Robbing Peter to Pay Paul – “To take something from one source and use it towards another.” (source: Urban Dictionary)
Last week, I asked readers of my newsletter to email me with issues they were having in their businesses, and I received several excellent questions. With permission, I am answering a question from Todd publicly.
Todd: What would you recommend to consider when looking at using short term loans to bridge seasonal gaps? This could clearly be applied to other scenarios where the costs are front-loaded and the revenue is delayed.
[With our software], there is a seasonal sales cycle, with a big bump in January and slowly trailing to December. We’re trying to fund tech development and marketing through this period but are facing declining revenue while we’re increasing costs. One of the things we’re considering is getting a short term loan or line of credit. This financial tool doesn’t seem to be discussed in many sources, but seems to have some valuable characteristics.
Tim: My initial reaction is that a short-term loan is not good strategy for managing expense levels which are running ahead of revenue. I don’t doubt at all the seasonality of your market, but it seems like a better choice would be to strategize about:
- Turning up the marketing even more in January when you have a captive audience and using the extra cash during the lean months,
- or looking for opportunities to run non-seasonal promotions,
- or lowering development expenses to be in line with average monthly revenue versus peak revenue.
If you were a retailer with physical inventory gearing up for the holiday sales season and a predictable business, I might be more inclined to look at the short term loan. In the case of a young software company, it would likely be difficult to collateralize the loan.
Todd: From my perspective, a short term loan simply has the equivalent of “code smell,” whatever that may be in financial terms.
I definitely agree about including better strategic planning so that we can better carry Q4 2014, but that’s 15 months away from where we currently stand. I was thinking about the short term loan as a tactic to bridge Q4 2013 and allow us to effectively run campaigns without being cash-starved. By the time the revenue comes in January, we may have missed the sweet spot.
From a collateral perspective, I would assume they would be personally guaranteed. 😉 We are a startup, and a software one at that.
Basically, this helps justify my efforts around developing more focused marketing. Our marketing efforts are nascent, so the acquisition cost per customer is difficult at this time. Our user base has grown organically, though direct referral, so we’re now putting together our marketing strategy, trying a few different things and seeing what’s working.
I’d be interested to hear your thoughts on how to best take advantage of this off-season to break the seasonal trend as much as possible.
Tim: “Code smell” – I like this, but I had to Google it 🙂 Yes, this is exactly what a short term loan would be, not a bug, but an inefficient design. Maybe an equivalent phrase would be “Robbing Peter to Pay Paul.”
I have several thoughts about Q4 2013, but keep in mind I have considered these ideas for about 5 minutes.
As a general principal, I think you would be well served to find a marketing strategy that doesn’t require you to run campaigns and/or eat the risk up front.
- As an example, what about running a self-managed affiliate program. Give each of your current customers a unique code and for anyone they refer that purchases you product, they get $10.
- And it need not be limited to your current customers. You could offer something similar to bloggers in your market by simply providing the same type of unique code plus a few sizes of banner ads.
Collateral – Yes, that is exactly right. But since that is the case, seems like you just cut out the middle man and make the loan to yourself 🙂
Customer acquisition cost – seems like it is worth testing in this area. For example, if you can run targeted Facebook ads at .30 cents per click and get a 2% conversion rate, your cost would be a $15 per customer. If that turned out to be true, then it would be printing money.
Todd: Short term loan is out, and I now have a better idea of why it smelled, so thanks for helping elucidate that idea. Bringing in the collateral really brought it into clearer light.
- Marketing is on. In our initial retargeting campaigns, we’re paying approximately $6 per customer, so we’re ramping that up now.
- General marketing, non-retargeting, is still being explored and defined, especially for the off-season.