Market Sizing and the cost of customer acquisition are as important to start-ups as they are to large companies
In good times Return on Investment (ROI) can be stretched over many years if the investment is determined to be a safe bet or there are ancillary or complimentary benefits to the investment such as additional revenues, increased competitive or defensive position, reduced cost, increased reliability, or any of a number of other benefits.
When the investment is related to a new business, new product or new service the revenue and margin potential and cost of customer acquisition are a few of the most critical aspects that must be addressed before seriously considering the investment.
Market size in many cases can be geographical. Fresh Pizza can only be delivered so far, and while I have driven 50 miles for my favorite pizza, I have not done it frequently. Had I not lived near the restaurant as a child, I would never have ventured to the location well off the main roadways.
Even with a good market potential, what is the cost of acquisition of new clients? How frequently would they buy from you and not competitors? How would they initially find you? How much do you have to spend to get your slice of market share and at that revenue is your margin enough to sustain and grow the business and pay back the initial investment? Do you have enough cash and cash flow to be in business long enough to cash flow neutral or positive and profitability?
Talking with many environmental entrepreneurs, or in other words people whom have lost jobs and are now trying to find jobs, start something “on the side”, or plunge into their own businesses, there seems to be enough desperation or optimism that market sizing is far from consideration when they are analyzing new business areas. Customer acquisition is also typically ignored.
While many businesses, and initial sales for new sales staff joining a company with a “book”, may seem quick and easy, the “Rolodex Effect” has effected almost very company I have worked with or for. What I call the “Rolodex Effect” is the ability for people to sell to customers and prospects that they already know or have existing relationships with. The “Roldex Sales” typically have a lower cost of sale (the lead and part of the sales process and pipeline is negated) and can in some cases cover a sales persons quota for an extended period.
When the honeymoon ends, the lack of: cold calling, prospecting, lead generation, pipeline management, and classical sales effort becomes obvious and the true cost of customer acquisition becomes more relevant. Sales decline, margins erode, morale slips and turn-over occurs.
Lead generation, prospecting and the sales cycle must be considered with respect to the market available in any ROI analysis.
