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Rocket GTM 🚀 - Channel Fit Framework
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(Estimated read time: 6-8 minutes)
So you've built your product and started getting repeatable traction. Maybe you've just hired your first VP of sales to take a single cylinder engine and grow it into a fully functioning rocket ship.
At this stage you'll be thinking about what channels to expand into.
With so many channels available and a million more strategies for each one, it can be overwhelming to figure out what's the best strategy to acquire customers.
One thing can help you: Channel Fit
Despite tons of available channels, not all of them will work for you. Others may work well for your current stage but can fail to provide scalable growth post Series B.
So how should you decide your distribution channels?
Here are a couple of frameworks to think about.
Stage determines what you're trying to optimize for. What you optimize for will determine which channels can work for you.
Series A companies are focused on proving product-market-fit
Series B-C companies are focused on scalable unit economics while gaining market share
IPO onwards are focused on profitability
Earlier stage companies have the benefit of being able to play in channels that don't have the depth or efficiency required to operate at the unit economics needed for scale. This can offer a highly competitive advantage in the early days.
If scalability is the game, then outbound sales teams may not be ideal. For every unit of growth you'll need to increase the sales team by an equally linear amount. Leading to hiring bottlenecks, training & development bottlenecks, HR issues and so on.
What stage are you?
What are you optimizing for?
What channels can you play in?
The depth of each channel is important. You have to link channel depth to the strategic goals of the company. If your goal is to bring on 1,000 customers you have to retro engineer that number and figure out whether the channel can provide such depth.
For example, if you're guest blogging on micro influencers to get initial traction, they may have audiences sizes of 1k-25k. Realistically you'll exhaust this channel's depth before you hit your business goals and thus it'll only work if you have access to lots of micro influencers.
# of members in a community
# of apps in an AppStore
# of users on a platform like Twitter
Google search has ENORMOUS depth, but there's a lot of competition. SEO takes six months to get started and your competitors can outbid you on Adwords.
What do you do?
Another search engine like DuckDuckGo may have a much smaller depth than Google, but their average user is a higher fit for your product and there is enough traffic to hit your business goals over the next twelve months. The depth, conversion rate, and customer fit of DuckDuckGo may be perfect for you.
With the cost of building product shrinking there is more competition than ever. Some channels tend to become more saturated than others due to the influx of VC funding, particularly in San Franciscan startups.
VC backed companies raising millions have spare cash to burn on paid channels like Google & Facebook Ads. Costs to acquire customers go up and often make these channels unprofitable to scale with.
You'll want to look for channels that are less saturated. Where can you be a big fish in a small pond (while ensure the size of that small pond has enough depth to achieve your strategic objectives).
SEO takes significantly longer to get up and running, thus some companies don't dedicate time to this from day one. Preferring the "switch on / switch off" nature of paid channels to kick-start growth in the beginning this can leave a competitive advantage wide open for you.
Over the years different channels will rise and fall, some will last for a while and some are not yet fully saturated. Youtube is an example where very few businesses manage to build an audience and therefore can be highly unsaturated for B2B SaaS companies.
Venture capital funding can drive the cost of acquisition up in paid channels, but for some companies cost is not an issue.
Your stage of growth will impact your cost sensitivity as well as your ability to extract value from your customers and how quickly your payback period is (see below).
How much you can pay to acquire customers will largely be impacted by the revenue you can claim.
Larger ACV (average contract value) products can make expensive channels like outbound worthwhile, whereas a B2C (business to consumer) product that is free will count on free channels like word-of-mouth, SEO, and viral loops.
Products can take time before the customer first experiences value. As a general rule of thumb the quicker the time-to-value (TTV)the cheaper your cost of acquisition channels tend to be.
Short time-to-value cycles are common in product-led companies because their product does the explaining for them. The product is so easy to use and adopt that it doesn't require implementation teams or hours of onboarding training.
Product-led companies lend themselves to self-serve models due to their low friction. It's much easier to acquire a mass of customers because the relationship between customer acquisition and customer maintenance is non-linear. Each acquired customer does not put an equal pressure on time and resources of the team.
Similar to the above, time-to-comprehension is a useful framework to identify channel fit. A general rule is: the longer it takes to understand the product the more likely you will have to invest in sales teams and marketing assets to explain the value proposition and ensure adoption.
The more your value proposition needs to be explained, the more costly it will be to acquire a customer.
You may want to avoid self-serve channels if your customers start to use your product and ask themselves "so what does this help me do exactly?"
This is the reason we chose outbound as our core channel at Spendesk. Building a new product category "spend management" takes time. It's a new concept that requires context setting and explanation of the challenges at play.
Compare this to Zoom, which can be explained in two words "video conferencing", you don't need a sales team to explain the value proposition.
Products which are easy to comprehend also mean they're easy to resell. This can open up affiliate and partnership channels to the mix. These can however be notoriously difficult to create if your product can't be resold without extensive training.
If every member in your partnership network needs to be qualified to resell your product, it can be done, but it will take a lot more time and money... again lending itself to only higher ACV products.
💸 LTV / CAC / Payback
First let's deal with the jargon:
LTV = Life Time Value = price * life time of the customer
CAC = cost to acquire a customer, focusing on sales & marketing costs
Payback period = the length of time it takes for you to recoup your acquisition costs
Benchmarks to strive for:
LTV / CAC = >3
Payback period = < 1 year
Why does this matter?
LTV/CAC = >3
The higher your LTV, the higher your CAC can be without negatively affecting your business model.
If you can get away with a high CAC while maintaining good unit economics you can leverage more expensive acquisition channels that your competition can't. Alternatively, you can just spend more money in existing acquisition channels and out-price your competition.
Payback period = < 1 year
You may have a high LTV/CAC ratio of 5, but if it takes you 10 years to recuperate your cost of acquisition then growth is going to be extremely expensive.
You'd have to wait 10 years just to reinvest revenue back into acquisition. As you can see in the below chart, more aggressive acquisition means more aggressive upfront costs (due to the nature of SaaS cashflows). Thus, slow payback periods are heavily cash intensive models.
The quicker you can get paid back your CAC, the more aggressive you can be in choosing an acquisition channel without negatively impacting unit economics.
The more customers you add, the more upfront cash you have to burn. Quick payback periods can be a real competitive advantage in choosing a distribution channel.
Low churn can help you access more expensive acquisition channels
Let's say your product costs $1,000 per month.
You have a strong product and customers have a strong affinity with your brand, leading to a churn half that of your competitors. The average lifetime value of your customers therefore doubles.
An average customer uses your product for 10 years before churning. Your LTV is therefore $1,000 * (10 years * 12 months) = $120,000.
To maintain healthy unit economics you can spend 1/3 of your LTV. In this example you can afford to spend $40,000 to acquire your customer.
Spending $40k to acquire a $1k per month deal is ENORMOUS.
Reducing churn and increasing LTV are powerful ways to augment your distribution model.
Unfortunately, increasing LTV and lowering churn are highly linked to your ability to ship good product. The ease of executing product makes it harder to demand a premium and normally drives price down making this a tricky variable to leverage 📉.
Leveraging innovative business models can give you access to more expensive acquisition channels
One company may have multiple channels sitting in different places on the spectrum. LinkedIn is one of those:
Ubiquity of PMF
Calendly has a value proposition which is ubiquitous for across countries, industries, and segments. Everyone needs to send calendar invites and everyone experiences the same pain.
Ubiquitous product-market-fit (PMF) means a large target-addressable-market (TAM).
Intercom would be another example. Anyone who has a website that needs to communicate with customers could be a customer.
Value propositions which are ubiquitous can be easily communicated, and tend to work better on free to low-cost channels. The larger addressable market means you can charge less, and may need deep channels.
Contrast that to companies with complex sales cycle, and hyper niche applications. The value propositions aren't ubiquitous as they can't be used by everyone. The market is smaller, requiring less deep channels, and contract sizes can command a higher price.
🌯 Wrapping it up
As product becomes table stakes, distribution becomes a critical part of go-to-market success.
The emergence of new channels can change businesses unit economics to the extent that they wipe out old incumbents. Aircall was able to turn Salesforce app marketplace into it's main acquisition source. The lower cost to acquire customers enabled them to offer a cheaper product and go after smaller SMBs that larger incumbents weren't able to serve.
Is your distribution strategy enabling you to open up new markets that were previously unserved?
Ultimately, the ability to acquire customers cheaply and efficiently will make or break a startup. Narrow down your options to 2-3 in the early days, make some assumptions, test them, check the results, and iterate accordingly.
Innovative distribution models are just getting started.
Would you be surprised if Tesla took over Uber? They've already got the distribution network of autonomous cars in place, all they need to do is put them on the grid and they'll pose a serious threat.
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