Even before COVID-19 upended the global economy in March, many consumer-marketplace businesses were facing a sort of reckoning.
Too many of them had raised huge amounts of money from investors to fuel “growth at all costs” business strategies—which were increasingly out of favor in the public markets. By last October, once-highflying marketplaces like Bird (scooter rentals) had raised money at roughly flat valuations compared to their previous fundraising rounds; iconic ride-sharing company Lyft saw its shares slide as its market cap slipped significantly below its March 2019 IPO valuation.
Then came the coronavirus. Finally, a true shakeout in the market began: Companies that were not operating efficiently and moving on a path to profitability continued to perform poorly. Meanwhile, a class of marketplace companies that were focusing on efficiency—including businesses that met the “Rule of 40”, which encourages a healthy mix between revenue growth and EBITDA margins in addition to high revenue growth—saw their businesses push on, and sometimes strengthen, even in the face of economic lockdowns.
Today, at The Marketplace Conference (held online), we presented our thoughts about the current state of marketplaces and also introduced some additional metrics we feel can help these companies find their way through this new economic normal—and keep pushing toward profitability.
The first new metric is what we call the “Battery Growth Magic Number”. This measures a company’s sales-and-marketing spending in relation to revenue growth. Companies arrive at the number by subtracting their combined sales/marketing spend, as a percentage of revenue, from their annual revenue growth percentage. We view a number greater than zero, indicating more-efficient sales-and-marketing spending, as positive. Online-education company Chegg, for example, has a Battery Growth Magic Number of 13; Netflix’s number is 15. Yelp’s number, on the other hand, is negative 41.*
It may sound counter-intuitive that spending less on sales-and-marketing can help your performance, but we often find companies effectively create success through product-led growth, encouraging organic traffic and network effects, versus human-led growth, depending on headcount (and salespeople) to drive business development and acquire new customers. It’s not a scalable process in our experience.
The second metric can also be magical for companies—we call it the “Battery Customer Experience (CX) Magic Number”. Our feeling is that great customer service is increasingly a differentiator for marketplace companies today. In fact, according to a study by American Express, customers are willing to spend 17% more on products or services from companies with great customer service. Conversely, 57% of customers have stopped buying from a company because a competitor provided a better customer experience.
So, it makes sense that companies should be focused on customer experience as much as many other business metrics. We suggest marketplace companies track this by dividing their net revenue per transaction by their CX cost per transaction. This is our Battery CX Magic Number. A number of 10 or higher indicates a business that is managing customer experience well. That means for every $1 you spend on customer experience, you should expect $10 back.
We’ll be writing more about the significance of these metrics, and how marketplace companies can achieve them, in the near future.
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*Magic Number calculated with data supplied by CapIQ