By Zahra Yarahmadi
Explosive Growth or Explosive Drama
How to Manage Customer Experience and Subscription Payments When Your Startup is Prospering
Every startup founder dreams of the moment when their first idea takes off. It can be an exhilarating rush to see the orders come through and the sales numbers rack up. But this time of explosive growth can also present something of a double-edged sword. Every new order takes capital to fill. A wave of new orders takes even more. A new startup facing this type of demand can easily find themselves serving hundreds of new clients while relying on the same ten employees who started the company. As subscription models grow in popularity for new startups they pose an even higher degree of difficulty for times of expansion from a management and finance standpoint. Many startups fail because they don’t properly balance their early growth stages. Success revolves around managing the rate of growth and always maintaining a high quality of service to your existing customers.
The Age of Paying Up Front is Over
As customers become more well informed and more selective about their choices of service they have come to value flexibility and the ability to choose the option that suits their needs best. Acknowledging this, more and more businesses are offering their customers the option of a subscription based pay structure to cover the costs of their goods and/or services. This could take the form of an extended mini-loan that allows customers to offset the payment for a product over a period of time or a freemium subscription service where customers gain access to basic features for free to entice them into paying for premium features once they see the value. In addition, these payment plans can vary widely in length and payment frequency depending on a number of factors. More hesitant, shorter-term customers for example may opt for a monthly payment plan at a slightly higher price-point knowing they can cancel it any month. While long term business clients will pay for a longer time horizon in order to cash in on savings. All of these options make the customer experience easier and more customizable.
The benefits of subscription models are not only for the customers, however. Most obviously they are able to attract customers from a wider range of individuals thanks to a lowered barrier for entry. But they can also help to provide a much-needed surge of initial funding when the first wave of subscribers signs up. Lastly, in the volatile world of startup funding, subscriptions on a monthly or annual schedule can provide a certain level of predictability for future revenue streams not seen elsewhere.
During and directly after the pandemic induced lockdowns, interest rates were low and money was cheap. Companies turned to subscription offerings during this time to expand their customer base at a time when people were struggling. Rates have now risen and many of the companies that started or introduced subscriptions during lockdown are struggling. As revenue decreases from canceled subscriptions, companies still have to deliver the products they promised. Only those companies that carefully planned and managed their subscription models and didn’t get out over their skis in terms of customer base are still thriving to this day.
Company managers also need to be aware of the unique challenges of offering subscription services to their customers. Many of these challenges are also exacerbated by the kind of rapid, early-stage growth that most new companies are hoping to achieve.
Rapid Early-Stage Growth: Blessing or a Curse
When the perfect series of events hits, and a new company rapidly gains popularity and demand in their initial stages, it is a fine line from tipping into a perfect storm with the potential to swamp the young business. When growing demand outpaces the company’s ability to satisfy every customer it can lead to an outcome much worse than staying small. Customers of a new brand are much more hesitant and much more likely to jump ship if they have one or two bad experiences. In emerging industries, where customers don’t know what to expect, this effect is multiplied. If a company grows too fast that it starts letting down its customers, either through delayed delivery, unavailable customer service, or any number of other issues, they could rapidly lose most or all of the customers they so rapidly gained. Once this has happened, the chances of that company ever establishing itself in its given industry are basically nil.
When new startups compete to establish themselves as the true players in an emerging industry it is likely only one of two of them actually make it out of ten. In order to achieve this you have to grab early attention and growth to pull customers away from your competitors. This has to, as always, be balanced with prioritizing customer experience and retention.
Adding another layer of difficulty to this rapid growth phase is the subscription model. Traditionally, a company is paid for the product when the product is delivered to the customer. When this happens, the money that went into making the product is recapped in full (plus whatever profit margin there may be) once the product is sold. When the company is using a subscription scheme, however, they are still responsible for creating and delivering the full product to the customer, but may not me paid back in full for months or even years. If the commitments of the plan are short enough, a user might stop their payments long before the cost of the product has been recapped.
A Balancing Act
Managers of early stage businesses face the intricate challenge of balancing a number of key priorities that in many ways work against each other. Marketing costs for each new customer are higher when a company is new, which suggests that is where early funds should be allocated. But when that prioritization comes at the cost of customer experience and retention the growth being paid for won’t be sustainable. Offering subscription services can also help to rapidly attract customers, but that has to be balanced with the ability to meet required financial outflows. It doesn’t matter how many customers a new company has if it is strapped for cash because all of its customers are paying over the course of two years.
It is almost a given that the initial phase of growth can present dilemmas in cash flow, but a strong focus on customer retention from the start can lead to a myriad of long-term advantages. A broad base of loyal subscription customers is a valuable footing of predictable revenue upon which to build a successful company. As your startup becomes more established the priorities will need to shift towards ongoing innovation. Staying abreast of consumer needs and the desires of your target customers is essential to avoiding the falls that are associated with falling out of touch.
About the Author: With over 15 years of dynamic experience at the crossroads of finance, entrepreneurship, and sustainable growth, Zahra Yarahmadi excels in strategic financial management. Passionate about mentoring startups, she has aided over 100 ventures in securing $200 million in pre-seed and seed funds in the last four years. Her unique perspective, gained from working with both venture capital firms and startups, provides a deep understanding of aligning goals for sustainable business success. She is the founder and CEO of BG Financial Consulting.