Growth Playbook for Recessions
I sat down with David Manela to get his perspective on how to achieve top-line revenue growth while cutting marketing investment/ad spend, decreasing fixed marketing expense, and preserving runway.
David is the Managing Partner & Co-founder of Exactius. Previously he was the Chief Revenue Officer at Fiverr (NYSE: FVRR). Prior to Fiverr, he scaled Inc. Magazine’s #1 Fastest-Growing Private Company (ideeli) during the 2008 recession.
David’s Playbook for solving for Growth while cutting investment:
State of the Market: November 2022
Venture investing activity is significantly down, particularly for growth-stage capital.
VCs are mostly pencils down, with the exception being supporting the top 25% of their portfolio. Specifically, they’re providing capital to these top-quartile companies via “Insider Rounds” to selectively extend runways of their top bets.
New investment activity is saved for only the Default Investable companies, and valuations are likely to remain down so long as interest rates continue to rise.
Implications
Most businesses must now pivot towards a focus on profitability, reducing burn, and runway extension rather than the growth-at-all-costs environment of the past 5+ years. The optimal marketing spend payback period must decrease in order to reduce cash flow risks.
Customer Acquisition Cost (CAC) and Lifetime Value (LTV) are the key metrics to align against.
This macro shift requires a specific playbook. The truth is capital-efficient growth is fundamentally different from Growth-at-all-Costs strategies.
The Challenge
Mismanaging this transition to capital-efficient growth often triggers the Death Spiral which plays as follows:
The Solution
Focus on optimal payback period as your North Star in order to cut and reallocate budget to deliver more revenue with less marketing expense, and in so doing, preserve and enhance your future position. The endgame and goal is to avoid exhausting your cash position while staying primed to capitalize on the eventual market snapback.
Here are the 6 questions every CEO, CMO, and board member should be asking in order to define the optimal payback period:
How can we improve unit economics to reduce variable expense line items like ad spend (in the P&L), while delivering the same or better revenue and gross margin?
What is the optimal payback period based on the current financial capacity?
Based on the above, what is the right combination of expense cuts and unit economics improvements that will bring the company to profitability?
Can we turn any fixed expense lines to variable lines (i.e. get vendors/others to share in the risk)? If so, which ones?
What investments/fixed expenses can be delayed/reduced?
How can you best position yourself to capture the eventual "market snapback,” while driving near-term capital efficiency?
Once the payback period is established, growth teams should prioritize initiatives based on a choice framework. A simple, impact/effort strategy can be very effective. A few related tips:
The hardest part is saying “No” to new initiatives and halting others that have been long underway.
Assume that any initiative whose result can’t be measured is by definition a high-risk bet. Moreover, define how many high-risk initiatives you can afford, and ruthlessly prioritize them - or eliminate them.
Brand programs are often the first to get cut – and that’s okay in the short term. Brand investment tends to move the needle only when backed by sufficient budget. Reprioritize this spend near-term and re-open brand investment when budgetary cycles permit.
Allocating share-of-wallet towards re-engagement, re-acquisition and top customers is likely to prove most profitable. Ensure that any dollars allocated towards Acquisition are truly incremental, and anchor around this question as your litmus test: “Would new users have bought absent this investment”?
The current environment demands an Efficiency Playbook that resembles a Fast-Growth Playbook – but they differ in their constraints.
Build real-time infrastructure to measure payback and estimate CAC and LTV values - this is critical for success because, without it, resources are sure to be wasted.
Provide clear objectives and redefine KPIs to allow your Growth Teams to focus on what truly matters.
Encourage growth-mindset behavior with a build/learn/measure mentality to test and fail fast. Use a disciplined investment-per-test approach to maximize the impact of your ad spend.
Conclusion
The companies that will succeed in this environment need to navigate both (i) optimizing their growth engine by improving unit economics and removing all non-essential expenses, while (i) revamping their growth engine to be nimble and scalable so it’s ready for the market snapback. If they do, they will be positioned to capitalize on a once-in-a-decade opportunity to cement themselves as market leaders when we all emerge from this market downturn.
Zan Bennett