From burning millions to profitability and back to growth in 60 days
A 10-step playbook for venture backed startups
The coronavirus hit Snaptravel in a dramatic way. By the end of March, we were looking at an 80% drop in bookings. We had a cost structure that did not make sense during a downturn and were burning money in the millions of dollars annualized.
As with most venture backed companies, growth is the true north star. At Snaptravel, we have achieved 11 out of 12 consecutive quarters of double/triple digit quarter-over-quarter growth. However, these unique times called for an updated strategy. We decided to take control of our own destiny and set a goal to become profitable as fast as possible. A lot of companies say “we can be profitable if we wanted to”, but few can actually pull it off, and even fewer manage to do so before their runway runs out. We now had the challenge of actually doing it while transitioning to remote work. We expected this to take us multiple quarters, but surpassed our own expectations when we got to profitability within 60 days. We are a much stronger company coming out of this and now (as of mid-July) have hit an all-time high in revenues and bookings. Below is a 10-step ‘playbook’ of sorts that we wanted to share with the startup community.
Background on Snaptravel
First — some quick context to understand our business pre-COVID and the scale at which we operate. Snaptravel uses conversational AI that enables customers to find and book hotels over messaging. We are a 9-figure sales per year business. We make money on every hotel booking that we sell. We subtract a set of variable costs that fluctuate with volume (payment processing, customer service, technology/server costs…) as well as a set of fixed costs (office, salaries, professional services…) leaving us with our net income number.
Below are the 10 major steps we took to get to profitability in 60 days.
Step #1 — Put out the fires and remove distractions.
The right tools and processes will allow everyone to stay focussed.
The first step we took was to put out the fires. We were being bombarded with customer cancellation requests for ‘non-refundable’ rooms. For a few weeks we became a ‘cancellation company’, processing more cancellations than we made bookings.
Without going into the details, cancelling a refundable booking is not a problem (minus the fact that we no longer make the profit we projected to make on that booking). However, cancelling a non-refundable room is inherently difficult based on the systems and processes the industry has in place. It requires exceptions to be made by automated systems as well as by people. Often we require explicit written permission from the hotel — many of which were closed.
We set up a daily cross-functional meeting where leaders from Product, Operations, Finance and Engineering could communicate and work together on solutions. The goal was to build out a set of tools and processes so that we could handle these requests in a trackable, consistent, and timely manner. We switched from a rigid 2 week sprint process to an ad-hoc kanban/war room style process in order to ship features as fast as possible for the business teams. We even collaborated with other travel companies to crowdsource a list of hotel closures. Within 2 weeks we ironed out the majority of processes and built the necessary tools to remove ambiguity and stress around COVID-19 force majeure cancellations.
Step #2 — Set a clear direction for the company
Everything you work on should be ‘stand-alone’ EBITDA positive.
After removing distractions, we set a very clear direction for the company. Everything you work on should be an EBITDA positive initiative in the immediate to short-term. This meant that any projects that did not have a clear line of sight to profitability would be de-prioritized.
As a management team, we discussed each project line-by-line and thought about every cost associated with it — the employee salary cost, the marketing dollars required to go to market, the overhead it would create for operations and finance, even the headspace it would take up from other initiatives. By taking this holistic approach, we were able to pair down what we worked on in half. This gave everyone clarity and simplicity in their roles. Instead of ‘running’ from one zoom meeting to the next trying to juggle all types of projects and initiatives, we cut meetings in half and pointed everyone in the same direction.
Step #3 — Tackle the hardest part. Payroll.
Make the necessary cuts given the new priorities
After going through a ruthless prioritization of projects and studying our fixed costs, it was very clear that we had to let some people go. On the personal side, this was an extremely difficult and heart wrenching decision. At a company of our size, there are strong bonds and relationships across all levels of the organization. However, the business decision was easy. The drop in volume of hotel bookings combined with the reduced number of projects we were working on meant that we had to reduce our headcount.
We made the decision to cut some of our core staff but did so as compassionately as we could. We doubled the required severance payment, we extended their benefits timeline, removed the 1-year cliff for vesting options and extended the time to exercise. These cuts would have been deeper but fortunately we were able to take advantage of the CEWS (Canada Emergency Wage Subsidy) to help cover a portion of remaining salaries.
My co-founder and I dropped our salaries to be the lowest paid full-time employees in the company but we did not drop any other salaries. We imposed a hiring freeze as well as a salary increase freeze.
All of these changes together allowed us to drop our salary line item by 67% which significantly reduced our monthly fixed costs.
Step #4 — Ensure alignment within the company
Issue additional equity to remaining employees
While the strategic direction of getting to profitability was clear, the restructuring of the organization, the transition to a fully remote company and the anxiety associated with the COVID-19 pandemic created an unusual time.
For the employees whose jobs were not affected, we wanted to make sure they understood the decisions we made and that they were aligned on our new objective. One of our core company values is transparency. We laid out our financial position, plans and projections for all to see and discuss.
It was super important to ensure that everyone was aligned, focussed, and motivated. In order to double down on alignment, we granted each and every remaining employee a 10% equity boost. We looked at the total equity that each employee had regardless of whether those options were promised, granted, vested or exercised and simply added 10%.
This was a way for us to show our commitment to the team as they continue to show commitment to the company as we all work together through this difficult time.
Step #5 — Identify and re-negotiate all costs
List every single cost and assign to a member of the management team
The first step in bringing down your cost structure is to identify each and every cost that you have. We asked our finance team to put together a simple spreadsheet that listed every single cost by vendor by month for the previous 4 months ordered by total cost. They pulled this directly from our accounting back-end such that all wire payments, bank transfers, credit card charges, and even petty cash was included. Each row was then assigned to a member of the management team.
This simple view allowed us to see which costs were recurring and which ones were one-time costs. It also created clear responsibility and accountability for each and every line item. Every member of the management team was required to review each item assigned to them over a certain value and assess if this is a cost we need to keep, cut, or renegotiate.
We then tracked all wins in a separate spreadsheet so we could quantify the wins. We also wanted to make sure that if a vendor agreed to some savings/reductions that the finance team was able to verify this later on.
A quick note on reducing costs is that this was relatively ‘easy’ to do. As a startup, you should not be afraid to re-negotiate especially in light of COVID-19. Most of the vendors we worked with were very understanding of our situation and glad to help out in any way they could. Part of it is the human side and that we are all trying to get through this difficult time together. The other part is the business side. It simply makes good business sense for vendors to help out their customers. Offering some relief means that these customers will be in a stronger position to get through this difficult time and continue to spend money with a vendor that they now have a deeper level of trust with.
When looking at reducing costs, there are three major areas to look at:
- Negotiating better pricing — this means getting them ‘on the phone’ and trying to get some type of reduction — this can sometimes require signing a longer commitment, it could be in the form of credits, it can be a one-time reduction of a more permanent reduction. Either way, you are getting some type of reduced pricing.
- Changing usage — the second (often overlooked) way to reduce costs is to change your usage. Many costs are billed based on number of API calls, number of active users, level of support required, amount of data stored. A lot of savings came from this technique.
- Cancelling Software — Take a full look at the SaaS software subscriptions and identify which ones are essential. We found a few pieces of software that were nice-to-have and/or rarely used that could be outright cancelled.
Below are a few real examples / real numbers highlights of what we were able to accomplish:
- Cloud Server Hosting — Received $25k in credits for future usage + switched support plan to save $1,500 a month (able to do this given our strong engineering / DevOps talent)
- Legal Bill — Received a 65% discount on a legal bill! Note that professional services (especially at big firms) are normally super high margin so there is a lot of room to negotiate. In return — we paid the invoice the next day.
- Data Visualization software — Dropped annual fee from $60k to $20k
- Infrastructure Monitoring software — 3 month fee waived
- Email Marketing Software — Removed unused contacts to save $2k/month
- Analytics software — Dropped annual fee by 33% + 3 months free
- Payment Processor — Received $25k in volume discounts
- Customer Service Automation — Doubled down on automating customer service using conversational AI to deliver 6-figures in savings
Step #6 — Tighten up paid marketing
Tweak each channel to be stand-alone profitable
The next step was to tighten up paid marketing. Similar to the company philosophy that each project/initiative should be profitable, we took the approach that each and every marketing channel should be profitable on its own. To be profitable, you have to look at true revenues and true costs, no cheating with attribution modelling, LTV projections or creative financial engineering.
The metric we use is ‘contribution margin’. We look at the Net Revenue that the channel drives. This means the actual revenue we made on the customers first booking within a reasonable attribution window by taking the GMV and subtracting the cost of goods sold. We then subtract the cost of the media and the variable costs (any costs associated with making and servicing the booking such as payment processing, customer service, technology/server costs…) What we are left with is contribution margin or essentially the profitability of that channel. A quick visualization below:
Looking at this simple math, we can then make a decision on each channel. Some channels needed to be turned off altogether but most channels just needed to be tweaked. There is always a trade-off between ROAS (Return On Ad Spend) and volume. Fortunately we have very strong control of the ‘knobs’ used to balance these two. Within a few days, we were able to optimize each marketing channel to be profitable without sacrificing too much volume.
Step #7 — Adapt the product to the new world
Make changes to reflect consumer expectations (i.e. clear refund policies)
COVID-19 meant that customers were on high alert. They were nervous to make non refundable bookings or plan far ahead into an unknown future.. We dedicated a squad (Product Manager, UI/UX Designer, 3 engineers) to work specifically on COVID-19 related product tweaks. After combing through our analytics tools for quantitative data and going through a quick series of user interviews for more qualitative data, we made the following tweaks:
- Created more transparent and clear cancellation policies
- Made product tweaks to focus more on spontaneous bookings
- Added COVID-19 messaging and notifications throughout the product
- Encouraged customers who were hesitant to chat with a live agent
- Adapted to cater to more business and essential worker traveler use cases
All these efforts together resulted in an increase in conversion rate across refundable and non-refundable bookings, a shift to more business travellers and essential workers, and overall a better product experience for those who wanted to travel during COVID-19.
Step #8 — Innovate to drive new revenue streams
Pay with credit card to earn cash back, Allow customers to leave you tips.
A crisis like COVID-19 forces business model innovation in unique ways. We brainstormed creative ways to make money outside of our core marketplace and quickly put the ideas to test. Below are a couple of examples where we could innovate to drive additional revenue that should be generally applicable to B2C e-commerce companies:
1. Pay suppliers by virtual credit card. In the majority of cases, hotels are not paid until the guest checks out. This means that hotels are often extending credit lines to companies like Snaptravel (and/or backing up the accounts receivables with insurance). In the wake of COVID, many companies looked to reduce their credit risk. Insurance providers, hotels, suppliers– these firms all wanted to tighten things up. Hotels were looking for upfront payment at booking time as opposed to check out time. This forced us to come up with an innovative payment solution.
We set up a virtual credit card system for those hotels/suppliers who preferred to be paid at booking time. Every booking made by a customers would automatically generate a virtual credit card number and we would instantly make a payment. This way the hotel or supplier would be paid right away. The benefit for us is a cash back incentive from the VCC. Although only a small portion of our hotels/suppliers have switched over to this model, it generated $30k+ in bottom line profitability last month and we expect this to continue to grow as more hotels/suppliers adopt this payment method.
2. Enabling customers to leave us a tip. Taking a page out of the food delivery playbook, we gave customers the ability to leave us a small tip as a token of appreciation for helping them save money. This was added to the final step and is 100% transparent and optional. Despite a partial rollout, it generated significant bottom line profitability last month and we expect this to continue to grow as we iterate on the UI and roll this out to all users.
Step #9 — Re-engaging with our existing customers
Reach out to your most loyal cohorts
One of the strongest assets that we have is our loyal customer base in the millions who use Snaptravel as their primary hotel booking service given the simplicity of messaging. We used this time to re-evaluate our retention strategies.
We maintain an ongoing chat conversation with our customers throughout their journey. This allows us to create loyalty in a very unique and personal way. As we dug deeper into our retention tactics, there were many that worked without affecting the bottom line. However, other strategies such as offering Snaptravel credits for referrals or to incentivize repeat bookings had to be examined further. We were able to tweak our strategies in a way that would still engage and entice customers to come back and book again while removing the unnecessary offers that hit the bottom line.
The Snaptravel AI was tuned up to be sensitive to COVID-19 market conditions and focus more on local/drive locations as opposed to stays that were further away for customers where we had their billing address. This allowed us to drive more revenue from our existing customers without any additional marketing costs.
One of the most exciting parts about our business is that this AI technology is extensible across verticals and use cases. More coming on this soon! :)
Step #10 — Maintaining a strong cash position
Hold on to cash as much as possible.
Cash is king during difficult times. We have had the foresight to always maintain a strong cash position. Our business also generates positive cash flows, as we charge upfront, but don’t pay the hotel/suppliers until a customer checks out. While many others in our space would leverage customer deposits/prepayments to operate the business, we set a clear rule to keep these funds separate and shielded. Lastly, when we raised our last venture round, we backed it up with a strong covenant free line of credit as extra cushion. All this meant that during this downturn, we had the cash reserves to weather the storm.
Coming out of this a stronger business
Taking all the steps above in a short period of time while transitioning to an all-remote company was not an easy undertaking. The team banded together in heroic fashion to execute on the 10 steps above. COVID-19 was a forcing function for us to tighten our belts and our new and improved cost structure ultimately provided a stronger foundation for a healthier business.
While we originally expected to remain in a lower cost / slower growth phase for many months, the fortunate news is that domestic travel has grown much faster than we had expected. By the week of May 11th, we reported that US domestic travel was at 54% of pre-Coronavirus levels. Now, as of the week of July 6th, we are at a full recovery. In fact, on the week of July 6th, Snaptravel had an all time high in terms of bookings completed — surpassing our previous all time high week (in February).
Adding the speedy recovery of our core market to all the work we did has resulted in our first month of profitability in May 2020, followed by another month of profitability in June. We are now returning to focus on growth while maintaining profitability. There is a quote that one should “never let a good crisis go to waste”. While we are arguably in one of the industries hardest hit by the coronavirus crisis, we have found a way to leverage this shock to our advantage. For all other venture backed startups, your 10-steps may not be exactly the same, but hopefully this framework and seeing some of the steps we took will help you to achieve profitability, and enable you to use this new strength to continue to grow.
Read Fast Company’s exclusive first look at our 10-Step Playbook by Martine Paris
https://www.fastcompany.com/90528345/how-this-travel-startup-became-profitable-during-the-pandemic
