get customers, there's nothing magic about cross sell, upsell and unbundling, there might be other strategies that your company, your startup might want to stick into this funnel as well. We put this up as kind of canonical model because most companies tend to use these types of techniques. But it really depends on what your industry and product line is.

So this last step is growing customers for the web mobile channels. Now if you remember we started here on the left, we did earned and paid media, we got customers, acquired them and activated them. We've kept them, trying to keep churn to a minimum and now we are going to grow customers with a series of activities just like in the physical channels. Can we upsell, can we next sell, can we cross sell or can we get referrals that will get us a viral loop?

One of the most important metrics to think about now that we have an end-to-end funnel is something called Lifetime Value. In lifetime value, LTV, is not your lifetime but your customers' lifetime. How much will they spend with you and your company from the beginning until the very end? This is an interesting idea because most startups, most founders are focused on, how do I get them to activate here? But for you to be a successful company and actually thinking about how much you could spend on them over here, you need to understand, can I get them to spend more and more over time and how to keep them longer and longer by reducing churn?

One of the interesting equations for every startup is that lifetime value needs to be greater than customer acquisition cost. Seems intuitively obvious, but what you want to make sure is the amount of money you're collecting over here is bigger than the customer acquisition cost, you remember the amount of money you were spending from here to here. That was a Customer Acquisition Cost, CAC, here. So lifetime value needs to be greater than customer acquisition cost. As you get more familiar with your company and start talking to investors, the real interesting thing is what is this ratio? For example in SaaS software, some investors think that number should be 3:1. In Telecom it might be something else. But the key idea is you're now not just focused on the initial purchase but you're focused on the lifetime value.

If you have the world's most perfect business model, investors would love to see this number much bigger than this number. So what you want to look for is a well balanced model that takes into account how much you need to acquire customers but how much ultimately you will extract from them over a lifetime. What's the lifetime? That really is up to you and your investors and how many years you calculate lifetime value. Some use three yeas, some use five, that's a question that you and your investors will discuss. This acquisition cost verses lifetime value discussion really is a balancing act.

So what are some of the balancing acts? Well in the customer acquisition cost, if all over sudden you can get a viral loop going, well that decreases your cost of acquisition. If in fact your conversion rate between acquisition activations could be increased. Again it decreases your customer acquisition cost. If you could do in physical channels, telesales or inside sales versus having a direct sales force, again your CAC declines. The idea is what can you do to make this very efficient?

Therefore also in lifetime value, how do you reduce churn and attrition and keeping customers? Do you have scalable pricing? Are you cross selling and upselling a lot? Can you expand your product line? Again are you getting a viral loop and a referral loop from happy and satisfied customers telling others word of mouth. So this is a balancing game and for first time entrepreneurs who are focused here, it's really important to think about customer acquisition cost and lifetime value.