In Milkshakes & Metrics Parts One and Two we re-imagined Clayton Christensen's well-known Jobs To Be Done Milkshake Metaphor for the subscription economy and posited the idea of a Milkshake Monthly subscription service. We also took a close look at how this subscription might break down in each stage of the adoption cycle.
So now, let’s say you’ve launched Milkshake Monthly, the subscription arm of your milkshake business. You've successfully applied the ideas of Jobs To Be Done in a subscription economy model. Congratulations! The buzz is good, you’re pleased with your adoption cycle metrics. You have a strong feeling that you could have a winning business on your hands if you keep up the hard work.
But you have a decision to make.
You can either continue to run Milkshake Monthly as a small business, or you can start to think like an entrepreneur. Neither choice is inherently better than the other. After all, nobody wants to live in a world without their favorite mom-and-pop cupcake shops, cafes, and corner stores.
But the fact is, some people do want to go to that next level of growth -- and beyond. That said, despite all the mythologizing of the lofty, visionary entrepreneur, it’s not an inherently better way to approach a business, it’s just a different way. You don’t have to aspire to be a Richard Branson, Elon Musk, or even Slack’s Stewart Butterfield to run a successful small business -- it really comes down to what you want. As Entrepreneur.com explains, “Entrepreneurs focus on scaling. They want to grow and grow they will.” So if you do want to approach Milkshake Monthly like an entrepreneur, you have to be ready to scale.
And what does that mean in a practical sense? Bottom line, it means that you will need to approach your business so that you will move towards making the maximum amount of profit per employee. At companies like Google, Facebook, Intel, and Cisco, that adds up to about $500K per head. Compare that to a Denny’s restaurant, which brings in an average of $350K a year. That means the revenue per head value of just one Google employee is worth as much or more than an entire Denny’s.
So if you want to scale Milkshake Monthly and become the Google of milkshake subscription services, there are some things you need to think about.
Unlike a Software-as-a-Service product (think Salesforce or Stripe) it must be acknowledged that with Milkshake Monthly you’re creating a real, tangible product. And while the cost of providing software to an additional employee is essentially nil, you have to get actual milkshakes into people’s hands. And that means that your production costs will be higher.
But you can mitigate this by investing in a large scale production facility -- essentially a milkshake factory. Sure, you can keep your storefront for visibility and to serve those customers who still want to come in and take advantage of their subscription, say, with their kids after school. But a milkshake factory will enable you to produce a higher volume of milkshakes at a lower cost. This is an important step to start to drive up your revenue-per-employee.
Why We Measure
A factory that allows you to scale up production is an important component of scaling your business, but it isn’t the only consideration. Like any recurring revenue business, you earn back your revenue from customers over time -- it’s not just a one-and-done upfront transaction. And this means, as with any subscription-based business, it’s imperative that you think about how much money you’re spending to acquire each customer (your CAC).
At the same time, you must do all that you can to retain the customers you already have. It’s common sense, really: If you’re spending too much money to acquire customers and your existing customers are churning before you can recoup the money you spent to get them, not only are you losing money, you’re losing more money the more customers you acquire.
What’s the Solution?
Remember those Milkshake Monthly adoption cycle metrics we talked about? Continually monitoring and measuring these these important stages of customer activity isn’t just something to do for fun, or to create a cool stack of numbers to stare at. The fact is, if your CAC is too high and you aren’t retaining customers, you’ll never increase your revenue-per-employee. Things that contribute to a high CAC are outsized sales efforts that don’t produce long term customers and an unwieldy sign up process that requires hand holding.
Daniel Lyon write about this phenomenon as he witnessed it unfold at HubSpot in Disrupted: My Misadventures in the Startup Bubble. He describes what is called “the spider monkey room,” essentially a warehouse of salespeople who have only one goal: Get someone to agree to a demo of the Hubspot CRM software. It’s a lot of money and effort to throw at customer acquisition, and to make matters worse, Lyons says, “Our churn rate is too high, meaning too many customers fail to renew. [And] our close rate is too low, meaning we generate a lot of leads but don’t turn them into customers.” Overall, it isn’t a recipe for creating a high revenue-per-employee situation. Or, for that matter, any revenue per employee.
But by measuring the right metrics, and knowing what actions to take based on the numbers, you can identify the ways to most effectively attract and retain customers, at the lowest cost to you. Remember that you’re working in a subscription model, which means you recoup your money over time by retaining customers. Simply acquiring them isn’t the end of it. Taking a hands-off approach or vainly hoping that the more you sell, the higher your GPM (gross profit margin) will be isn’t going to work in a subscription business.
The Method Behind The Metrics
So why do metrics play such an important role in scaling Milkshake Monthly? Consider this:
- Through onboarding, you make it easy for people to sign up and customize their subscriptions. You don’t have to hire people to explain it, sell it, or walk them through it. You understand why people should hire your product to make their lives easier -- and you make it easy for them to understand too.
- You monitor activation as the time people begin to use your product, not just when they sign up. You monitor and recognize patterns that indicate people will begin to use your product continuously. You discover what “ah-ha” moments reliably indicate they will become continuous users, and you recreate those moments for others, consistently.
- You build a feedback loop into your subscription and monitor activity churn in order to be proactive and take the steps to retain customers before they churn.
- You identify the behaviors of your most engaged customers, and you reward these desired behaviors to keep them engaged. And you also reward these behaviors because you know that engaged customers tend to be your biggest promoters, and will refer other customers to you, which translates to a low-to-no CAC.
Of course, despite your best efforts, some customers will churn. But you can offset that to a degree with Milkshake Monthly subscription upgrades and upsells to your loyal customers. And identifying those loyal customers is easy, because you’ve been measuring and monitoring every stage of the adoption cycle!
So while scaling your product production (in this case, via your milkshake factory) is important, closely monitoring and being proactive about your customers’ adoption and engagement behaviors are key to working towards a maximum revenue-per-employee figure. As Smart Bear Software founder Jason Cohen puts it, “The metrics themselves need to improve — lowering cancellation rates, lowering net churn, increasing GPM, reducing cost to acquire customers. Leaving the metrics alone, and trying to ‘grow until profitable’ doesn’t work.”