pivot or stay the course

Good morning Predictable Revenue community,

Should I pivot or stay the course? This is the question a friend of mine hit me with when we were checking in this week. How would you have handled this conversation?

They’re a few years into their journey, have some revenue, but aren’t seeing the growth they would like. They had a product and customers were getting value from it but they were losing deals at the executive level. They just couldn’t get enough exec support to get deals across the line. Their question was - do I pivot or double down on my current market. It’s an interesting question because there is no right or wrong answer so I thought I’d share the bones of the conversation with you all today. 

tl;dr

• They have product market fit but it’s not super strong

• They haven’t found where they’re 10x better

• They might be capturing more value than they should (~19% of value created)

• Their next steps are to interview some leaders outside their customer set to see what problems are top of mind for them and if there might be a 10x problem waiting to be solved

“Is this a founder or a product issue?” 
My first thought was on how to dissect the problem. There are many reasons why a startup could be struggling with sales but for this call I lumped them into two categories, a founder issue or a product market fit issue. First, I needed to rule out that my friend was the root of the problem. I needed to make sure it wasn’t a skills gap (not knowing how to close) or a strategy issue (driving the ship in the wrong direction). Then, I wanted to understand the impact their product was having on their customers. 

“Is this a gut check or guidance call?”
I could tell from the outset of the call that they already had a strong feeling for what they wanted to do and didn’t need any new ideas. This call was about making sure they were following a good decision process and were seeing the facts clearly. Sometimes people are lost and need a guide and sometimes they already know where they want to go but want someone to help pressure test their decision. Knowing what my friend wanted out of the call was where I needed to start. The next thing I needed to know was about their revenue.

“Tell me about your revenue”
This was a calibrating question for me, I wanted to see where in the journey they were. The situation would be much different if they had $7 in monthly recurring revenue (MRR) compared to $70k in MRR. They were somewhere in the middle, not small enough to walk away but not big enough to be investing in growth. While they were closing new customers regularly, they were also losing a very high percentage of deals to no decision. I knew my friend knew how to close so this was a little surprising. It told me their revenue motion was likely good because they were seeing lots of opps and pointed directly at the product. 

“Tell me about the impact you’re having on your customers”
You can learn a lot about where a company is by asking this question and paying attention to how concise the answer is. When my first company wasn’t doing well, my answers were super long winded because I was explaining all the context. When my second company was taking off, my answers were short and to the point because the value created was so obvious. In my friend’s case, they were creating an average of $160k for each customer and were charging $30k, capturing 19% of the value they created. Their average customer was a $10m ARR SaaS company so their impact netted out to a 1.6% improvement on revenue. These weren’t stellar but also didn’t seem terrible so I kept pushing. 

The two thoughts we discussed here were that most CEOs of $10m companies won’t care about something that generates a 1.6% lift. While it’s significant, it’s not significant enough to garner executive attention and therefore budget. The second idea was around pricing. When I was first learning about pricing a mentor of mine, Steven Forth, shared a benchmark with me that I found super helpful. He recommended avoiding capturing more than 5% of the value I created because it didn’t leave enough bread on the table for your customer. While bringing the price down would likely get deals moving, it didn’t feel like we were there quite yet. 

“Where are you 10x better?”
My question was met with silence. “Nowhere,” he finally replied. I’ve written about this before so I won’t regurgitate my arguments. Needless to say, this is where we spent our time. What it came down to was that they weren’t confident there was a 10x improvement to be made to the problem space. It was possible but they needed to run some customer development interviews in order to find out. 

I don’t know if they’ll pivot or double down, only their future customers will be able to guide them on this one. I suspect that if they perform 20 open-ended interviews with companies outside of their current customers, they’ll have a much stronger sense for where they need to go. 

How would you handle a conversation like this? Is there anything I missed? 

Collin 

PS - apologies in advance if I’m slow to reply to emails, I’m riding from Vancouver to Victoria this weekend to see a band called The Dip. They’re a retro-soul band, which is like a jazz band and an indie band made a baby. 

PPS - I’m thinking of heading to SaaStr in a couple weeks, ping me if you’re going to be there and we can catch up for a coffee or beer.