Get to Break Even Faster to Reduce Your Startup Financing Requirements
When you start a new business, your cash expenditures will almost always exceed your cash receipts. Consequently, you’ll draw down your cash balance until your rate of cash receipts equals your rate of cash disbursements. The longer it takes to reach this break even point, the more starting cash you’ll need.
The sales rate at which break even occurs is determined by your rate of fixed expenditures per month (F) divided by your profit contribution per unit, which is equal to your price per unit (P) minus your variable expenditures per unit (V). To break even, you need to sell Q units per month.
Reaching the Goal Line
Get to your break even sales rate faster, and you can minimize the amount and duration of the financing required to get your business off the ground. That means developing a marketing strategy that maximizes your rate of customer conversion—your buying rate, in other words.
There are two paths to increase your buying rate:
- Increase your advertising effectiveness and/or
- Making your word-of-mouth marketing messages more likely to spread
Pure word-of-mouth marketing seems to offer a free lunch. That is, all you need to do is seed your product with a few “influencers”, and your marketing message will spread throughout your target market with nothing more than a shoestring budget.
Except there are no free lunches. Pure word-of-mouth success is exceedingly rare. Conditions have to be just right for a word-of-mouth campaign to work. We can’t often see, much less control, those conditions. Even when conditions are right, it can take a long time for word-of-mouth to build momentum.
A pure advertising strategy, on the other hand, can more predictably yield an increased buying rate. However, advertising is expensive. The more you increase your fixed and variable expenditures, the higher your break even sales rate. If you aren’t careful, you can end up chasing rainbows as your break even point recedes into the distance as you pump more and more into your ad campaign.
Cash-efficient Startup Marketing
If you want your product to spread like a wildfire, you don’t want to rely on your ability to miraculously place a single match in just the right spot. A disciplined advertising campaign is like lighting several matches and dropping them throughout your target audience. Advertising can stimulate adoption more-or-less randomly through your total market population. Thoughtful word-of-mouth techniques can help those little fires of customer adoption spread. Together, advertising and word-of-mouth marketing likely represent the most cash-efficient path for a startup.