In today’s episode of The Startup Chat, Steli and Hiten talk about reaching $1 million in revenue in your startup.
Reaching $1 million in revenue for your startup is a number that a lot of entrepreneurs aspire to reach and can seem magical for some. However, reaching this milestone is not easy and sometimes, founders who do, often take it for granted.
In this week’s episode, Steli and Hiten share their thoughts on what it takes to reach a million dollars in annual recurring revenue, strategies to help you reach that milestone and much more.
Time Stamped Show Notes:
00:00 About today’s topic.
00:40 Why this topic was chosen.
02:32 Hiten’s point of view on reaching $1 million ARR.
03:26 Why it’s easier to reach $1 million ARR.
05:38 The MRR of $1 million in ARR.
06:42 Why you need to be charging a lot of money in order to make your math work if you sell to enterprise.
07:04 Why, due to the time it takes to acquire one, it makes no sense to go after large enterprise customers and charge less than you need to.
09:04 The kinds of sales and marketing strategies that are needed to get to SMB.
11:04 General channels for acquiring customers for low-end SMBs.
12:20 Steli’s final thoughts.
3 Key Points:
- You need to figure out how to drive enough value so that people will pay a certain amount for your product.
- Sales is designed to get to those customers.
- If you do the math, it takes a lot of time to acquire an enterprise level customer
Steli Efti: Everybody this is Steli Efti.
Speaker 2: And this is Hiten Shah.
Steli Efti: And in today’s episode, we’re going to talk about how to get to one million in revenue with your business today. And the reason I wanted top talk about this today is twofold. One, one million is just still a magical number, a number I think a lot of people aspire towards when it comes to maybe their personal finances. But especially when it comes to their business, kind of a big milestone. So I find that there’s this incredible hunger out there for people to learn how to cross that milestone, or how to accomplish that. But the other reason that I wanted to talk right now about this is because recently … I’ve heard this a few times before over the last few months but it never really clicked. Until I heard it recently, where a friend of mine and I were discussing the traction of a new SaaS company. And the company was sharing their revenue numbers. And they had basically surpassed the one million in ARR, Annual Recurring Revenue within nine months or so. And I was like, “That’s actually pretty decent, pretty good.” And then my friend said, “Yeah, but you know it’s easier than ever before to cross the one million ARR number. Companies do this faster and faster. So this isn’t that impressive.” And I agreed with him. And we continued the conversation. And afterwards, I had a moment where I thought, “How crazy is it that we’re talking about reaching a million becoming easier and easier. And we’re talking about it as a negative thing.” As if it’s like, “One million isn’t so special anymore because everybody can do it,” versus, talking about it from a perspective of, “Isn’t it amazing the you can start a company and reach a million much faster than you used to? And it’s mush easier.” Which means a lot more people around the world, especially the people that are listening to this podcast that are not necessarily fully dedicated to doing the venture back thing. People that want to run their own companies, self funded, customer funded, and build them and run them the way they want to. It could be incredibly encouraging that it’s easier than ever before to reach a million. So either way you want to slice it, I wanted to talk to you about this today. And I’m dying to get your first response on what I just said.
Speaker 2: Yup. So a million ARR, and that’s recurring revenue, right?
Steli Efti: Right.
Speaker 2: So we’re focused on … Let’s just focus on … Keep it simple. Focus on subscription businesses. Because there’s a lot of them, and those are easier than ever to start. Okay, so that’s about right around 833 customers a month, or total customers at 100 bucks.
Steli Efti: At 100 bucks, yes.
Speaker 2: Right.
Steli Efti: Right.
Speaker 2: So then that’s more like 1,700 customers at 50 bucks a month. That’s more like 3,400 customers at 25 bucks a month. Right?
Steli Efti: Yeah.
Speaker 2: So here’s the thing. You’re just trying to figure out how many customers is it going to take me at the price point I currently have to get to that many customers? And that’s it. And I think that the reason it’s easier than ever, and how amazing that is, as you put it, is because there is way more propensity of people to use SaaS software products and pay a subscription fee than ever. There’s also a lot more of them out there, which you could say is good or bad, depending on what perspective you want to take. But at the end of the day what I see founders not doing that are struggling to get there is doing the math. And then being honest with themselves about their ability to reach it. So if you want to get there in 12 months, you need to figure out how you’re going to get there in 12 months in terms of number of customers at a certain price point. Because it’s very unlikely that you’re going to change your price point in those 12 months. You might change it, but you’re probably not going to change it so drastically that it’s not in some range. So then you’re thinking, working backwards from there, you’re thinking about, “Okay, if I want to keep under a 1,000 customers and get to that number, I need a product that people will pay 100 bucks a month for. And I need to figure out how to drive enough value that people are willing to pay 100 bucks a month. And create a product where opportunity are willing to pay 100 bucks a moth.” And I think, like I said, we think about product, we think about marketing, we think about sales. But we don’t necessarily think about how do we get to to a number like that based on the number of customers. This is one of the reasons I like sales because sales has a lot of tangibility around getting to a number like that. And a lot of control over it. And sales is designed to get those customers. That’s the whole idea of that department, that area. Same with growth in some ways. Where growth helps you get there. Or of you don’t have salespeople [inaudible] what the lever is. Lots of optimizations and testing of marketing channels, and things like that help you get there. So to me, Steli, like most things, let’s make this a simple problem. And I like the sentiment of, “Hey, let’s make it positive.” But let’s even take that out of it and just say, “Limit it to basics.” Basics are number of customers at a certain price point to get to that million ARR. A million ARR is about 83,333K, or sorry, 83,333 dollars a month in recurring revenue. And then break it down from there.
Steli Efti: So I love that. This is actually not that complicated as most things aren’t in life and in business. It’s like sometimes we as humans, we might over-complicate things. So if you just break it down by a number of customers times the amount of money they have to pay us per month, this becomes very simple math. Let’s actually go through this exercise really quickly and look at small, medium, and big. I’ll start with big because it’s going to be probably the easiest to break down. So if we say the market we’re going after is very, very large companies. Hence, if we think about the first year, let’s say. Let’s say that to make this simple, within a year we’re going to reach the million in ARR. And we know we have very large customers, it’s clear that if we do the math, it takes a lot of time to acquire a massive enterprise level customer. Right?
Speaker 2: Correct.
Steli Efti: So in most cases it might take 12 to 18 months. So if we know it’ll take us probably a year, year and a half to acquire a customer, then we need … It immediately points to we need to be charging a ton of money in order to make this math work. If we want to reach a million in a year, then we might need just one enterprise customer at 80K a month. Or we might need 10 enterprise level customers at 8K a month. But it makes no sense to try to go after large customers, enterprise level customers, and be making 500, 600, or 700 bucks a month with them. Because it takes so much time to acquire them, we need to be making a ton of money. It just makes them simple in terms of the pricing of revenue you need to generate per customer. But then also, in reverse, you need to ask yourself, “What do I need to do if it takes me a year to get to a large customer to get there?” So it kind of breaks down, or simplifies the tactics. We’re going to have to do a lot of cold outreach, a lot of good networking. We’re going to have to meet with people multiple times, have many calls. And really follow up and follow through and work on these relationships for a really long period of time until they materialize to something like a paying customer. Does that make sense?
Speaker 2: Yup, it does. And I think that’s a very legit way to think about enterprise and larger deals. For sure.
Steli Efti: So boom. Now let’s cut into the mid-market. The place where it’s not going to … The SMB market is one where you … Hopefully it doesn’t take you a year, two years to acquire more massive customer that pays you 80K a month. Those are customers that might be able to pay you 400, 500, 600 a month. And you can acquire a lot more of them. But you can’t quite acquire as many of them as if you were in the end-consumer space where you can conceivable acquire thousands, even tens of thousands a day. Right?
Speaker 2: That’s right.
Steli Efti: Its faster than enterprise, it’s slower than professional. So what do we do there? Let say we’re not going to be making 80K a month per customer, in the most crass sense. We might be making 500 to a K if we’re looking at mid-market range. What does that open up in terms of the tactics or the route to get there? What are the channels that are mostly available, mostly successful to use today to acquire these customers at that price? But all this assumes that we are product market fit, and that we know who our customer is. And that deliver real value to them. We’ve covered these episodes on these topics before. But assuming we have all that, what kind of growth, sales, acquisition tactics or channels are most easily available for us in the mid-market to get to the number of customers we need at that price point?
Speaker 2: Yeah, that’s a good question. I think at that price point you are doing outbound sales. You are cold outreach and things like that. While I think in the previous one, the enterprise, you’re probably focusing much more on relationships and things like that. And in this one, you can go outbound with a cold email and get these mid-market companies, mainly because the ability to do that today’s easy. And the buying cycle is a few months, at most, usually. Sometimes as quick as 30 days. So yeah, it’s cold outreach, it’s trials. Like a product that has a trial. And a price point, roughly like 500 bucks a month, right?
Steli Efti: Yeah, at 500 bucks, you need to acquire 160 customers, roughly, right?
Speaker 2: There you go, there you go.
Steli Efti: If it’s 1000 bucks, it’s 80 customers. So eighty-ish. Let’s say it’s 500 bucks, that’s 160 customers to acquire those. Those still will need, as you said, significant effort. So it’s still going to be outbound. But it’s not going to be as much lunch, dinner, events, playing golf together. It’s not going to be massive pilots. It’s going to be a shortened version of an enterprise deal. We’re still going to have to do outreach to find these customers. It’s still going to take a lot of follow up and follow through. And some real investment to acquire them. But hopefully the cycle there is more in the 3 to 6 months, than in the 12 to 18 months, to make the math work for you. So the final step, let’s break this down to the small part of the SMB. The small businesses or the professional market. Now we’re at the point where we’re making 50 bucks or 100 bucks. Maybe it’s just 25 to 50 bucks and we’re to talking about 1,000, 700 to … Let’s say around the 2,000 customers that we need. Around 50 to 80 bucks a customer, something along those lines. What are the general channels that we’re going after? Because now we need to acquire customers really fast because we’re making fairly low money per customer per month. So we can only spend very little money per month to acquire a customer.
Speaker 2: That’s right. So generally there, your ability to drive traffic. Your ability to have a product that spreads itself, high word of mouth. SEO sometimes, if you have trops on that you can get results pretty quickly. So it’s really a traffic game more than anything else. Getting trafficked to a website is the number one way. The number two way would be you could still go outbound, you’d just have to be very efficient about it. And your sales cycle better be really quick and not require a lot of touch. So that’s usually what you do on the low- end SMB. There have been companies that have been successful doing outbound with SMB more recently because of all the technology and stuff available. But at the end of the day, my take is the best ways to do that are products that grow themselves, and marketing channels, referral programs, things like that that really help you get a number in the 800 marker range.
Steli Efti: Beautiful. All right. We’re going to wrap this episode up. I want to keep these episodes super tight and super technical. One thing that I want to end the episode with on is that if you’re listening to this, and you have a business that is generating revenue but it’s far away from a million, but a million sounds like an exciting target to hit for you, take some of the things that we shared with you today. But also, if you just type in into Google, “One million in ARR. How we got to one million in ARR. Sharing how company X got to one million in ARR. At this point, tens if not hundreds of blog posts and articles where companies that surpass one million ARR wrote an article about how they got there. There are more, and more, and more knowledge shared around this topic. Make sure to consume some of that. And just ask yourself, find a business that’s similar in terms of what customer base they’re going after. Small, tiny, or medium sized, or large enterprise. Just learn more about what channels they used and what tactics to get to surpass that million milestone. And just see what fits naturally to your customer base, and how your customer likes to buy. And just do it. But it’s important to believe that you can. And it’s important to be excited about it. At least, I think it can’t hurt. All right, that’s it I think for us for this episode. We’ll here you very soon.
Speaker 2: Later.