As Steve Blank insists, startups are “organizations formed to search for a repeatable and scalable business model” and businesses that struggle to grow and scale relatively quickly are destined to fail.
Money, of course, is the number one resource on which such growth ultimately depends: a startup that fails to attain positive cash flow simply cannot sustain itself.
What can you do if you find yourself in a situation where your startup is generating some revenue but nowhere near the amount of income you need to scale?
In this article I’ll outline several key strategies you can use to effectively boost startup revenues.
Understanding The Core Concepts
Before you start implementing different methods for increasing your startup’s revenues, you should first have a solid understanding of the core concepts, strategies, and processes involved in making money as a startup.
Thus, for anybody who needs a little refresher, here’s a quick listing of some of the most important points to keep in mind when it comes to the economics of startup life:
Market dynamics ultimately determine whether you can generate enough money to scale your startup’s operations. You need to determine the size of your market, the demand for your proposed solution (by actually talking to real-world people), and the specific characteristics of your ideal customers (i.e., going after your “early adopters” rather trying to create a product for every single person in your industry).
There are a number of tried and true monetization strategies that your startup should utilize, where appropriate, to their full potential. These forms of monetization include advertising, affiliate marketing, e-commerce, and SaaS (software-as-a-service).
Make sure you take full advantage of viral marketing, including “viral loops”. Startups are unlike traditional businesses in many ways. One of the key differences derives from the fact that startups approach marketing in unique ways, using methods that simply didn’t exist a number of years ago. Exploit the power of viral marketing in order to maximize the popularity and income of your startup.
Startup equity is a tricky yet crucially important facet of making money as a startup. See here for a very useful introduction to the basics of startup equity.
There are a number of essential financial metrics that all startups should measure closely.
With this refresher out of the way, let’s now consider 5 specific techniques for boosting your startup’s earnings.
Note: there are two basic ways for increasing the amount of money your company earns, i.e., reducing your customer acquisition costs (CACs) and increasing the amount of revenue generated per customer.
[nextpage title=”1. Use Upselling”]
One of the most common ways to increase the amount of money that a customer spends on a transaction is to effectively apply the “upselling” tactic.
According to businessdictionary.com, upselling is:
“A sales strategy where the seller will provide the buyer with opportunities to purchase related products or services, often for the sole purpose of making a larger sale.”
Typical examples of upselling include:
Electronics stores offering to sell extended warranties on top of the sales of the electronic goods themselves;
A domain name provider offering the purchaser an opportunity to buy domain name protection and other add-on services (e.g., a https certificate); and
Fast-food restaurants asking customers “Would you like fries with that?” after hamburger orders have been placed.
As a strategy, upselling works when the average transaction size is increased and/or the amount of money spent by each customer goes up on average.
Upselling is often used by e-commerce businesses but mobile apps and SaaS companies are also using it more and more these days.
Two specific examples are Amazon and Evernote.
Amazon introduced upselling to its platform back in 2006: pairing the phrase “customers who bought this item also bought” with links to other products, Amazon reportedly increased its sales by 35% as a direct result of cross sales and upselling efforts.
Up until 2016, Evernote, a note taking, organizing, and archiving app, combined its freemium model with additional e-commerce revenue in the form of physical product sales via the Evernote Market.
The Evernote Market was an online store that sold bags, wallets, pens, notebooks, and even socks.
The Market reportedly generated $10 million in its first 10 months of operations, leading to a revenue increase of 45%.
Evernote discontinued its e-commerce operations in 2016.
[nextpage title=”2. Increase the Likelihood of Transactions”]
One straightforward way to earn more money is to convince your customers to purchase your products or services in more reliable ways.
Depending on your business model, this can be achieved using various methods.
For instance, subscription-based businesses can market and promote annual subscription plans instead of relying on month-to-month billing.
Rather than re-selling your product to customers every 4 weeks and thereby risking the possibility that they will fail to pay their bills and/or cancel their contract 12 times per year, you incentivize your customers to pay for all 12 months in advance (e.g., by offering them a discount in comparison to the monthly pricing).
This approach guarantees that your customers remain paying users for at least a year.
Slack is one popular subscription-based service that uses tiered pricing with a heavy emphasis on annual billing.
Another way to solidify transactions is to use automated payments, which help to minimize customer churn and thereby increase your revenues.
In general, people are resistant to change, confrontation, and having to exert great effort to achieve something.
Many customers simply can’t be bothered to cancel a subscription even for a product or service they don’t actually use but, by the same token, they often won’t manually renew a subscription even for a product or service they enjoy using.
To capitalize on these dynamics, it’s best to make it as easy as possible for your paying customers to remain paying customers, and using automated payments is one effective method for achieving this. [nextpage title=”3. Raise Your Prices”]
Although a rather obvious strategy, it’s surprising how many companies are hesitant to raise their prices due, presumably, to a fear that doing so will cause them to lose customers.
One way to raise the prices of your goods or services is to create and market newer, “premium” options alongside existing options, allowing your customers to choose between the various alternatives.
For example, a freemium SaaS startup, Mention, managed to increase its Average Revenue Per Account (ARPA) by 296%, simply by switching from a freemium to a fully premium model.
Mention stopped advertising its free plan and instead focused all its efforts on attracting customers to the paid option.
According to Mattieu Vaxelaire, Mention’s CEO:
“By advertising our free plan so aggressively, we were risking the perceived value of our software. On top of that, it made our enterprise plans more difficult to sell.
With our new pricing structure, we decided to keep the free plan, but stopped advertising it so aggressively.
What’s the take-away? Do not underestimate the consequence of a free plan sitting next to your paying plan, especially, if you are also targeting companies with it.”[nextpage title=”4. Encourage Customer Investment”]“Customer lock-in” (otherwise known as “vendor lock-in”) is a phenomenon whereby it becomes very difficult, if not impossible, for party A to abandon its commitment to using party B’s products and/or services without incurring significant loss of resources (money, time, etc.).
It’s a controversial, morally questionable, and potentially legally problematic approach that should be used with care, if at all.
What’s important for our purposes here is the spirit or basic idea behind customer lock-in: as a startup, you should seek to create products and/or services that (organically, ethically, and legally) dissuade your customers from abandoning your company.
The point is not to create unfair and insurmountable barriers that prevent your customers from leaving your company if they so wish but rather to setup technologies that make your customers naturally not want to leave your platform.
We see this all the time in the non-digital space.
For example, consider the line of proprietary coffee makers offered by Nespresso (Nestle).
Nespresso’s coffee makers require special coffee capsules made exclusively for their machines.
If a customer wants to have a cup of coffee using a Nespresso coffee maker then she has no choice but to buy and use a proprietary coffee capsule.
The company reportedly makes over $3 billion in global revenues each year on these capsules alone.
How can this be applied to digital products like apps?
The key is to encourage user investment and thereby boost your user retention rates.
I’ve written an entire article on this topic. When it comes to boosting revenue, the key point is to capitalize on what’s known as the “sunk costs trap” in order to ensure that your customers continue buying (more of) your products.
The sunk costs trap refers to a phenomenon in which a) people become less willing to give up on a commitment b) the more resources (time, money, energy) they dedicate to it.
As I’ve recently explained:
“Successful startups create growth loops in which the more their customers use their products, the less likely their customers are to permanently abandon their products.
– You’re far less likely to abandon Instagram and join a rival mobile photography app if you’ve spent, let’s say, two years building up your Instagram profile and using specific hashtags.
– You’re far more liable to abandon Dropbox in order to join a competing online file storage service if you’ve used Dropbox for only a few days as compared to, for instance, the past 10 months. It’d simply be too much of a hassle to move, re-organize, and re-share across all your devices the files you’ve been storing on Dropbox for nearly a year.
– The more friends you accumulate on Facebook, the less likely you are to de-activate your profile.”
Try to apply these strategies to your own startup in order to build something that your customers become naturally disinclined to leave.
Your revenue will surely increase over time as more of your users become long-time customers and help introduce your products or services to their friends, families, and colleagues.[nextpage title=”Bonus: Acquire New Customers”]As this article focuses primarily on how to increase revenue by targeting existing customers, let me just very briefly discuss one final strategy for increasing your earnings, i.e., boosting the total number of customers paying for your products or services by recruiting new customers.
Your goal should be to increase the number of customers as cheaply but effectively as possible.
Two efficient methods for attracting new customers are 1) utilizing viral marketing techniques (see here) and 2) creating referral programs that reward current users for successfully bringing new users over to your company.
Airbnb, DropBox, Evernote, Lyft, PayPal, and Uber are all examples of startups that have successfully used referral programs to substantially increase their user bases.
Whether it’s discounts, free products, gift cards, redeemable points, or even free money, you can increase the number of people using your product or service by incentivizing your current users to draw their friends, family members, and colleagues toward your company and converting them to new paying users.