I read a book over 25 years ago I believe that was called Take a Chance to Be First: The Secrets of Entrepreneurial Success by Warren Avis. To this day one thought that has always stayed with me about entrepreneurship and starting a business;
So do some careful figuring and planning, come up with the figures you’ll need to get your business off the ground – and then add 50%; or better still, double it. That’s how much you’ll probably need before your enterprise can begin to generate enough income to present itself.
Of course most of us realize the importance of capital in a start-up venture. For a few, that may still wonder why someone would say something that outlandish when we have such great modeling tools and financial planning instruments at our disposal. Doubling it seems ridiculous. I seldom see the mistake made from the budgetary numbers anyway, they are just financial forecast, and we can always explain why they shift and have the ability to influence them through creative ways of marketing or outsourcing. So what’s the deal with the numbers? The deal is not with the money, the mistake I often see is the entrepreneur’s assumptions based on the time to market.
Most entrepreneurs seek out sales and marketing assistance way to close to launch date. Others may plan for but never fully understand the time it takes to enter a market. They have never even considered the time it will take a customer to make a decision. They think that they can manipulate this and/or create a marketing event that will cause instant sales, or as Dr. Deming might say, “Instant pudding”.
I asked Bill Aulet, author of (author of Disciplined Entrepreneurship: 24 Steps to a Successful Startup.) Not 4-Hours but 24 Steps to Successful Entrepreneurship: Another part I enjoyed about your book and it was in the later stages is that you actually start putting numbers and quantifying things for people – calculating lifetime value, acquisition costs. I can say you’re one of the very, very few books about entrepreneurship that start addressing those issues.
Bill Aulet’s response:
In our class when you get a paper back, “this isn’t specific”, “this is too general” – this is some kind of MBA BS, we want numbers and give us numbers, relevant numbers, because, at the end of the day, business is about numbers that you need to make. If you don’t make it economically, you don’t have oxygen and can have all these other things. Now that doesn’t mean that those should drive the business – you can be a mission driven business, a customer driven business, but at the end of the day the numbers have to work. You think this obvious, Joe, and people talk about it but what we’ve found was that people didn’t know how to calculate the cost of customer acquisition. One of the character’s in the book you’ll see, and he’s got wine and seems a little bit tipsy and that’s because he is tipsy because entrepreneurs pathologically lose their rationality when it comes to cost of customer acquisition; how much does it cost for me to acquire a new customer? They just think “oh, if I build it, they will come”, that’s not how it works.
There’s a whole process that customers have to go through to buy a product and entrepreneurs need to understand that process and understand whether the sales cycle is three weeks, three months, six months, nine months, a year and a half because that very data right there could absolutely kill a company. If you’re sale cycle is a year and a half it’s very, very hard, but if it is a year and a half it might be possible but you need to know that and not think that it’s three months and then you need to make sure that your lifetime value of the customer is very, very high to support such a high cost of customer acquisition.
You typically cannot change someone behavior. You can alter it, influence it but seldom change it. With a new product it is even more difficult. You may want to consider;
- How long does the market or your user persona take to make a decision on a similar product?
- How long does the market or user persona take to accept new ideas?
- Are you in a position to ask these questions?
- Do you understand who your market is?
My advice for determinng the customer acquisition time goes back to what Warren Avis says,
So do some careful figuring and planning, come up with the figures you’ll need to get your business off the ground – and then add 50%; or better still, double it.
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