Thanks to Eric Ries, we now understand the term pivoting a company. That is, when we determine that a major assumption we previously made about our company, whether it be about the product, the market, or the competitors, is wrong, we redirect the company making different assumptions.
However, when leading a company, as when steering a ship, there is also a need to implement hundreds of small micro-corrections (micro-pivots) to the path.
Step 1: Determine “Planning” Values for Your Key Measurements
The ability to grow a company is determined by seven key variables (see 5 Steps to Get Your Startup on Track and Stay on Track to learn about them):
- Customer Acquisition Cost (CAC)
- Sales Cycle (SC)
- Average Order Size (AOS)
- Periodicity (P)
- Retention Rate (RR)
- Viral Coefficient (VC)
- Viral Cycle Length (VCL)
Let’s assume that you have decided that financial success will be determined by the internal rates of return (IRR) to external investors. The best indicators of whether they will receive those IRRs are if the company achieves its revenue, EBITDA, and EAT (earnings after tax) goals of $22M, $11M, and $8M.
During the planning stage, you will determine the values for the seven key drivers of company growth that are both feasible and drive the company to financial success as defined in the previous paragraph. Use software to verify the relationship between values for these variables and financial results.
Step 2: Analyze Your Results Frequently
Each month, calculate the actual values for the seven key drivers of company growth.
- Customer Acquisition Cost (CAC). Determine how many new customers were acquired in the past month as the result of your direct marketing and sales efforts (eliminate, for example, referrals; but include new acquisitions through search engines). Divide the money you spent on marketing and sales this month by the number of newly acquired customers.If you have not yet determined a value for SC, but assume it is between 1 and 3 months, you could instead use the rolling average expenditures for marketing and sales over the past 3 months and divide that by the number of newly acquired customers for the most recent month.
- Sales Cycle (SC). For some businesses, SC will be easy to determine; for others not so easy. For example, if you are using a direct sales force, you will be able to calculate fairly easily how long it takes from lead generation to closing a sale.On the other hand, if your sales are more passive, such as online sales, you will only be able to determine SC by plotting changes in budgets and actual sales over a period of many months.
- Average Order Size (AOS). The actual for this is easy to calculate for all businesses. If your customers purchase more often than once per month, just aggregate their purchases and record their average purchases per month.
- Periodicity (P). The actual for this is also easy to calculate for all businesses. Just keep track of how often customers return to purchase again.
- Retention Rate (RR). When you first start your business, this will be very difficult to compute because a few lost customers could have drastic effects. By the time 1-2 years have passed, you should be able to have a pretty good idea of how loyal your customers will be.
- Viral Coefficient (VC). Only two ways exist to compute this:
- Create a rewards-based referral program so you can keep track of exactly how many new customers are being referred by existing customers.
- Ask all new customers how they heard about you (this is much less accurate).
Until you do one of these, you will have to assume that VC is zero or you can be optimistic, and keep entering it as a guess every month.
7. Viral Cycle Length (VCL). Same comments apply here as for VC.
Enter these actual values and see whether they lead to financial results as good as the original results. If you are like most startups, you will find early results disappointing, and will have to decide how long you will wait before executing changes.
Use software designed for fast and easy financial reporting to identify that the new (actual) values for these variables have created quite different financial results and thus determine whether or not to pivot.
Step 3: Execute a Pivot or a Micro-Pivot
A pivot is executed when:
- The actuals portend a poor financial outcome
- You believe that the actuals reflect the best the company can do
In such a case, you may need to change the product, change the target market, change the way you sell the product, find new channel partners, and so on. These are significant pivots.
A micro-pivot is executed when:
- The actuals portend a poorer financial outcome than you planned
- You believe that the actuals can be improved by changing tactics, not through major company redirection
In such a case, examine each key driver of company growth and determine what actions you can perform to improve its specific value. Here are some examples:
- To decrease CAC: Change the content or vehicles for advertisements. Change your messaging. Offer better pricing or better promotions.
- To decrease SC: Offer better incentives to the salesforce.
- To increase AOS: Offer quantity discounts.
- To increase P: Offer frequent buyer programs.
- To increase RR: Improve your product’s stickiness. This is the most difficult to improve in the short term.
- To increase VC and decrease VCL: Offer referral programs.
- It might be that all the values are sound; you just need to spend more money on marketing and sales during the early stages of the company to “prime the growth engine.”
When you implement a series of micro-pivots, use graphs.as shown below.
These will show how your incremental improvements to actual values for the seven key drivers of company growth are driving the company increasingly toward the predicted fifth-year revenues, EBITDA, and earnings after tax, as a function of time.
These seemingly small but very important adjustments have the power to right the ship and set your business back on the course for success.