The Myth of Startup Sales Targets
“If I can get to 10,000 customers a month at $50 each, then I’ve got something interesting here.”
Every entrepreneur comes up with simple sales targets soon after figuring out their most basic price point. We can’t help it, it’s what we do. But when it comes time for real sales projections, the math gets murkier. And we’re usually still just throwing random numbers at a wall and hoping they stick.
I used to go into my growth phase with sales targets. Then I realized those numbers were meaningless. Now I have a smarter plan.
Why Do We Create Sales Targets In the First Place?
Let’s think about revenue from the perspective of a service startup, specifically, one launched as a solo leaving a full-time job. That first sales target comes down to survival: If we can scrape together X hours of client work at Y dollars per hour, we can pay the bills. Then make X or Y a little higher and we can replace our former salary. Make them even higher still, and we can hire our first employee.
Product is much less linear. We can’t count on a consulting agreement that promises a steady flow of hours from week to week. In order to take those risks like quitting a job or hiring an employee — basically the risks of survival — a product startup has to guess how much product will sell this month, next month, this year, and next year.
The other reason we need sales targets is to seek investment. Anyone who is going to fund us is going to want to see revenue projections that go up and to the right, with solid reasoning behind those numbers. If we’re seeking venture capital for a high-growth/high-tech startup, then we need to go “hockey stick,” basically a point in the growth phase where sales go way more up than to the right.
Except That’s Not How Growth Works
There is no magic moment when a product sales chart starts going way more up than to the right. Not organically anyway. Some will tell you that moment comes when landing an outsized investment that allows the company to accelerate on all fronts, mainly the sales front, to turn their product from minimum viable to maximum revenue.
Fair point, but it’s actually the spending of that outsized investment that makes growth happen, and unless we’re accelerating in a direction that already resembles a hockey stick, we aren’t going to hockey stick. If you point a rocket in a direction and give it fuel, it will go very fast in that same direction, which may be sideways or even down.
So the hockey stick needs to take shape way before the acceleration happens.
Why Sales Targets Fail the Startup
Traditional linear sales targets can’t capture the momentum needed to give a product startup the same assurances for survival as a service startup. With a service startup, for every dollar we spend, we expect $1.25 in return. That 25% is our margin, and our revenue limit is how many hours a person can work in a week.
With a product startup, both margin and revenue are unlimited, so the goal is to maximize the return on every dollar spent producing and selling the product. The downside is there is no predictor, let alone a guarantee, of sales. We still take a lot of guesses on ad spending and cost to acquire and lifetime value, and we make mistakes, but the most fatal mistake is often made when we set our targets in the first place.
Setting a target for any amount of revenue realized at any point on a timeline is just a snapshot, it’s not a predictor of how the business is growing. I can say I’d like to target 10,000 units at $50 each in 12 months and salivate over that $6 million in annual revenue. But is it $6 million? Of course not. That assumes I’m selling 10,000 units in the first month, which I’m not. It also says nothing about the 13th month, and whether or not that growth is sustainable after I hit my target.
So we’ll break down that 10,000 units. We’ll plan to start slowly at month 1, ramp up in a curve to hit 10,000 units at month 12, then use that slope to draw the curve up and to the right beyond month 12, which gives us exactly those ridiculous projections that venture capitalists love.
Based on a made-up snapshot in time.
It’s the Shape of the Curve
When we talk about sales projections, it’s not the number on the timeline that matters, it’s the shape of the curve. What I’ve realized is we shouldn’t be thinking about hitting X units in Y months.
Instead, the moment we legitimately sell the first unit, we should be thinking about how long it’s going to take to sell the next one, then the next, and the next, and so on. In other words, we shouldn’t be thinking about units, we should be thinking about time.
As I said, growth doesn’t happen in a straight line, it happens in chunks. Sawtooth. Until we can smooth it out, all projections are meaningless. So how do we do this?
We Plan For Doubling Our Revenue
Doubling revenue is as good a stake in the ground as any. It gives us a nice smooth curve because it becomes more difficult to double revenue as time moves forward. It makes it simpler to break down the costs and effort needed get through the next time period. And we also realize sooner when we’re about to tap the current well and thus have to move to the next, either by adding new features, closing new customers, or expanding into new markets.
Let’s do a quick example. In out first month, we bring in $300 in revenue. We can go back from dollars to customers to prospects to usage to features to marketing and basically know that in the second month, we need to double the results of all that. Then we do nothing but push those things until we get to $600. Then we spend whatever remaining time we have plotting our next feature set, customer group, or new market.
Unless, of course, we’re not feeling confident about hitting $1,200 in our third month. Do we need a head start?
We’ll get those kinds of early warnings while we’re pulling those levers at the feature, usage, and customer level. Is month 4 a legitimate $2,400 month?
Three Kinds Of Projections
We know at some point we need to come back to reality, because revenue that doubles forever winds up in some kind of Ponzi Scheme nightmare. In my own example we came in at just over $1.2 million in revenue in the first year and $1.2 billion in the second year. Come on.
But I like that insane math as a motivator, so I always keep my eye on how long I can double month over month. That’s Projection #1, insanity, and it’s the first to get tossed.
The two other projections we can create are based on reality, and come from two different approaches to growth.
Projection #2 takes into account a revenue cap on the current strategy. At some point, with this product and these customers and this sales cycle and everything else we’re doing, we’re going to hit a ceiling. We’ll need to start another cycle based on incremental revenue when we tap that new feature, customer group, or market segment. When Projection #1 slows, Projection #2 starts. Repeat.
Projection #3 can be established by tracking the slowdown in growth as it impacts the shape of the curve and applying that math moving forward. At some point, it will take two months to double revenue, then three, and so on. We replace Projection #1 with Projection #3.
Then Fire the Rocket
Now we have direction and we just need magnitude, and this is where we get to be entrepreneurs. Using whatever projection method we chose, we plug in our product roadmap and sales pipeline for however long we want to run the projection.
We can either fund the fuel for that rocket from that first cycle or seek outside investment to get there more quickly. One way we’re taking on a bunch of risk and the other way we’re selling the return for that risk to investors.
But in each case, we’ll have a more logical, more viable, and frankly more fun rocket ride mapped out. And it should even be somewhat empirically based. We’re betting on the value of our product, our knowledge of the market, and our sense of where that market is headed over time, not some random snapshot based on math we did on a napkin when we came up with the idea.