Many software companies can relate to the experience of starting in professional services and pivoting towards product development. “Most of you will dramatically charge your target market, ideal customer profile and revenue model two to three times in your first five years,” said Promise Phelon, a serial founder and TapInfluence CEO, from the stage at day 2 of the SaaStock conference in Dublin.
TapInfluence had been an agency since 2009, before deciding to become a product company in 2012. In 2015, the company raised $1 million in venture funding to accelerate the transition and recruited Phelon as CEO to manage the process. “The reason most companies fail at changing the business model, is because they’re scared of failure,” she said from the stage. Adding that changing a business model from services to scale involves a combination of meticulous process and luck.
Moving from service to product
TapInfluence identified goals to improve gross margin, and to help customers to move away from direct interaction with the company, and towards using the product as self service and managing their own campaigns.
Another critical step was to hire a product marketing specialist to create an ideal customer profile, and to iterate based on data from the market. “The one secret for the success of how this worked for us is product marketing. You don’t typically have those people inside a small startup. Product marketing sits between the market and the company, understands prospects and be part of the sales machine,” Promise said.
Customer value vs acquisition
That process uncovered ideal customer types, and over time, it also revealed data about lifetime value (LTV) and customer acquisition cost (CAC). The value of a customer should ideally be at least three times higher than the cost of acquiring them - a LTV to CAC ratio of 3:1. It took two years for TapInfluence to build those benchmarks but now it has a group of customers with a 6.5:1 ratio. Along the way, it identified customers that were loss-making for the company. The lesson from this exercise was “get the economics right”, said Phelon.
Scalable unit economics
“If you are making a model conversion or looking to growth, your instincts are to scale when you see the early results. Do not! Get scalable unit economics. It’s better to wait, and preserve capital. There’s got to be time to get enough data to know that you’ve found your ideal customer.”
She also urged companies - and the CEOs leading them - to avoid falling into the trap of accelerating this stage too quickly. “The process of changing a business model is studying who your customers are, and not scaling. And that’s very slow,” she said.
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