Companies struggle with two questions. One is whether to implement a business idea or leave it. The second is how much customer acquisition cost is alright.
It is necessary to have a model to guide our decision-making process in such situations. I use a model that has three steps. They are akin to the gears of an automobile engine. And they should be applied in the right order.
Gear 1: The first and foremost thing for a business to check is whether their idea has any potential. The best way to test it is to run a low fidelity experiment with few customers. It is like putting the car in first gear and starting to move. If the engine sputters and shuts down, then there is a problem. In this stage, the objective is not to check whether the idea is scalable and profitable. We should learn from the experiment and modify the plan accordingly.
Gear 2: When the business moves past the first stage, the second step is to acquire customers. In the second gear, we want the company to pick up speed. If we spend money on marketing and sales, then we should get business. This stage is to validate that assumption. Of course, we should be clear about how much cost our organization can bear. The profitability of this initiative is not the primary concern. We know that we cannot get fuel efficiency in the lower gears. The same principle applies in business.
Gear 3: When the idea has passed the first two stages, it's time to accelerate. In the third gear, increment cost on operations and marketing should yield a disproportionately higher number of customers. This means that the customer acquisition cost should reduce substantially as compared to Gear-2. In this stage, profitability and growth are the primary objectives.
We move the gears of the car up or down depending on the obstacles we encounter. The same thing needs to be done with the three-gears I mentioned here. Every organization needs to learn and act in all phases of its business. There should be no shame in moving to a lower gear and even giving up on an initiative.
Metrics:
List all the initiatives you have undertaken.
Assess which phase of the model they fall into.
Apply the criteria applicable to the individual stage.
Test the concepts and move up gears accordingly.
Pivot if you do not meet the success criteria even after a few iterations.
Subodh
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