Roger is a former entrepreneur who is now a general spouse at Battery Ventures and focuses on the market and software companies.
In March 2019, customer market companies in the acceptable products market were crying, but some high-level stumbles, such as the addition of Uber and WeWork, reduced our battery market index in the acceptable products market in early 2020, and that before the Covid-19 arrived. they are still mass-turning to certain corporations on the market, where they are placed, which are effectively emerging. As an investor where they are in the market, I sought to quantify what effective expansion looks like right now.
In this miniseries of articles, I’m going to delve into some of the parameters that startups monitor to make sure they grow in the sustainable and effective way investors are looking for now.
My previous post explained the “rule of the 40s”. This is a background calculation that captures anything about how a business is developed, especially in its pre-profitability stages.
Here I will take care of what our company has called the magic number of battery expansion. Like the rule of 40, the magic number of expansion is undeniable to calculate, but don’t be fooled by undeniable calculations. This measure shows not only whether your business is developing, but also how it is developing, and can be a remarkable harbinger of good fortune for customer market corporations in today’s climate.
The magic of expansion when revenue grows faster than sales and marketing expenses.
Here’s the rule: your annual profit-consistent expansion rate should be consistent with your combined sales and marketing expenses as a consistent percentage of profits. For example, if your profits accrue by 30% consistent with the year, however, you spend more than 50% of your profits on sales and marketing, your sales/marketing service is ineffective. On the other hand, if your profits accumulate by 50% per annum and you spend only 30% of your profits on sales and marketing, you get a ton of leverage from your expenses and effective expansion.
Simply put, if your magic expansion number is positive, you’ll manage an effective sales and marketing organization that investors will greatly appreciate right now.
Let’s take a look at some publicly traded examples: Netflix also increased its profits by 28% in 2019 and spent 13% of its profits on sales and marketing. Its magic number of expansion is 15, very strong. it recorded a 130% profit expansion in 2019 and spent 90% of its profits on sales and marketing. Its magic expansion number is 40, even better.
How do I create an effective organization and marketing?
It’s one thing to do this calculation and see if the magic number of your business expansion is up to par. If not, what do you want to do about it?
Ultimately, the main differentiator is the loose product or user-led expansion in relation to paid expansion. Its purpose as the beginning of a customer market is to integrate expansion directly into the main product experience, so that it does not have paid acquisition channels to grow.
Netflix’s well-known video streaming tip engine, for example, naturally leads to an increase in content consumption, which in turn improves visitor engagement, subscriber renewal and lifetime value. a physically powerful network effect.
Pinduoduo has created a desirable “group purchase” style in which users recruit friends or other users to register with a “team” to purchase items. If the computer becomes large enough, a relief is unlocked and the user who created the team gets the product with much higher relief (up to 90% off). Users also have praise issues when their friends click on the links they share, even if they don’t buy the product. By betting on recruiting new users, Pinduoduo has incorporated an expansion engine into its product.
On the other hand, Yelp, a company I talked about in my article on Rule 40, relies heavily on commission distributors in local markets. Yelp has thousands of vendors selling advertising to small businesses. Every dollar new source of income prices expensive to acquire, and this is reflected in its very small magic number of growth, negative 41.
The most productive way to grow well is to integrate the expansion levers into your product to grow organically and at a lower cost.
What else can the market do to stimulate biological growth?
The examples above some other methods to stimulate biological growth:
• Create a convenient freemium funnel that, once established, continues to turn new users with great effort. The key here is quality content and careful design of steps along the way to conversion. Chegg, an example we saw earlier, has a well-designed freemium funnel, which drives strong biological expansion. (They also have a magic expansion number of about 12. 5).
Incorporate network effects into your product. Ideally, your product will be wonderful to get started, but make it even more wonderful as other people use it, again, without too much effort on your part. Netflix, Etsy and Airbnb get advantages from difficult network effects.
Turn users into sellers. Pinduoduo has done this with a wonderful effect: users gain advantages by persuading their friends to see products or buy items.
Create a heterogeneous (rather than homogeneous) font. Uber and Lyft have a homogeneous source: cars and drivers are not so different. Food delivery apps are: you can order pizzas in your favorite living room from 3 or 4 other apps. corporations have to compete in prices, which reduces their profit potential.
Airbnb, on the other hand, has a heterogeneous offer: one apartment or space is very different from another, in terms of price, location and amenities offered; a heterogeneity takes time to build, but creates a forged and defensible hole once it is in place.
The all-price expansion phase is over for new customer companies. Acquiring new profits without spending too much is a key detail to show investors that their business is developing in a sustainable and wise way, simply by spending money.
Battery Ventures provides investment advice only for the budget presented through the personal sector. Battery Ventures does not request or make it accessible to the public or other consulting clients. Content received from third-party sources, although considered reliable, has not been independently verified for accuracy or completeness and cannot be guaranteed.
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Roger is a former entrepreneur who is now a general spouse at Battery Ventures and focuses on the market and software companies. Read Roger Lee’s full executive
Roger is a former entrepreneur who is now a general spouse at Battery Ventures and focuses on the customer market and software companies. Read Roger Lee’s full profile here.