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Customer Acquisition Is Your Biggest Problem

You’re not going viral, so stop it

There are three main ways first-time entrepreneurs seem to think they’re going to acquire users:

  1. It’s going to go viral (everyone needs it)
  2. I have a lot of friends who will use it
  3. I have a ton of facebook and twitter friends/followers who will share and retweet me

Unfortunately, telling a sophisticated investor that you’re going to go viral and that you’ve got Twitter/Facebook personalities is basically saying “I have no idea what I’m talking about.”

Even more unfortunately, that’s one of the most difficult things to convince a new entrepreneur.

Going one step further – if someone who knows what they’re talking about asks you “What’s the most important issue you have to solve for your consumer web business”, the answer is “Customer Acquisition”. (Shout out to Shawn Broderick of TechStars and Allan Tear of Betaspring, for giving me the smackdown on this one.)

THE REAL QUESTION ISN’T “HOW?”…IT’S “HOW MUCH WILL IT COST?”

It turns out, the most important inequality in your life is:

LTV > CPA

LTV = Lifetime Value of the Customer
CPA = Cost Per Acquisition

You need to determine if, over time, your business model can support a LTV higher than your CPA. If this isn’t possible, your business won’t turn a profit. Maybe more importantly to the budding entrepreneur, if you don’t have a good argument why long term LTV > CPA, you’re not going to raise any money.

At the beginning of your startup, you won’t have much data here. If there are similar, established companies in your industry, you can try to determine their numbers.

Ways to do this include:

  • Google AdWords costs
  • Financial statements can sometimes be used, if available
  • Blog entries or other primary research on their business
  • Ask folks in the industry, or investors who may have a general feel for that industry

But realistically, you won’t have much data at the beginning, and this will be difficult. That’s part of the reason why you so often hear of investors asking to see “traction” before becoming seriously interested in a relatively new entrepreneur. Not only do they want to see proof that you can get users, but you will begin to build data on your LTV and CPA that can help them understand if your business can be profitable.

HOW YOU’RE REALLY GOING TO GET USERS

There are a number of strategies with which you’ll acquire users (though obviously no magic bullet exists to capture either businesses or consumers). Major examples include:

  • Helping users find you (Inbound Marketing)
    • Search Engine Optimization (SEO) – Making sure you appear high up in search engine results for relevant searches
    • Blogging – Helpful with SEO, building brand
    • Social Media Marketing – Using social media channels to spread marketing messages, blog posts
    • Viral Effects – Rare, but possible. E.g. viral hooks used by Zynga (“Help your friend by…”). Only launch will tell if this can be achieved
  • Going out and getting users (Outbound Marketing)
    • Search Engine Marketing (SEM) – Purchasing search engine advertising like Google AdWords
    • Display/Video Advertising – Finding where your users are and paying to put content there
    • Email Marketing – Creating useful content and educating users about your product, and making it simple for them to buy
    • Direct Sales – Having a live sales force who directly reaches out to individual consumers (in person, via phone or web)
  • Getting help from others
    • PR – Getting into blogs, newspapers, journals, TV
    • Strategic Partnerships – Partnering with other businesses to market your product or service
    • Widget – Low-touch version of partnering – create a value-adding widget to be easily added to other websites to extend reach

WHEN YOU’RE VERY EARLY STAGE – DON’T PAY FOR MARKETING

One of the most interesting pieces of advice we received was from two media executives – one was the head of a major TV network’s interactive division, and another was the former CEO of one of the web’s most popular news sites.

Their tip: Early stage, pre-Seed Round startups shouldn’t have to spend ANY money on marketing. There are just so many ways to reach audiences, via inbound marketing, smart PR, and partnering.

In addition, paid advertising is in many ways dominated by large companies. Another advisor from one of the world’s largest online travel companies advised us: Don’t even try to fight the big guns at SEM – they have full teams of people with huge budgets who spend all their time optimizing Google AdWords spend. There are certainly places where SEM makes sense for smaller companies, but these are generally companies who have raised money or have significant cash flow to plow in. Paid advertising can be very important, but gets very expensive very quickly.

YOUR CUSTOMER ACQUISITION STRATEGY WILL CHANGE – FIGURE OUT HOW AHEAD OF TIME

Eventually though, you will most likely have to pay for marketing.

At this point, even if you are able to find scalable ways to acquire users at a reasonable price, each incremental user will become more and more expensive. Given the size of your business and resources available, there will be shifts in the types of marketing you use, and which are most effective.

Keep this in mind as you plan your marketing strategy – it’s very unlikely that you will succeed with the same strategy in the long term, and you’ll want to understand how this strategy will shift to continue to accumulate users where LTV > CPA.

A few helpful resources: