Growth is everything
Startups are defined by growth. Many entrepreneurs have fever dreams about creating a product that takes the world by storm—the next Google, Facebook or WhatsApp—and investors have similar visions of funding them. Behind product, growth is the single most important thing on which startups should focus: without a product, there is nothing to grow but after that everything has the direct or indirect goal of growing your business.
For most young companies, however, the ideal of runaway organic growth is not a reality. They have to figure out—and investors want to see—how they can grow their business in a cost-effective manner. This can be broken down into two components. First, how can you acquire customers profitably? Second, can you scale your customer acquisition and maintain this profitability?
Choosing channels
Unless your product is an organic growth machine, you should strategically test and measure the performance of paid growth channels to find ways to grow your customer base profitably. You should know, for each channel, how much it costs to acquire a customer and how those customers behave. But how do you decide which channels to test?
Paid growth takes many forms: Google Adwords, Facebook ads, paid referrals, business development, billboards, print ads, etc. You should select channels that have a high probability of reaching your target customer, leverage the unique strengths of your product and are quick and cheap to experiment and iterate.
Marketing is only effective to the extent you can find the people whose problem you are solving. There are many ways to market your product (e.g. billboards) that access a very broad group of people. Unfortunately, this means a lot of the money you spend on these channels will be wasted. Unless your product has a very large market (e.g. Coca Cola), billboards or similarly unfocused channels are unlikely to get good results. Choosing a channel that lets you narrowly target the people whose problem you are solving will give you the best possible chance of succeeding.
The channels you choose should also emphasize the unique strengths of your product. Dropbox famously used this to great effect by giving free space to users who invited their friends. This accomplished two things: it grew Dropbox’s user base at near-zero cost and encouraged existing customers to use the product more. Be creative about customer acquisition and keep your product’s idiosyncratic advantages in mind when evaluating your growth strategy.
Finally, as a young business, you should choose channels that allow you to iterate quickly. When you make inefficient choices about ad spending, it’s easier to take a loss of $100-1,000 than $25,000-100,000 and change strategy without weeks of delay. It’s entirely possible to have a very low ad spend on Adwords, Facebook ads or even Craigslist, just to see what happens, but television advertising does not afford this flexibility. Pick the channels that keep you most agile, and be prepared to adjust quickly.
Will it scale?
Once you know which channels you can use to acquire customers profitably, it’s time to turn your attention to scalability.
A marketing channel is a limited resource. At some point, your demand for new customers in a channel will outstrip supply, which will make acquiring incremental customers increasingly expensive. Potential customers are finite, and the dynamics of supply and demand come into play. It’s easy enough to test customer acquisition with a minimal weekly budget, but how do you know if you can profitably ramp a channel to significant spending levels?
To understand how quickly a channel saturates, try a burst test. Pick a profitable channel and increase its spend by an order of magnitude. For example, if you spent $10,000 on Google Adwords last month, see what happens if you spend that much in a week or a single day. Measure the results and compare them to what you saw at lower spend levels. How do customer acquisition cost, payback period and customer lifetime value vary under burst conditions compared to lower spend levels? The results may surprise you.
You may find that while you were previously very efficient in acquiring customers, under burst conditions, you’re now paying more per customer and their LTV has gone down. An ideal outcome for your company’s growth would be that nothing changes and that even with 10x spend, you can acquire customers just as profitably.
Most channels will saturate eventually: it’s just a question of the point at which it happens. The volume at which you reach saturation directly affects your ability to scale. If your cost to acquire a customer doesn’t materially increase as you spend an order of magnitude more in a channel and the customers are just as valuable as they were before, it’s time to start pouring money into that channel.
Why it matters
If you’re thinking about raising venture capital, you will want to show that you can deploy that money in ways that it will generate the best returns. For many startups, part of this answer will be demonstrating that you know which channels you can use to grow quickly and cost-effectively. Burst tests are critical to understanding how to grow and what the limits are. Knowing you can spend 10x your current budget in a channel while maintaining positive economics inspires confidence: it makes it easier for investors to underwrite your ability to turn advertising dollars into new customers and revenue at a constant margin.
As much as startups are about growth, they’re also about highly efficient allocation of scarce resources, and investors want to know you will deploy their capital in a manner that creates the greatest leverage. If you’ve achieved product-market fit and the metrics align, it’s time to pour gasoline on the customer acquisition fire.