Market cadence is one of the key reasons the first startup I worked for failed. Despite having raised nearly $60M and getting commitments from customers to buy tens of thousands of units, we ran out of money before ever coming near break even. It hurt, but it was a critical lesson I use to help other startups understand the importance of market cadence.
What do we mean by “cadence” and how is it different from the sales cycle?
- The Sales Cycle, or sell-in, is how long it takes for a customer to commit to buying your products. In many B2B enterprises it can be anywhere from 12 to 18 months, or even longer.
- Cadence is the rate at which the customer is going to actually purchase your products once they have committed to them: The lag between the sales commitment and revenue.
The difference is subtle, but critical to understand as it relates to your burn rate.
- The first startup I worked for was Home Director – a spin-off of the IBM Home Networking unit. Our target customer was new home builders. Primarily the large ones building more than 40k units per year, as well as high-end custom builders in select geographic markets. Combined, this group built somewhere between 250k and 300k homes per year.
- We needed to sell about 20k units per year to break even. This meant achieving about 7% and 10% market penetration in our defined targets, plus any spill over we could get from the other 800k homes that were being built. We thought it was a pretty modest target, considering it only takes a few 5000 home communities to hit our number.
- Early on, we started getting regular commitments. By the end of the first year we had somewhere in the neighborhood of 20k. Yay! We’re doing great! Right?
Nope! This is where cadence came into play.
- Many of the communities that committed to installing Home Director were still in the planning stages, or had only a model home or two built. And all of them had a build-out schedule that was anywhere between 5-10 years.
- This meant that in the first year they may only build 50 homes; 300 homes the second and maybe 1000 the third. After three years we would have only sold 1350 units of a 5000 home commitment in a particular community.
- Spread that out over the ~20k commitments we received in our first year, and in year three we would only sell about 5000 units. Our business model wasn’t built for this.
We were screwed.
- Had we understood the cadence of the market better, we would definitely have changed our business model, slowed our burn rate, and more aggressively sold into the smaller builders who could provide a more immediate return.
- It would have changed how we built our brand, marketed our products and structured our sales team.
So what does this mean for your startup? If you are targeting B2B enterprise customers, it is important to understand their adoption curves, or cadence. You may have something that is completely game-changing, but chances are it will be adopted slowly and in phases in your customer organizations.
They may have 10,000 employees, but it’s likely that very few will be part of the initial trial. This will be followed by a department, then maybe a business unit and then a division. The process can take months or even years.
Just like Home Director, you may have a commitment that your product will be used by every one of the 10k employees, but it may take years before the roll out is complete. Make sure you understand this cadence. Accounting for it is key to your business model.
Believe me, it sucks to run out of money and close your doors, specially when you have customer interest. Understanding the cadence of your core target markets can help save you from that fate.
If you’d like to know more about identifying the cadence of your target market and how it affects your business model, I’m here to help. Visit my web site – https://andrewhayden.com– and set up a free discovery session.