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Scaling a startup

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FINEX Folio -- Reynaldo C. Lugtu, Jr.

FINEX Folio

“How can I grow my business? How can we scale?” These are the common questions I got after my talk and after the panel discussion in Slingshot Cebu 2017, a gathering among tech start-ups and medium, small, and micro enterprises (MSMEs) organized by the Department of Trade and Industry (DTI) Cebu. Almost in unison, these companies expressed apprehension, at the same time, optimism, on what is in store ahead amidst threats and opportunities in presented by technology drivers.

There is reason to be worried. Nine out of 10 start-ups fail, according to a Fortune survey among founders of failed business ventures. While locally we are seeing the strongest resurgence of the startup craze since the dot-com era, we will not see them all succeed commercially. Why do they fail despite the plethora of business incubators, venture capitalist funds, and courses on entrepreneurship?

In my 2015 article in BusinessWorld titled “From 1 to 10: Scaling your business,” I explained why this is so, which I will recount here. Our informal education teaches us quite well about how to start a venture from zero to one. In fact, the seminal book of PayPal founder Peter Thiel, Zero to One, inspires readers to invent something new for the future. There are scores of other self-help books and training courses on how to start a business.

On the other hand, our formal education teaches us how to incrementally grow and sustain a business from 10 to 10,000. We are thought how to craft strategic plans, manage finances, and so on.

But what is sorely missing is the framework, preparation, and training for an entrepreneur to grow a business from one to 10, commonly referred to as scaling, and this is the main reason startups fail.

From my experience in scaling and advising startups and growing business units, my conversations with venture capitalists, coupled with teaching Master in Business Administration students, I have crystallized a framework on scaling a business.

But for scaling to work, the foundations of a startup should be in place — having the right product or service that meets customers’ needs, having the right set of people with the right set of skills, having a simple business model, and having enough cash to weather the startup storm.

The scaling framework requires a thorough and methodical understanding of three pillars: market segments, product development, and the sales engine. These work hand in hand and in an iterative process until the optimum mix is reached.

Identifying and understanding market segments are a key pillar to create a winning product or service. Market segments can be divided through benefits segmentation, which focuses on satisfying needs and wants of a set of customers, and psychographic segmentation, which focuses on consumer or customer lifestyles and behaviors. These can be further divided into anchor customers — those who mainly use the core product or service and provide a stable base revenue — and adjacent customers — those who use a derivative of the core product to satisfy a different set of benefits.

The product development pillar deliberately develops products that target and satisfy the needs of each market segment. The product derivatives come from the core product platform, much like a bunch of Lego blocks, by building on top of the core product. The pricing and positioning of each product derivative should be optimal to maximize adoption of each product derivative in the corresponding segment of the target market.

For example, Uber, through its app, started with anchor passengers who value convenience and time. Uber then launched a merchant delivery program that allows online shoppers to get same-day delivery of goods, an attractive adjacent market segment that is worth billions.

The most important pillar is the sales engine, which should be created and run like a well-oiled machine to acquire customers. Ultimately, businesses grow when customers buy what companies sell. The core product is sold by salespeople, be they the founders of the startup or an experienced sales force, to anchor customers. Product derivatives are sold through alliances and partnerships with complimentary players, such as the online retailers that Uber is now engaging to target online shoppers.

Reach to the mass and other adjacent markets is implemented through digital presence — online presence, digital calls to customers, and social media marketing — which is a relatively inexpensive way of reaching a big market base. These digital efforts are supported by well-integrated advertising, public relations, and promotion activities to reinforce the product positioning message. Publicly referencing early customer acquisitions is key to word-of-mouth and viral effects.

For this framework to be effective, the business model should have the following characteristics: repeatable systematic offerings (core and derivative products), recurring and repeat revenue (annuity or subscription business), and revenue diversity (revenue coming from different segments).

In the end, scaling is all about efficiency and replication. But what spells the difference between success and failure is execution.

The opinions expressed here are the views of the writer and do not necessarily reflect the views and opinions of FINEX. The author may be emailed at reylugtu@reylugtu.com.

Reynaldo C. Lugtu Jr. is the Managing Director of The Engage Philippines, digital marketing and customer engagement solutions company. An information and communications technology firm. He is the Chairman of the ICT Committee of the Financial Executives Institute of the Philippines (FINEX). He teaches strategic management in the MBA Program of De La Salle University. He is also an Adjunct Faculty of the Asian Institute of Management

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