Let’s begin by crafting a quick story through data.
- “It only takes six days to start a business in the United States.” - Dynado
- “The most popular financing method for startups in 2018 was personal funds at 77%.” - Lendio 2018 survey
- “Individual venture capital firms receive more than 1,000 proposals a year and are mostly interested in businesses that require an investment of at least $250,000.” - Money Crashers
- “Only 2 in 5 startups are profitable, and other startups will either break even (1 in 3) or continue to lose money (1 in 3).” - Small Business Trends
- “10% of startups fail within the first year, and about 90% of startups fail over 5 years.” - Failory
- “The number one reason why startups fail is due to misreading market demand — this is found in 42% of cases. The second largest reason why startups fail (29% of cases) is due to running out of funding and personal money.” - CBInsights
What story did you create? In relation to revenue optimization, the data shows that we all can benefit from focusing on it from day one. Whether you bootstrap your company or have venture capital funding, it’s essential to understand how to optimize your revenue, and the reverse funnel is a great place to start.
Revenue Optimization Challenges for Venture-Backed Startups
Your first stage of scale is that startup scale when you're trying to identify what that go-to-market fit is once you've confirmed you have a subset of customers that are willing to pay for the product and get the right ROI out of using it. With that, you get another chunk of cash, and now you just go hire like crazy. You take portions of the raise and say, “this is going towards R and D,” or, “this portion's going towards the tech roadmap,” “this portion's going towards hiring people, and this is going towards our internal processes.” Whatever you decide.
Next thing you know, there is no correlation between the revenue you’re bringing in and the expenses that you’re paying. So revenue optimization is harder to achieve when you have a company that is scaling with receiving investment.
However, you can still build your revenue economics. If you need to understand what revenue economics is, download this. It's a beautiful spreadsheet, and it shows you how to model out building a sales department and what your input, output, and profit will be. It's a great model to show you twelve, twenty-four, and thirty-six months. It's a proforma explicitly built for growing your sales department, but it also considers components like your client acquisition and marketing expenses. Grab the resource to learn more about revenue economics.
So a company that has received investment and scaling off of that investment typically has spurts of expenses. Then, down the road, they'll have the return on those expenses with the new, consistent revenue coming in. It's more challenging to have revenue optimization for a scaling company going through product-message fit, product-market fit, and go-to-market fit. It's ultimately more difficult to achieve revenue optimization.
Revenue Optimization Advantages for Bootstrapped Startups
If you look at a bootstrap company, it typically has revenue optimization from its first day. From the first second, they're financing their company through cash flow. They know their numbers intimately. Bootstrapping is more common for service-based companies, but bootstrapping might also be common for founders that can acquire a technology that's already written - meaning the code is already in place. They may have acquired that tech and might have short-term debt against it, but then they can grow with the cash flow of early paying customers. They can finance the growth through revenue because they didn’t have to shell out half a million dollars out of the gate to create the technology.
When you can bootstrap your company, your path toward revenue optimization is much clearer. In your proforma, or revenue economic sheet, you can identify your core product lines, ancillary products, or services. Then, using this information, you can calculate the average revenue per client. From here, you can use a reverse funnel.
The Reverse Funnel Approach
A reverse funnel can help you understand how much it costs to acquire a client.
Follow this process to build your reverse funnel:
- Start with your top-line revenue number.
- Next, divide it by your average revenue per client.
- Then, divide it by your close rate. (40% close rate = .40)
- Now, divide it by the number of meetings it took to generate that amount of proposals.
- Finally, divide that number by the total number of (outbound calls + emails + texts) or marketing outreaches to generate that number of meetings.
Once you’ve completed this exercise, look back at the results. You now have a prime example of revenue optimization at your fingertips. You’re can now look at your numbers down to the granular expense for each attraction method’s expense and volume. You can now answer the question, “How much does it cost, and how many do we need to yield x number of meetings?”
The reverse funnel method is critical to comprehend in your revenue optimization journey. By completing the above process, you now have the makings of your expense analysis on attraction methods to acquiring the customer. But don’t stop there. Use the reverse funnel on the whole second half of The Bowtie Funnel and dig deep into the expenses of retaining customers.
Funded Startups vs. Bootstrapped Startups: The Defining Difference
Based on the name, you could have probably guessed the biggest difference between a bootstrapped company and a funded company when it comes to revenue optimization.
The Defining Difference: A bootstrapped company typically has to adhere to growth as they can afford it.
Bootstrapped companies may take on short-term debt like an SBA loan or something similar to infuse a little bit of cash, but you'll often see them wait to invest into their growth until they have a surplus of cash on hand or their cash flow allows for growth. We typically experience the latter with our clients.
Now that you’re aware of the advantages and disadvantages of revenue optimization for your type of business, it’s time to learn more about optimizing your revenue through the customer funnel. Join me as we dive into the next topic in this series, “Revenue Optimization Part 3: Why Customer Churn Rate Matters.”
Ready to Tackle Your Revenue Optimization Challenges?
We know it can be challenging to commit to significant investments without a high level of cash flow. However, this kind of investment will set your business up for success and return massive results, both in the short and long run.
You can start small, but you have to invest something into infrastructure, systems, processes, and automation from an early stage if you truly want to optimize and scale revenue. The good news is that the more you invest now, the quicker you will see the results (and the less you’ll have to invest in the future)!