At Hustle Fund, we talk a lot about speed of execution. Part of this is grit and founder hustle. But what most people don’t realize is that speed is also baked into the business model itself.
For example, one of the things that people don’t realize is how much sales cycles and payback periods matter. As a concrete example, fast growth direct-to-consumer companies are now able to go from $0 to $1m revenue within a month or two with just < $25k in ad spend. This is incredibly fast — unprecedented and very low cost.
How is this possible? All because of fast sales cycles. Let’s dive in:
Let’s start with a simple example. Suppose the following:
- We start with $25k in ad spend on day 1
- As soon as people click on our ad, they buy immediately and we get that revenue immediately
- For every $1 we spend on our ads, we make an average $1.15 in revenue
- We pour everything back into ads the next day
- You can see that within a month, we are at an almost $2m revenue generated with just initial ad spend of $25k! This is crazy. You can raise a small pre-seed tranche and get to Series B benchmarks within a month.
Now, in practice, the scenario I’ve outlined is near impossible. Namely, most of the time, your ad spend is not this effective on day 1 and often requires iterations and testing. Moreover, it often takes some time to clear with your payments provider even if you generate revenue right after someone clicks your ad.
But this scenario is actually not that far off from what many of the direct-to-consumer incubators are achieving.
Ok, let’s add some delay to make this a bit more realistic. Let’s suppose:
- We start with $25k in ad spend on day 1
- As soon as people click on our ad, we do get our initial ad spend back immediately but we don’t make any profit until the even numbered days
- For every $1 we spend on our ads, we average $1.15 in revenue (on the even days)
- We pour everything back into ads each day
This is a contrived example (profit only on even numbered days?? weird.), but you can see in this example, we went from a near $2m revenue generated at the end of the month to just a $200k revenue generated, even though the delay in our profit is not that long. Not only that, we are making about half the profit as before, but our revenue generated has now dropped by nearly 10x. Why? Because time is a compounding factor.
So when investors are concerned about sales cycles and payback times, this is what they mean. Regardless of whether you are using ads to get customers, if you calculate this out, you can see how just small affects in sales cycles / payback periods hurt you big time. The other thing is that as an entrepreneur, you’re working just as hard in the first scenario as in this one, but your sales are affected 10x.
Both of these examples are still a bit contrived, because as I mentioned above, you usually don’t know if your ads — or any of your customer acquisition channels – are working (they probably aren’t) on day 1.
So now let’s assume that you don’t start with $25k in ad spend. Let’s start with $5k. Suppose the following:
- We start with $5k in ad spend
- As soon as people click on our ad, they buy immediately and we get that revenue immediately
- For every $1 we spend on our ads, we make $1.15 in revenue
- We pour everything back into ads the next day
- We add an additional $5k in ad spend every 5th day
You can see that with this example, we can get to near $1m revenue generated by the end of the month ($800k+). In this case, we end up spending a bit more on ads, but this is a more gradual (and realistic) approach to ramping up ad spend. Again, in this example, because we make the $1.15 for every $1 immediately, you can see that this helps us achieve greater revenue than in the prior example.
Here is the spreadsheet with these 3 examples that you can copy and play with. I’d encourage you to fiddle with the levers of this model in the green boxes. The amount you make for every dollar of spend. The payback periods. Ramping up ad spend. Etc.
In your own business, how can you decrease your sales cycle + payback period by even just 10%? How can you increase your margins by even just 5%? These all add up significantly as you can see over short periods of time.
The tl;dr is never underestimate the value of time in making money.
Featured image credit: Freeimages.com