You’re a private equity investor screening acquisition candidates. Company XYZ is on the table, and its upside value isn’t clear. Is the company’s growth model a disaster? Or is it optimized and ready to scale? Maybe it’s somewhere in in the middle.
Regardless, you need to understand the reality on the ground. A faulty investment hypothesis could derail your entire acquisition strategy.
So where does Company XYZ stand? What will it take to maximize your return?
Put the company’s marketing materials aside. Go behind the walls to see firsthand how the organization operates. Then you can zero in, and cash in, on its revenue potential.
Revenue Growth Maturity Model Holds the Key.
Gauging the opportunity in front of you is a complex task. But your primary calculus should be Customer Acquisition Cost (CAC) vs. Customer Lifetime Value (CLTV). In shorthand, this is the CLTV:CAC ratio. Companies with high CLTV:CAC ratios enjoy a robust sales and marketing ROI. Low-ratio companies spend a small fortune to acquire customers they can’t retain.
A company’s CLTV:CAC ratio reflects its revenue growth maturity. Below are the five stages of development. Think of level 1 as infancy and level 5 as adulthood. The higher you go, the tougher the transition.
Where Does Your Candidate Fit?
No matter where Company XYZ falls on the curve, there’s potential for big returns. Consider whether you’re prepared to take the necessary steps.
Level 1: Chaos!
There is no strategy. Sales, marketing, product—they’re all rowing in different directions. They’re not aligned with customer needs or market realities, and they’re in constant conflict. CLTV:CAC is painfully low.
There is a tremendous opportunity for transformation here. The higher you move up the growth maturity scale, the more revenue you generate. That means you’ll have more to drop to the bottom line.
Action steps: Define your strategy. Consider strategic divestment to fund transformation and to develop a market niche and corporate identity.
Level 2: Strategies Defined
The company has defined its strategies, which aren’t necessarily aligned internally or with the customer. It’s close to ground level—another potential wellspring of new revenue.
Action steps: Begin to execute. For now, focus on internal alignment (sales, marketing, and product). This will eliminate internal miscommunication and subsequent delays.
Level 3: Strategies in Action
The company is living its strategy. It’s starting to drive down customer acquisition costs and drive up lifetime value. But it hasn’t achieved alignment. There’s a lot of untapped value here, and the foundation has already been laid.
Action steps: You’re looking at a two-phased approach: cleanup and scaling. Further progress will require a big mental and cultural shift. Your leaders should focus on coaching and active management.
Level 4: Internally Aligned
Product, sales, and marketing are operating in line with the corporate strategy. But they’re still out of step with the marketplace and the buyers. You’re on the cusp of achieving a scalable platform—and potentially huge gains.
Action steps: To reach the next level, the company must upend its outward-in approach. Challenge the management team to center every process and decision on buyer concerns.
Level 5: Fully Optimized
Sales, marketing, and product are buyer-centric and in sync. No transformation required. CLTV:CAC is high; customers cost little to acquire, and they spend lots over time. This platform is primed for new products and new markets. The sky’s the limit.
Action steps: Scale the platform globally. Look to acquire new companies with great products but broken go-to-market models. Then snap these products into the level 5 system and supercharge your sales.
To advance to this final level, you need to maximize sales force effectiveness. For help with this process, download our Maturity Model Review tool.