The dreaded cash flow trough.
If you know what it is, it’s probably because you’ve experienced it as a founder.
Like the plague to the people of medeival Europe, it’s deadly but not well understood by those who contract it (at least for the first time). It can literally shut your company down, and it occurs as a result of growth.
Crazy, right? But it’s true.
In this post, we’ll quickly look at the traditional way people try to manage through the cash flow trough.
Then, we’ll talk about the more innovative approach that most people don’t know about.
A Refresher, Just In Case …
Analysis of your company’s cash flow status revolves around these two numbers:
- ARPA (average revenue per account – in our case, we’re looking at monthly revenue)
- CAC (cost to acquire a customer)
With these two numbers, you can calculate your your break-even period – the amount of time it will take an average customer to pay back your cost to acquire him/her.
When you encounter a gang of break-even periods in a dark alley, they have come to be known as the sinister Cash Flow Trough. Indeed – they are one and the same!
Because each customer costs money to acquire, but won’t pay you back until the break-even period is over …
You enter a cash flow trough as you acquire customers, where your company is bleeding cash every single month.
And, counter-intuitively, the more customers you get, the deeper this cash flow trough becomes.
As an article by David Skok eloquently explains:
SaaS businesses face significant losses in the early years (and often an associated cash flow problem). This is because they have to invest heavily upfront to acquire the customer, but recover the profits from that investment over a long period of time. The faster the business decides to grow, the worse the losses become.1
This is one case where the old mantra doesn’t apply – more sales can’t solve this problem.
Now, I’m thinking you’re reading this today because the cash flow trough has either stepped onto your turf, or you think it might be ready to do so.
So how do you change it?
How You Improve Cash Flow
The popular approach looks at these numbers and tries to do things like lower customer churn rate …
And increase prices …
And go get more capital …
And many entrepreneurs simply hope against hope that the finances of the business will somehow change when they get more customers.
You should do all of these things …
Even that last one! Because you will become profitable at a certain point in time, as your cumulative recurring revenue catches up to your monthly overall spend to acquire customers.
But most businesses will die from the cash flow trough before the problem resolves itself on its own.
To survive the cash flow trough, the business needs a shift so it can keep growing.
And while the popular approach has fixed the cash flow issues for some companies in the past …
Many more have crashed and burned. Facing down the cash flow trough is a dangerous game of chicken.
My purpose today is to teach you a more innovative way to stare it down and beat it.
The Innovative Approach That Almost Nobody Is Doing
Here’s what the popular approach I’ve described is missing:
A clear understanding of the entire customer journey, and the different points at which you can monetize the customer on that journey.
Yes – we’re talking about marketing. But not just any marketing – this is marketing that creates and captures real value.
The popular approach to the cash flow trough assumes that the only value your startup can offer a customer is in the core product you’re selling.
Therefore, this approach pulls all the levers that exist around the product, but doesn’t ever stop to consider tweaking what the company is offering the customer.
This assumption is not true.
Your SaaS product is certainly the core of the value you offer to a customer.
But if that’s all you do to monetize your customer relationships …
You’re leaving a lot of money on the table.
And your startup may crash and burn due to cash flow issues …
Which you could have easily avoided with a better understanding of how to monetize your customer on the various parts of his/her journey with you.
But I know you’re not going to understand or believe what I’m saying here until I get more specific.
So … what does this look like in practice?
The Playbook To Monetize More Of The Customer Journey
Your customer’s journey involves multiple touch points with your marketing before they purchase your product.
You may be doing content marketing, for example – blogging, holding webinars or events, etc. And even though you do this only halfheartedly, because it doesn’t produce marvelous or measurable results today, each one of these touch points is part of the customer’s journey toward you.
As a matter of fact, they define the journey.
And there are two characteristics of this journey that you must understand very clearly:
- You are providing value on this journey
- There is a massive amount of leakage in this journey
Let’s dig into each of these characteristics.
Your Are Providing Value On This Journey
This first point is extremely important.
You are giving a lot of value to your customers as they engage with you and your content to decide whether they should buy your product.
If this wasn’t valuable, they would not be there.
If people are on this journey toward you, that’s an indicator that you’re providing value to them.
To put it simply, solving your cashflow issues involves monetizing this value.
I’m not talking about monetizing every touchpoint – that would be absurd. You have to give a LOT of value for free in this customer journey – that’s the only way to get people moving.
But you can capture value very strategically along the way.
When you do this, your CAC can be drastically reduced (or subsidized, if you prefer a more technically accurate term).
This is because the revenue you generate during the customer journey is used to offset the cost of getting the customer on that journey – i.e. the CAC.
If we step back and try to express this in its simplest form, you’re generating revenue to subsidize the CAC when and where that CAC is incurred, instead of waiting to break even on revenues generated at some later time.
The result: your break-even period is reduced or eliminated. You can grow fast without facing the cash flow trough (or only facing a diminished one). You keep more equity in your company because you don’t have to go back to the funding well.
Some Practical Ideas
Companies that are doing this successfully offer valuable expertise, training, or access to valuable information. They might even offer opportunities for networking, or opportunities for increased prestige:
- Think about offering your customers a video training that’s directly related to the value you’re trying to provide in your core product, but isn’t necessarily about your product itself.
- Give them a cool experience that you know they would love related to the space you’re in.
- If you’re a B2B company, offer your customer a certification on your product that will make them more valuable in the job market.
- If you’re a B2C company, offer him/her something that will lead to an increase in prestige in the circles you and they both travel in.
We call this a “pre-product purchase.” And not only does it make you some immediate cash …
But it also helps you identify the people who are most willing to pay you for what you do.
That knowledge is VERY valuable if you use it properly.
So, in summary:
You are providing value in your customer journey.
DO NOT believe that you have nothing valuable to offer here!
You have a lot to offer, and it can actually be really easy to create the thing you’ll sell.
And DO NOT believe your customers won’t pay for it …
They are willing to pay for it, right now.
Getting them to do so will recoup some or all of your CAC, and allow you to scale without getting torpedoed by cashflow shortages.
Which brings us to the second important characteristic of the customer journey:
There Is A Massive Amount Of Leakage In This Journey
This part, you probably already knew. But this is why it’s important:
As you capture some of the value you’re creating in your customer’s journey, you need to focus on reducing the number of people who drop out and don’t come back.
The first reason for this is simple:
When more people stay in the journey … more customers will finish the journey and buy your product.
But the second reason is more directly related to the value you’re creating and capturing as you take these customers on their journey with you.
Some of the people who would have dropped out of their journey before purchasing your core product …
Will actually end up making one of these pre-product purchases.
And this means you’ve captured revenue from a prospective customer where, previously, you would have only seen a loss of money (the CAC) …
Not to mention the fact that this customer is more likely to stay in the journey now that he/she has purchased from you and experienced your value.
The Steps You Can Take NOW To Solve Your Cash Flow Problems
The first time I learned about this approach to marketing, my mind was blown.
I hope this blog post has been equally mind-blowing for you.
But, I’ll be honest:
I know the concepts I’ve described here are still fuzzy in your mind.
And you probably have a lot of questions, like:
“How do I go about selling something to a customer before he/she is a customer?”
“What tools do I need to start doing this?”
“Are there any tricks to getting this to work?”
This has only been a short blog post. I learned about this strategy on web trainings, through in-person and online coaching, and through many, many hours of trial and error.
There’s actually a lot to learn if you want to do this right.
My goal is to help you start doing it as quickly as possible.
Cash flow problems are, after all, rather urgent.
So, if you think this could help your business get through its cash flow problems …
Leading to more profitability, higher valuations, faster growth, and better terms at your next funding event …
Then you’ll want to attend my free web class, where I’ll get into more detail about how this works.
So if you’re a startup founder or leader who wants to avoid the early death caused by the cash flow trough …
Create better financial results in your company today …
And a create much more positive outlook on future growth …
Then register for the web class right now.
(Web class is past).
- David Skok argues that if your break-even period is higher than 12 months, you won’t be very profitable, ever.