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  • Writer's pictureJeff Waggoner

The Three Mandates of Building a Company

The fundamentals of building a company can easily be lost within all the frameworks, opinions, and perspective available out there. I have found through the course of five high-growth experiences building organizations from concept to as much as $385M per year as well as over a dozen turnarounds that there really are 3 basic mandates. Focusing on these 3 things, and evolving elements of each of them in the right order, can serve as solid foundation for building capitally efficient companies under any circumstances.

  • Build a product / service that creates real value for a set of customers you can identify

  • Capture a sufficient amount of that value through pricing and operational effectiveness

  • Build a sales and marketing engine that can onboard those customers effectively and efficiently

Everything else, while certainly important, is really about the specific tools of performing these 3 mandates. It is probably worth unpacking these 3 items for greater insight.

Build a product / service that creates real value for a set of customers you can identify

The first mandate of building any company is building a product and/or service that creates real value for an identifiable set of customers. A product has to solve a real problem, provide some real tangible benefit, and make a difference in the lives of its customers to matter. That is not a surprise and much of the frameworks associated with startups and design thinking center on the process of understanding a customer, their problems, and identifying ways to think of meaningful solutions that can generate initial traction. Customer development, as a process, is well documented as a clearly defined iterative process of identifying a clear problem, brainstorming solutions, and exploring the capacity of that solution to create value for the customer, actually be produced, delivered, and support value capture. Those concepts are then evaluated first in concept form through customer development and then through early market validation through a Minimum Viable Product (MVP). It is well understood that this highly iterative process requires empathy, creativity, and patience. Teams that are successful at this process also understand the criticality of learning from and accelerating each iterative cycle in order to reach a viable solution before expiration of their limited resources.

However, building a successful MVP is only the first challenge to building value. Real value comes from building a deeper relationship with an identified market segment(s), their problems, and the value that can be created by solving them. There was a time when value in B2B companies was considered simpler than in B2C companies; if the product produces a superior ROI, solves a problem that cannot otherwise be solved, then it’s a winner. B2C consumers were seen as putting more value on prestige, image, and emotional context; though many B2C transactions still have a fundamental economic component. Competition in B2B products and services combined with buying and marketing processes that have morphed to become more B2C like means that B2B products need the fundamental economic and performance value proposition, but to thrive in the long haul also need additional layers of value in prestige, ease of use, sustainability, risk, and others. These types of multi-faceted value propositions take time to build and can only be built with a sustained relationship with customers in those market segments. Those relationships are built on the economic and functional performance of the product as a bedrock that sustains that relationship, as additional value is built-in.

It is worth noting, as a way of thinking, that the ability to create value for others ultimately forms a cap on the valuation of the company. That is why the first mandate of building a company is to create value for customers; and then find a way to continuously deepen that value through enhancements, extensions, and add-ons to that core product.

Capture a sufficient amount of that value through pricing and operational effectiveness

The second mandate of building any company is capturing sufficient value through pricing and operational effectiveness; all of the economic productivity of the company comes from the ability to capture a sufficient amount of the value created for customers. When more value is created for customers, then more value can be captured, increasing the value of the company. The two levers for value capture are pricing and operational effectiveness.

There are a great many pricing strategies and reasons for using them, which I will explore in a future blog. Defining the mechanism of pricing as well as the specific level of pricing is something to be explored during all of the initial phases of development of a product and then tuned and modified throughout the remainder of the product’s lifecycle. I have found the following to be good guidelines on price setting, especially in growth stage companies:

  • Prospects and customers must easily get it; does it make sense to them and is it perceived as a fair exchange of value (meaning do prospects perceive they are getting enough to justify switching or adoption costs and risks)?

  • Value based pricing is superior for conveying the value of the product as well as for achieving higher margins. Use cost-based pricing only where the transaction is highly regulated and/or highly transparent.

  • Startups and scale-ups solve unique problems in unique ways and/or build brands that raise image. These are premium approaches and justify premium pricing, so a price skimming approach is often the right answer early on.

  • Avoid pricing models that create barriers to success by being misaligned to customer needs such as organizational cost-spreading, growth and scaling, and risk.

  • Ensure pricing models are kept simple enough for everyone to understand; complexity and novelty can confuse customers, partners, and even employees of your company – all with different problematic results.

  • Don’t price below cost at all, if possible, and then only for a limited time in exchange for something truly valuable. That value could be customer insights and relationship, but be careful that the customers created are actually the customers for whom you want / need insight.

The key point to pricing is to remember that pricing should be a function of the perceived value of the product and the objective is to continue to increase that perceived value over the life of the product.

Operational effectiveness refers to two highly related but different concepts. The first is the effectivity or ability to perform of operations, and the second is the ability to perform efficiently. The order is important. Note that I use operations here very broadly as that could mean the development and operation of the integrated interface and hosted software components of a SaaS product, the people-centric functions of a service-oriented product, or the manufacturing, warehousing, and delivery functions of a material product. Many startups and scale-ups field products that are some hybrid of these three.

A company must focus first on producing the promise of its products. Some early adopters, especially with unique products, have a level of forgiveness of quality, reliability, and service issues but no company can scale up with these types of problems continuing to occur. An early focus on developing operational capacity that actually delivers is crucial. In most scale-ups, the ability to deliver will start with a dependency on heroic efforts by staff. This introduces the risk of staff burnout as well as misunderstandings of capacity. These risks, if not mitigated, will eventually result in staff and/or customer churn along with reputational loss. As a first step, the heroic action dependency must be tuned away through staff growth as well as continuous improvement initiatives and/or process migration.

Once heroic action risk is mitigated to an appropriate level, the next focus is on reliability, scalability, and efficiency. This is where the combined approach of process migration and continuous improvement can drive tremendous results. Alongside the converging pricing model and a deepening understanding of the drivers of value from a customer perspective, the drivers of cost can now be introduced to develop a set of goals for gross margin and R&D. This can now enable more intelligent decisions around the product roadmap and investment in R&D and operational effectiveness.

With that, a company can start managing the maturation of customer lifetime value (LTV). LTV is a measure that encapsulates both gross margin and customer satisfaction. Gross margin obviously encapsulates both pricing as well as the efficiency side of operational effectiveness. Customer satisfaction, usually expressed in churn (either actual or forecast from satisfaction metrics), encapsulates the customer’s perception of value received.

Good management of Lifetime value will deepen customer retention, accelerate the production of cash flow to fund growth, and give a company the best chance of raising capital under the right terms when needed.

Build a sales and marketing engine that can onboard those customers effectively and efficiently

The third mandate is to build the ability to bring on customers effectively and efficiently. A company that builds a product that no-one purchases isn’t a company, but a company that sells what it can’t deliver or at either margins too low or customer acquisition costs too high to sustain won’t be a company for long.

In early stage companies, as they evolve through customer development, product/market validation, and business model validation the sales and marketing teams’ focus is far more on understanding the customer and the market and being the company’s eyes and ears into the market. There is a great deal of comprehension, conceptualization, and experimentation that is required to evolve through these stages and a high degree of coupling that is required between sales and marketing and product development. At first, effective and efficient is best measured by convergence of an understanding of the value proposition and the market segment(s) to which that value proposition appeals. As the company moves into product/market validation and even business model validation, the measure shifts to success in finding ways to validly explore a spectrum of market segments, product features, pricing models, and to understand the levers of value in the product. During business model validation, the definition of success shifts to identifying a sales and marketing model that can be replicated and measured. Finally, during product/market growth, the measure of success is in building a growing organization that can perform that sales and marketing model and then continuously refine it to drive customer acquisition costs down.

The objective is to build a production sales and marketing operation. A production sales and marketing operation has a well-vetted playbook. It knows how to identify a good lead, prospect, and customer. Has material and presentation channels developed to appeal to people fitting these buyer personas and to address all the potential objections. It has a good understanding of how to negotiate with or bypass the players in a buyer organization and to navigate the most efficient process to presenting a proposal that will be well received. It has an understanding of conditions and circumstances that warn of potential failure and when to either correct the approach or withdraw and focus elsewhere. Finally, it has metrics in place for the process, the team, and a method of collecting, refining, and training the team for continuous improvement to drive both customer acquisition as well as customer acquisition cost.

There are two entirely separate concepts and ways of thinking required to evolve this sales and marketing engine. The first way is often described as business development or product management, while the second is production sales and marketing operations. In early stage companies, the entire focus is on the first. By the time a company has reached business model validation and starts building the production sales and marketing operation, a different way of thinking, and often a new team, will be required. It’s worth remembering that sustainable growth usually requires the ability to exploit far more than one product / market fit. Shifting the business development team into the exploration of new product / market fit while building the production sales and marketing operation and the lines of communication between these two teams is usually the right approach.

With an effective and efficient sales and marketing engine, the company can grow and scale while onboarding customers for whom it can fulfill the value proposition, retain, and capture value. Of equal importance, it can onboard these customers at a cost that makes investment in growth a worthy investment.

These 3 elements of building a company are crucial to success. Taking each to its appropriate level of refinement enables a company to not only grow, but also grow with capital efficiency and that is the true key to growing corporate value. When capital is plentiful, capital efficiency can accelerate the utilization of that capital to capture market more quickly and enable equity retention for early stakeholders. When capital is less plentiful, the ability to grow with capital efficiency can mean the difference between success and outright failure.

If you would like a complementary evaluation of where your company is in this process, to discuss a specific challenge you’re facing, or just have a question please contact us.

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