Growth Strategy for the Technology Downturn

How to Reinvent Your Product Growth Strategy for the Technology Downturn

The Necessity to Rethink Your User Growth Strategy

 

Declined growth in the business forces to rewrite the business’s strategy and expectations. In an economic situation where the prices are rising or expected to rise (bull market) the focus of the business will be on increasing the revenue through its core business (top-line growth). A new product often wants 2x or 3x growth Year on Year (YoY) in its first few years. High growth and high money burn are satisfactory at this stage. You expect a high return on investment (ROI) for all the money you spent in high volume.

 

But in a situation where the prices are getting lower or expected to go lower(bear market), it is not advised to invest high. You cannot expect a high ROI by investing in high volumes. It is not the correct time to hire more and more employees when a hiring freeze is implemented. It is clear that the market change is making the user growth strategy from “as much as possible” to “efficient, profitable, and productive”

Here are some ways every team should be thinking about situations like those above

  1. Embrace the new normal
  2. Cut your marketing spend
  3. Increase the focus on your engaged and high lifetime (LTV) values, users
  4. Live to fight another day

 

Let’s analyze each of the above points

 

The New Normal

As mentioned earlier, during the bull market the growth strategy will be top-line growth. We can exceed the 10x YoY growth rate. But the new normal is focused on efficient growth. The growth rate is expected to be 2.5x YoY. If you ask how to measure this, we have one popular metric called “Burn Multiple” by David Sacks

 Burn Multiple=Net Burn / Net New ARR (Annual Recurring Revenue)

 This metric can tell you how much is the business burning to generate each additional dollar of ARR

 Example

 If you spend $10M and gain $5M more in ARR, that will be a 2x burn multiple

 Burn Multiple = 10/5 = 2

Burn Multiple metrics are very simple, yet cover all the cost and revenue. This simple metric, allows you to compare the different companies and businesses and reduce the cost.

 Let’s see a sample data

We can see the Burn Multiple rates goes down as the ARR increases over the years. This is because you burn out more in the early stages of the business for product development and then get more efficient as the business grows. During the shift from top-line to efficient growth, you should be thinking about how much money to burn.

Cut Off Your Marketing Spend

The first and simplest thing to do is to cut your marketing spend

  • Keep the high ROI channels

  • Cut the low ROI channels even if they are in big volume

  • Focus on accountable spending and reduce once have a long payback

  • Consider spending on brand marketing

Every growth effort is built from different marketing layers of channels built on top of each other. The highest ROI tends to be from channels like SEO, word of mouth, and other organic efforts. The next might be paid channels like newsletters. Then there is highly targeted paid marketing. Usually, the lowest ROI tends to be broad targeting, like display advertisements on large advertising networks.

Marketing people work on the  LTV/CAC

LTV-Life Time Value

CAC-Customer Acquisition Cost

They intend to keep the ratio from 10:1 to 3:1 then 1.5:1.

It is time to focus on new short video formats instead of large videos. Spend money on direct response marketing than brand marketing. It is time to pause large-scale events, PR, and splashy videos unless you can afford the cost. Each incremental channel might add more volume, but the efficiency is very less. 

 

Summarizing the idea-It is time to focus on high intent and low CAC  channels

Laser Focus on Your Engaged and High LTV Users

The business has a goal to grow by a percentage in a period. For example, if there is a goal to grow 10% by next year, the motive will be to acquire 10% of new customers for the business. The new customers tend to start everything from the bottom. We have to spend a lot to level these new users to the same level of engagement as existing users

There is another better way to achieve this 10% growth target. The motive should be to increase the engagement of already existing users by 10%. This way we can cover the expected supply for the demand without spending much on acquiring new users.

This is a trade-off between marketing vs user/product lead growth. The CAC is being redacted here and money is spent on product development. Indeed, marketing time and engineering time are not interchangeable, but reducing the marketing budget while maintaining/increasing the product feels like a good trade

Live to Fight Another Day

This milestone is required to make additional funding/headcount. Especially startups, need to raise more venture capital. Understanding these milestones will allow the businesses to put realistic plans into action and live to fight another day.The following graph will show the forward revenue numbers expected for public software companies

As you can see the revenue is going down significantly. What used to be 15x multiple is now 7x. That is the valuation has gone down by half. You will be needing much more revenue to justify the previous validation that was done on the business.

 

The easiest way to flex to hit these elevated targets is to take more time, with higher efficiency. Teams have to focus on better ROI and not a “high growth, high burn” mindset to hit the growth metrics. For startups who have recently raised, they’ll need to “catch up” on their most recent valuation, and additionally progress to justify the customary 2-3x jump in valuation between rounds. That’s the new bar.

Conclusion

The next few years are going to see a lot of change in the tech landscape. Mainly on how businesses are going to think about growing them. So far the growth has been focused by any means. But in the next phase, efficiency means reducing the cost and responding to the economic change within the industry and focusing on efficiency and quality. Businesses must take a pause, figure out a new approach and build toward the future

Leave a Reply