I am not much of a finance person – except for one thing. Tracking cashflow. Because if there is one sure way a business dies, it is because of a lack of cash.
I cannot read financial statements and haven’t bothered to learn how to analyse balance sheets and P&L statements. But what I always track is the cashflow. Cash is the oxygen of every business. Without cash, you cannot pay salaries or vendors. And that creates a negative spiral from which it can be very difficult to recover.
It is possible to be profitable and yet have cash challenges if you do not get your payments on time. In India, this is especially difficult because of four issues. First, customers take their own sweet time to pay – 90-120-150 day payment cycles are not uncommon. Second, salaries, rents and even some vendors expect to be paid on time. Third, statutory payments to the government have to be made on schedule. Fourth, because rule of law doesn’t exist in India (justice delayed is justice denied), higher write-offs are a reality of life.
What this means is that the business needs some working capital. That can either come from past profits or one has to raise it externally. Growth also requires deploying additional capital since there is a gap between money coming in (later) and money going out (early).
That is why in IndiaWorld I was very keen to make the business cashflow positive as soon as possible. In the early days, subscriptions and website development fees sustained the business until advertising took off. We kept a sharp eye on our cashflows to ensure we never would get squeezed for cash.
I had learnt these lessons in my childhood – writing a daily cash diary for my mother. Each month, my father would give her a certain amount for household expenses. At the end of each day, she and I would sit and write down all the day’s expenses under different headings and calculate the amount left for the month. This way, there would be no surprises until the next cash inflow came when my father got paid at the start of the following month.
No proficorn can be built without attention to cashflows from the early days. And once there is a cash buffer available, keep it safe in liquid investments so it is always accessible. Take the risks in business, but not with your hard-earned cash.
Will be continued soon.
One of the good things that the lockdown has done is to make us Indians punctual! There is zero travel time so no traffic excuses. All one has to do is to click a link to join a meeting from home – so it becomes harder to be late. “My previous meeting ran over” can only work so many times.
Punctuality has been part of my DNA since I can remember. I don’t know when it began. Maybe it was because I grew up listening to BBC World Service radio – and news on the hour wouldn’t wait for me to switch on the radio!
I find my early attention on punctuality quite surprising since I haven’t worn a watch since I was 12 years old. (I had an old Favre Leuba wrist watch in school, and I lost it on a picnic to Gorai Beach – it fell out of my shirt pocket and got washed away with the waves. I was so upset with myself then that I decided not to buy another watch.) I soon learnt to estimate time quite accurately and realised that I didn’t need it – even in the pre-mobile era.
Punctuality is a personality trait. You are either punctual or not. There is no halfway house. And it is not difficult – one has to factor in a little buffer for meetings. You cannot expect others to be punctual if you are not. Of course, there are some unavoidable situations – in which case the host needs to be informed, even if it is a matter of a minute or two delay.
In business and in life, punctuality helps. It can be seen as a proxy for reliability and willingness to keep commitments – if you cannot be on time, what is the guarantee that you will honour a contract. This may be a bit of exaggeration, but given that many people neglect being on time, it becomes easy to stand out.
Starting meetings on time is the right thing to do – else you penalise people who are punctual. The “let’s give the others a few minutes” line is ridiculous – what it actually means is “it was stupid of you to come on time because the later-comers will decide when the meeting starts.” This attitude can easily spread to other aspects.
An entrepreneur needs many things to be successful – punctuality is one of them.
Tomorrow: My Proficorn Way (Part 20)
Entry and Exit
An entrepreneur has a good sense when to enter a business. What is not so clear is when to exit.
I faced such a decision in late 1999. I had unsuccessfully tried to raise venture capital many times over the preceding few years. And then, suddenly, almost against the run of play, I had two acquisition offers on the table. I had been looking to just raise some capital so I could keep running my “forever business.” But now I faced the prospect of selling. The offers were good – way beyond what I could ever have imagined. But giving up my entire business for money? I had not considered that eventuality.
I had toiled hard for a few years growing IndiaWorld. Even vacation time was filled with thinking about what to do next. And there was so much to do. I never imagined myself doing anything else.
I had hired DSP Merrill Lynch as my investment banker to help me raise some capital so I could better compete in the marketplace. We were profitable, but the game in 1999 seemed to be shifting from passion and profits to capital and cash-burn. I was going to have to adapt. Profits were too small for me to make the large investments the business was inevitably going to need down the line.
I was confused. It was then that Hemendra Kothari, DSMPL’s Chairman, gave me advice that I have given many others. He sat me down one day and said, “Rajesh, in a business, even more important than knowing when to enter is to know when to exit. The valuation that you are getting today – it will be difficult to get the same again for a long time. You have many ideas. Sell this business and build others. You will have the freedom to do many other things in life if you do this deal.”
Those words of Hemendra bhai – “know when to exit” – turned out to be prophetic. A few months later, the stock markets tanked and a long dotcom winter began. Even though I didn’t know it then, it was his wisdom that saved IndiaWorld and perhaps my future.
So, for proficorns, there will be a moment when they may have to decide – continue to build, or sell and move on. At these times, one will have to keep the emotional aspect aside and remember those words from Hemendra bhai, “Even more important than knowing when to enter is to know when to exit.”
Tomorrow: My Proficorn Way (Part 19)
During the IndiaWorld days when we were a small company, I used to often think about my day job as fire-fighting. I would wake up every morning and make a list of the 10-15 things that needed to get done for the day. And then, reality would hit! Something or the other would come up during the course of the day, and before I realised it, the day was over. Looking back at my list, I would find that I had barely done a handful of the tasks that I wanted to – and another dozen or so new tasks would get added to the list! That’s the feeling one has to like as an entrepreneur. Over time, I have come to realise that the ToDos list is an infinite one. It will never be over. The important ones will bubble to the top and get done.
But to make that happen, the entrepreneur needs “me-time”. It is time when you are alone and with yourself. No people, no meetings, no phone calls, no emails, no Whatsapp. Just you. Solitude. So, you can focus on the flow that’s coming, reflect on the meetings that have happened and the ideas that came, tap into the inner sixth sense to know when there is a new idea that is germinating or something bad that needs to be stopped.
In the past few years, the me-time bubble has become harder to come up. There are so many distractions that beckon. There is always that next urgent task that needs to be done. And before you realise it, life has become a clickstream of such tasks which while useful will not give the elevation needed for take-off.
That is why it is important to create contiguous time and a comfortable space for me-time. You have to get comfortable with yourself and solitude. Let the mind wander. I typically sit in a chair with my notebook and let the ideas flow. I think better when I write. For you, it may be walking or exercising or anything else. Whatever it is, each day needs a me-time slot. Because there is no one else in your company who can do this better – connect the dots, feel the new opportunities, think of the future. Your me-time may not ensure success, but lack of it can definitely stunt or kill the proficorn.
Tomorrow: My Proficorn Way (Part 18)
An Advisory Board
When one is running a business on a day-to-day basis, it is easy to lose sight of the forest for the trees. Each day brings with it new challenges to be solved. One is deeply involved in every aspect of the business. Failure often becomes personal – because one is the engine driver in a train wreck. It becomes hard to hold people accountable – because everyone is in it together. You as the leader are part of every decision, so the responsibility for failure is yours. This is especially true in the early stages of a venture.
When Netcore was struggling to grow, I decided that I needed an outside-in view. I wanted a couple of people who could provide a view at a higher-level, and question me and the team. (Since I had no external investors, we did not have a formal Board.) It was then that I decided to set up what I later called the Advisory Board. It started with one member, and has since grown to 6 members. They have no fiduciary responsibility. We all meet once a quarter for 4-5 hours where the management team presents the quarter’s performance and the plans. It has worked very well in bringing discussion and debate which did not exist earlier.
The Advisory Board is now intimately familiar with the business and the team. They bring in their own experience to give us suggestions on what to do – this is something I lack since my only external work experience was 30 years ago! There is a good mix of expertise in our Advisory Board – management, strategy, financial and marketing.
As for the team, they present the numbers and plan as if we were a listed entity – because one day we will be. This creates a discipline of ensuring targets are given – and hopefully met. For the management team, there is not just an oversight (other than me) but also insight (on what can be done better). These quarterly meetings for the past decade have been a major factor in Netcore’s growth.
I would strongly recommend an Advisory Board for every entrepreneur at an early stage. Get a few people you respect and who have diverse industry knowledge. And then make it a discipline to do the quarterly reviews. This additional layer will go a long way in identifying mistakes early and reducing the prospects of failure.
Tomorrow: My Proficorn Way (Part 17)
For me, thinking deeply about marketing is something that is quite new. It is only in the past few months that I have started probing into how the current marketing techniques can be improved in a world of digital customers, unlimited data and low barriers to customer churn. I have to the field as somewhat of an outsider, even though Netcore has been in the business of selling marketing solutions for many years. That has helped me bring a new perspective to the existing knowledge base of ideas.
Velvet Rope Marketing was the first big idea. While the core concept that a small number of customers can account for a disproportionate share of revenues and profits has been around for a long time, what I tried to do is to put together an end-to-end framework that covered concept to execution to measurement. It was during this process and through the conversations that I had with many CMOs and digital heads that the problem statement for thinking about referral marketing emerged.
As happens so often with new ideas, all that’s needed at times is for a newcomer to come in and combine existing building blocks differently to create something different. This is what I have tried to do in this series on referral marketing – by combining three elements that already existed:
- Best customers, who can get others like them through their social networks
- Lifetime value, which can create greater rewards and incentive for best customers for referring others like them
- Multi-level network, that further enhances the value of referrals for the best customers
Some additional tech-led tweaks can also help in making referral marketing as core to marketing as adtech and martech are: ensuring that both referrer and the person referred get the same initial benefits (either both get it, or none get it), simplifying the process of referring (ask a new customer at sign-up about who provided the nudge), and creating a cross-brand rewards program and adding game-like elements to provide far greater incentives than what a single brand could do.
Hopefully, these ideas can serve as the foundation for transforming referral marketing. Perhaps, Velvet Rope Marketing has found its perfect companion – Velvet Circle Marketing?!
During the 2014 Lok Sabha election campaign, when I was assisting in the election campaign of Narendra Modi, my team at Niti Digital came up with an interesting twist on the Amway-type multi-level marketing program. Our goal was to get Modi supporters to identify other Modi supporters, and let us know. This way, we could ensure that all of them received the right nudges and reminders on the polling day to go out and vote.
So, we came up with an idea called “Namo Number”. An existing supporter needed to SMS their VoterID to enroll. They could then get others to also show their support by asking them to send their VoterID along with the mobile number of the referrer. This way, a tree could be built. We extended this to two levels and gave one point for every sign-up. (To keep it simple, we did not distinguish between the first and second levels.) The total count of the tree was the Namo Number.
We showed a leaderboard in real-time, and offered an incentive that those with the highest Namo Numbers would be invited to the BJP HQ in Delhi for an interaction with the party leadership.
The program worked very well – we ended up getting well over 10 lakh SMSes across states. The VoterID helped us identify the supporters at a booth level who could then be prioritised for the turnout operation on election day. It also helped identify the “super spreaders” – those with a large influence in specific areas.
Now imagine applying this same idea to the world of referral marketing. Allow the best customers to create a multi-level network of referrals for which they get credit based on the lifetime spends of the referred customers. This is how brands can build customer evangelists and measure their impact in a transparent manner.
The one big difference between what brands like Amway and others do is that there is no cost to joining. Each of the best customers can decide if they want to participate or not. There is no pressure and there is no payment; there are just good rewards as a recognition of the contribution made to the growth of the brand they love and are loyal to.
Taken together, the three ideas – focusing on best customers, rewarding them based on the lifetime value of their referrals, and extending the rewards program to the downstream of the referred customers – can transform referral marketing and make it a very powerful parallel track for new customer acquisition.
Tomorrow: Rethinking Referral Marketing (Part 11)
The second issue with current referral programs is that they do not offer rewards based on the lifetime value of the referred customer. So, all that one gets as a referrer is some small one-time incentive – either a cashback or a free ride or some additional points. None of this is exciting to make referral marketing a key plank in new customer acquisition. It thus ends up just becoming another checkbox in the marketing toolkit.
Customers have different lifetime values. When a new customer comes in through a referral, the brand is not incurring marketing costs in acquisition. It can thus afford to reward the person the referring customer.
Let us take an example. Suppose the lifetime value of a customer just acquired is Rs 20,000. A brand may have spent Rs 2,000 or so in acquisition costs as part of a marketing campaign. Instead, it now no longer has to spend all of that money. It could take some part of the money saved and split it in three ways: give both the existing referring customer and the newly acquired referred customer the same initial incentive of say Rs 300 (for a total spend of Rs 600). It could then allocate 5% of the future spend by the new customer as an incentive to the referring customer, who would thus earn Rs 1,000 in the coming months and years. This creates a substantial incentive and encourages the best customers to make sure they get more future best customers. [A point to note in the example above: the payment need not necessarily be in cash. It could be through an alternate currency (virtual coins, points, etc.) also.]
Taken together, the first two solutions offer a big upgrade to existing referral programs. The focus on best customers ensures that the brand can get more higher value customers. The incentives offered by giving rewards linked to the lifetime spend of the new customer also ensure that quality is emphasised over quantity in the referral process. Our next upgrade to the referral marketing will, quite literally, take it to another level.
Tomorrow: Rethinking Referral Marketing (Part 10)
Let’s begin with the point about best customers. The referral programs that we see today do not factor in the differences between their customers. As such, there is a lowest common denominator element across these programs. Thus, they are limited to offering small incentives.
Just as brands should use CLV to segment their customers and create a differentiated experience for their best customers (what I have termed as Velvet Rope Marketing), they need to do similar for their referral programs – use the same segmentation and create a different program for their best customers.
The key reason for this is that while all customers may not have an affinity towards the brand, the best customers do! They are the most loyal, highest spenders and have the greatest lifetime value. As such, they are willing to overlook all deficiencies with the brand or products (if any) and ignore competitors. They will thus be also willing to champion the brand to others – if asked and if given an incentive. Some may do so on their own – but recognition of their contribution can give a fillip to the referral activity.
And yet, no brand that I have come across has a referral program that is focused on just their best customers. In fact, most brands do not know who their best customers are. Solving both of these problems can be a big booster tor revenues. This is because not only will the best customers appreciate the special experiences, they will also help get more like them – more future best customers. This will be many times more cost-effective for the brand than running ad campaigns to a wider audience.
All we have to do is to think about ourselves as customers. We know people like us. And if we are the best customers of a brand, it is very likely that the people we know could also become best customers of that brand. This is the growth flywheel brands need to create.
Tomorrow: Rethinking Referral Marketing (Part 9)
Let us next understand the types of referral marketing programs that exist. We will then discuss the problems – and possible solutions to make referral marketing more effective.
Here is an excerpt from 2015 research paper by Barry Berman entitled “Referral marketing: Harnessing the power of your customers”:
There are two types of referral programs: one in which existing customers are paid an incentive, and another in which current customers work without pay on presentations, case histories, and user forums. The second program benefits the referrer by increasing visibility, heightening his or her recognition as a specialist, and/or gaining special treatment from a supplier/vendor. Both program types share common characteristics. They are initiated, managed, and at least partially controlled by the marketer. They use the social connections of existing customers with their friends, family, and business associates. They focus a firm’s marketing efforts on existing customers as opposed to new customers. And, finally, the referring customer receives an incentive in each program type, either via direct or indirect payments. Direct payments can come in several forms, such as cash, points in a loyalty program, miles, free goods and services, or donations to a nonprofit organization in the name of the recommending party. In the indirect payment type, the referrer may receive recognition as an expert or may be given the opportunity to serve on a company advisory board.
The paper also covers the advantages and disadvantages of referral programmes:
There are many other articles on how to structure referral programs. Here are a few:
- The 5 Best Practices for a Successful Referral Program by Joseph Nies
- Do’s and Don’ts of Referral Marketing by Amity Kapadia
- 11 Ways To Build An Effective Referral Marketing System (Forbes)
- Top 10 Referral Marketing Insights by Kirsty Sharman
- Referral Marketing Software – Everything you want to know (Invite Referrals)
- The Do’s and Don’ts of an Effective Referral-Marketing Program by Jeffrey Epstein
- 17 Surprising Referral Marketing Statistics (CustomerThink)
- The 5 Factors That Make Customer-Referral Programs Fail by Sujan Patel
As I see it, there were three primary problems with the existing state-of-the-art in referral marketing:
- There is no focus on best customers; it is the same program for all
- The rewards do not factor in the referred customer’s lifetime value
- The programs do not create a multi-level referral network
The common thread is that the referral programs as they stand today are not exciting for the referrer. Let us consider each of these – and how they can be addressed. Taken together, the solutions can open up a new world of opportunities in the world of referral marketing.
Tomorrow: Rethinking Referral Marketing (Part 8)