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Startups Fail When They Assume Market Fit Based on the Wrong Factors

by kirkcoburn
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As an entrepreneur, you should know the danger of startups all too well: 90% of them ultimately fail, leaving only 10% effectively competing within the industry. Failure is not good in this industry, and I explain why here. Knowing that startups fail, however, is rarely enough reason to stop your dreams in their tracks or to prevent you from going after your goals. Instead, make sure you understand what it is that causes startups to fail the most often. Then take steps to ensure that your business is protected against those potential failures. One of the most common concerns? Assuming you have reached product-market fit based on the wrong factors.

Consumer Sales Versus B2B and B2E Sales

As an energy entrepreneur, you aren’t working directly with consumers — and that means taking a very different approach to marketing than consumer-based businesses. Selling energy relies heavily on B2B and B2E sales (business to business and business to enterprise) rather than marketing to consumers. That means the metrics to track product-market fit are very different from what most people face in the consumer industry.

In the consumer industry, you’ll deal with a variety of important factors when determining market fit:

  • Organic new users are increasing steadily over time, with more than 70% organic new users rather than paid users
  • You have myriad acquisition channels growing steadily
  • Your landing pages are converting more than ~ 30% of the visitors to that page, convincing them to sign up for the business
  • Spikes of traffic lead to significant increases in overall traffic so your acquisition graph steadily increases at each level
  • You have a constant rate of users who stay signed up with your business, such as when you offer a subscription-based service

These metrics can be just as crucial for B2B and B2E businesses as they are to consumer-facing businesses, but there are exceptions to that rule. Marketing directly to consumers is about metrics. In the B2B and B2E business, on the other hand, the metrics can be much more qualitative. This does NOT mean you should ignore the metrics, on the contrary, it just means that your numbers (what to track, key leading indicators, etc…) are different. One of my frustrations is that many B2B and B2E startups do not have a radical focus on data like their B2C counterparts when managing their marketing and sales funnel…you need this as a skill set.

Customer Acquisition Costs Are Higher

Many consumer-based businesses rely heavily on word-of-mouth traffic to help spread the word about their businesses and their efforts. Some refer to this as the viral effect and even track this metric. If they can get people talking, the customer acquisition costs dramatically go down. As a result, consumer-based businesses focus heavily on social media marketing. They’re trying to start a conversation that will encourage others to buy their products.

In energy, as in other B2B businesses, on the other hand, customer acquisition costs often run much higher. It’s not as simple as marketing to the average consumer, providing information on social media that will convince those consumers to take a closer look, talk about your products, and ultimately make a purchase. B2B and B2E-based businesses often have much higher customer acquisition costs. Their marketing may focus on:

  • Event marketing, including networking events.
  • Content marketing with extremely high-value, well-researched content, rather than marketing-based content.
  • A solid website with all the information that potential customers need to make buying decisions.
  • Making connections and partnerships with other businesses in the area.

Instead of focusing on individual consumers, energy startups must focus on marketing to businesses, and often to specific roles within those businesses. They must market to a position, not to an individual. Ideally, they’ll also provide content that will help decision-makers within those businesses make a decision for their companies. Remember that these “buyers” follow the same journey as consumers: awareness, consideration, and decision stages. Your content must speak to your buyers along the same path.

Remember, just because you are using more qualitative and offline distribution channels, you can still track metrics and determine what is working, conversion rates, and ROI. If you are not doing this today, SHAME on YOU. I guess this is one of the reasons that you are calling me to infuse more capital, right? But do you know where to spend this capital effectively?

The Sales Cycle Is Much Longer

In a traditional consumer customer relationship, many businesses deal with a relatively short sales cycle. They have multiple touchpoints with their customers. They acknowledge that it may take time to convert leads, especially if they offer high-cost goods and services. The sales cycle for an energy startup, however, may take a little longer….actually a lot longer. You may have to evaluate additional steps in the process, including:

Getting approval from C-level executives:

Often, decisions made at a lower level of the company must make their way up the ladder to C-level executives. In addition to providing information that will move employees at the decision-making level of the business to choose your energy startup, you must also provide information that will encourage C-level executives to make that crucial move.

Waiting for new fiscal years or contractual years:

In some cases, businesses must wait until a new fiscal year, or until a current contract runs out, to make a new decision about a new product/service. That time must be part of the sales cycle since until the contract is final, businesses cannot really unwind the existing contract without penalties and/or higher switching costs.

Sales are Larger

In factoring in the cost to acquire new clients and the length of the sales cycle, energy startups must also consider the ultimate payout. The sales for an energy startup are often ultimately much larger than those acquired by smaller companies focused on consumer sales. Dealing with B2B and B2E sales means that you are dealing with large, corporate contracts and high-dollar sales. While client acquisition cost may run higher for energy startups, the payout from acquiring those customers also rises to match it.

DANGER: we have seen many B2C type energy startups enter this space…and FAIL. Why? They had a very low-cost product that relied upon closing many users within large companies; however, they underestimated the long sales cycles and customer acquisition costs to get their foot in the door. If your customer acquisition costs are larger than your customer lifetime value, death on a stick.

Establishing Your Place in the Industry

Many people parachuting over Deland

With B2B and B2E, you have to hit the target first — and you have to hit it straight on.

In order to help your startup succeed, you must clearly establish your place in the industry and fully understand how to measure your product-market. This not the product-market fit for businesses “like” yours; it’s the product-market fit for precisely your business. You can accomplish those goals with these key steps.

1. Hire the Right Salespeople

Sandler Sales says it best: hiring a good training salesperson with no industry experience is more effective than hiring someone with a Rolodex full of industry relationships, but who has relatively weak on sales skills. Ultimately, a salesperson can know your industry inside and out but lack the skills necessary to genuinely connect with potential clients. You want a salesperson who:

  • Knows how to effectively prepare to connect with new clients ahead of meetings and presentations
  • Knows how to establish trust with the customer (LISTENS and ASKS QUESTIONS)
  • Understands a customer’s key pain points including personal pain by being inquisitive and insightful
  • Understands how to get a NO quickly and not waste time on leads that were never truly qualified
  • Can quickly understand whether the customer has the budget, can understand who are the key decision-makers required to make a sale, and can determine how long the customer has been trying to solve the problem

The best salespeople are self-motivated and willing to do what it takes to dive in and make sales. They usually do not struggle with asking for the sale, do not have a high need to be liked (or is able to overcome the problem of needing approval which is not good for high dollar sales), are comfortable talking about money, and can say NO. Not only do you need these salespeople on your team, but you also need salespeople who can teach others these skills. That will help you make the most of every client interaction.

2. Predict Revenue

Ideally, your company needs to be able to accurately predict revenue within approximately ±10%. Your playbook depends on your ability to effectively predict your finances throughout the early years of your energy startup (and your ability to manage cash flow). You need to know:

  • The cost to acquire customers
  • The conversion rates from prospects into leads
  • How to transform marketing qualified leads into sales qualified leads
  • How to move sales qualified leads to opportunities
  • What it takes to move opportunities into sales

As you develop this playbook, you will get a better idea of the costs associated with your process. This includes whether it makes sense to pour more money into hiring more salespeople. If you cannot predict your future revenue, you won’t know whether you can afford to hire more salespeople, who you need, or where you really fit in your market. Until the playbook is known, all bets are off, and your company has not yet found its product-market fit. Revenue and number of employees do NOT predict product-market fit. Being able to hire a new salesperson that can follow the proven playbook and get results w/in ±10% is the metric. By taking the time to put together that playbook, you will establish whether your company has found the product-market fit. Without it, you’re flying blind — and that single decision could spell failure for your energy startup.

3. Using Your Skills

Most founders are already good “salespeople”. You see the opportunity. You have the passion, and you have the ability to convince early adopters to dive in and invest in your company. Those skills, however, do not necessarily translate as your company grows.

You must make that transition by translating your vision and value proposition into a plan that can be measured on real results. Replicating the vision and value proposition of the founders into something that can be repeated on a larger scale as a company grows is why I started and why it is thriving today. There is a gap for most growth companies on the verge of breaking out of No Man’s Land. They need to be able to codify their marketing and sales funnel before hiring a sales team. Can you predict revenue? Take advantage of the skills you already possess. Then use them to help predict your future successes and future ventures.

Until you establish your place in the market, you cannot truly call your startup a success (for investors and your opportunity cost if you raise external funding). Unlike consumer-driven marketing, your place in the market is not simply a set group of people who want a certain service or product. Instead, you must look at the bigger picture as you learn how to scale your efforts. Until you reach this point, your company may generate a lot of revenue. But it’s a lifestyle company — not something that can scale.

As you use these strategies to truly determine and establish your place in the market, on the other hand, you will transform the way you interact with your customers, find your market value, and ultimately increase the chances that your startup will be one of the 10% that goes the distance. Do you think there’s more to finding the right product-market fit? If so, let me know what else we need to talk about.

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