A practical guide to building a profitable startup from the ground up

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Mari Luukkainen

Prior to becoming a part of the team at Icebreaker.vc, I held the reins as the Head of Growth at Freska, where we experienced a surge in our annual recurring revenue (ARR), from €700M to €13M.

An aspect that is often under-emphasized is that our expansion in client acquisition was profit-generating nearly throughout this period, with the Customer Acquisition Cost (CAC) managed at such a level that the payback period was after just one cleaning service. As someone who honed my skills in affiliate marketing through hands-on experience, I’ve always embarked on business ventures without external investments, instead, focusing on profitable acquisition models.

Given the contemporary investment climate, with investors prioritizing profitability and cost-effectiveness, I’ve put together a practical guide filled with valuable tips to keep in mind as you navigate the path to building a financially sustainable business in today’s market.

Here are some practical tips to help build a sustainable and profitable business:

1. Keep an eye on your CAC

Monitoring Customer Acquisition Cost (CAC) closely is a critical aspect of maintaining profitable growth. Here are practical steps to calculate and monitor CAC using a spreadsheet, like Excel or Google Sheets:

  • 1. List all your customer acquisition costs (seriously: all of them!)

Start by listing all the direct costs related to customer acquisition over a specific period (for example, a month or a quarter). This would include costs like advertising expenses, marketing tools, marketing team salaries, freelance or agency costs, etc. Don’t forget to include a portion of overheads, such as office space and utilities, that are attributable to these activities.

I highly recommend including everything in the calculation of blended CAC. A common mistake I see startups doing is only including advertising and spending €20K /month on everything else.

  • 2. Calculate the number of new customers acquired

Next, you need to find out how many new customers you’ve acquired during the same period. This data can usually be gathered from your sales team or from your CRM.

Due to GDPR and marketing attribution challenges, I recommend focusing on CRM instead of Google Analytics. It could also make sense to have a separate view for channel-based conversions but don’t get too obsessed with it. Overall conversion trend is what matters.

  • 3. Calculate the CAC

Now you can calculate the CAC by dividing the Total Acquisition Costs by the Number of New Customers.

CAC = Total Acquisition Costs / Number of New Customers

This formula will give you the average cost to acquire a new customer during the specific period.

  • 4. Monitor and Analyze your CAC

Once you have your CAC, keep track of it in your spreadsheet over multiple periods. If it’s increasing, it could be a sign that your customer acquisition process is becoming less efficient, and you might need to reevaluate your marketing strategies. If it’s decreasing, it suggests you’re getting more efficient at acquiring new customers, which can contribute to profitability.

Lastly, remember that the CAC is just one piece of the puzzle. Other costs, like payroll, operational expenses, and the cost of goods sold (COGS), will impact your overall profitability. Be sure to incorporate these into your larger financial model to get a comprehensive understanding of your business’s financial health.

2. Understand the Lifetime Value (LTV) of your customers

LTV is the projected revenue a customer will generate during their lifetime. It’s crucial to understand this number as it directly impacts how much you should spend on acquiring new customers. Aim for a healthy LTV to CAC ratio, generally 3:1, indicating you’re earning more than spending.

In practice, calculating LTV can involve several factors depending on your business model. A simplified version might be (average value of a sale) X (average number of repeat transactions) X (average retention time in months or years for a typical customer).

Consider segmenting your customers and calculating the LTV for each segment, as it can vary significantly. Once you have this data, you can create targeted marketing strategies for each segment to increase their LTV.

At Freska, our industry-leading LTV and retention rates were the result of our commitment to quality and a nuanced understanding of our customer segments on an individual level. To gain this deep understanding, interviews were my primary tool of choice. It’s crucial not to become mired in the concept of “scalability is everything.” It’s entirely acceptable to carry out non-scalable actions in the pursuit of hypotheses that can later be scaled.

I strongly recommend conducting comprehensive interviews with your most valuable customers. Such conversations can unlock deep insights into their preferences, behaviors, and decision-making processes. Understanding why they chose your product or service, how they use it, and the benefits they receive can guide you towards the critical elements that fuel high LTV.

3. Leverage organic growth

Utilizing organic growth strategies has always been the bedrock of the profitable growth engines I’ve established in startups. When you’re acquiring 50 customers every week through SEO without incurring costs, it’s a bit more stress-free to dive into paid acquisition. However, if your business depends solely on paid acquisition, the numbers can quickly turn grim if you need to cut costs, such as during a fundraising.

Commit to SEO, content marketing, and social media engagement as primary growth strategies. Although these methods often demand more time and effort, they tend to deliver a higher return on investment (ROI) over the long term, fostering profitable growth.

One way to execute this is by starting a blog aligned with your industry and regularly posting valuable, relevant content. Actively engage with your audience on various social media platforms, respond to their queries, and share useful information. Carry out keyword research to discern the search terms your potential customers are using, and optimize your website to improve its ranking in search results.

When resources are limited, tackling the challenge of consistency should be your primary objective. Leverage tools such as ChatGPT to amass a sizable content repository, encompassing blog posts and social media content, and schedule daily posts for the next three months. Avoid the trap of obsessing over the uniqueness or “quality” of the content to the detriment of broader productivity goals. A common misstep I’ve noticed is startups becoming stagnant in their SEO efforts because they are too fixated on minute details. The aim should be to kickstart the process, striving for steady improvement rather than absolute perfection from the outset.

4. Focus on retention

A faithful customer base is a bedrock of steady revenue. Employ strategies aimed at bolstering customer retention rates, such as enhancing customer service, personalizing user experiences, and devising loyalty programs.

To accomplish this, a well-structured customer service program is paramount. This could involve training your team to efficiently address customer inquiries, offering round-the-clock support, or deploying chatbots for instantaneous responses.

In addition to this, as mentioned in the LTV section, customer interviews can serve as an invaluable tool in understanding your customers better. Conducting regular feedback sessions or interviews can help you identify what your customers value most about your service and what could be improved. This understanding can then be used to tailor your product, services, and customer interactions to meet the unique needs of each customer, leading to higher customer satisfaction and retention.

Launch a customer loyalty program that offers incentives like discounts or complimentary items for recurring purchases. Such programs can significantly enhance customer loyalty and retention. Regularly dispatch newsletters or personalized emails to maintain engagement with your customers and keep them informed about new products, services, or changes in your business. These touchpoints are opportunities to remind your customers of the value you provide and to deepen your relationship with them.

And yes, you should produce the content with ChatGPT. You do need active touchpoints with your potential and current customers, but instead of getting too overwhelmed to not do anything, focus on finding a resource-effective process of producing a lot every now and then and scheduling it.

5. Monitor your Key Performance Indicators (KPIs)

KPIs serve as essential barometers for gauging the effectiveness of your business strategies. A regular review of your KPIs, informed by data, will guide your decision-making process.

It’s crucial to discern which KPIs are most relevant to your business. These might include sales revenue, net profit margin, gross margin, operational cash flow, customer acquisition costs, and customer retention rate, among others. Employ a dashboard to visualize these KPIs and keep track of them over time. Regular analysis of these metrics will help ensure your business stays on the path to success.

The key lies in establishing a consistent routine and process for closely monitoring your KPIs. A common pitfall I’ve observed in startups is investing significant resources in costly tools that often go unused and require constant upkeep. During my time at Freska, a simple Google Sheets that I updated manually each week was my primary tool for tracking customer acquisition. In retrospect, it might have seemed time-consuming, but it offered a substantial advantage: I had an immediate grasp of where customers were coming from and their associated costs, even if woken in the middle of the night. This method kept me well-informed about the business’s dynamics without the need for an expensive BI-system.

Begin with a simple method to establish a habit of tracking numbers and making data-driven actions. Over time, this will cultivate a routine that can adapt and scale as your business grows.

6. Embrace an agile mindset

Adaptability and a readiness to embrace change are paramount, particularly in the ever-shifting landscape of startups.

Keep a pulse on emerging industry trends, changes in consumer behaviors, and fluctuations in market conditions. Implement agile methodologies in your project management to foster responsiveness to change. Promote a culture of innovation and flexibility within your team, and do not hesitate to recalibrate your business model or strategies when necessary. Bear in mind that stagnation in a volatile market can be a roadblock to growth and profitability.

Avoid complacency at all costs! If your aspiration is to build a substantial startup, you must become comfortable with a continuous sense of uncertainty. If the journey seems too straightforward, it’s likely that your growth is not sufficiently challenging. Remember, growth often entails stepping out of your comfort zone, but this can be approached with a sense of curiosity rather than fear. Engaging a mentor, participating in a peer-group, or seeking guidance from a mental coach can provide valuable perspectives and encourage you to continuously push your boundaries.