Nivi · December 26th, 2009
David Skok, serial entrepreneur turned VC at Matrix Partners:
“In the many thousands of articles advising entrepreneurs on what they have to focus on to build successful startups, much has been written about three key factors: team, product and market, with particular focus on the importance of product/market fit. Failure to get product/market fit right is very likely the number 1 cause of startup failure. However in all these articles, I have not seen any discussion about what I believe is the second biggest cause of startup failure: the cost of acquiring customers turns out to be higher than expected, and exceeds the ability to monetize those customers… [emphasis added]
“A quick look around all the B2C startups shows that, although viral growth is often hoped for, in reality it is extremely rare. When it does happen, the associated businesses are usually extremely attractive, provided they have a way to monetize their customers. (For more on the topic of Viral Growth, refer to my blog post on that topic here.)
“Far more common is a need to acquire customers through a series of steps like SEO, SEM, PR, Social Marketing, direct sales, channel sales, etc. that will cost the company significant amounts of money. What shocks and surprises many first time entrepreneurs is just how high the numbers are for CAC [Cost to Acquire Customers] using these kinds of techniques.”
Read the rest of David’s excellent post: Startup Killer: the Cost of Customer Acquisition. But don’t worry about it too much until you’ve built a product people want. It’s hard to know what the CAC is before you know what the product is. And check out the rest of David’s new blog — his post on Viral Cycle Time is great.
Topics Customer Development
“the cost of acquiring customers turns out to be higher than expected, and exceeds the ability to monetize those customers…”
Too many companies get discouraged initially because of this. In so many cases, with expertise and at scale, companies can acquire consumers at 20% of their present cost… and monetize customers at 2x their current rate. So if you spend $1.00 to make $.10 right now, you might be at break-even with the right knowledge and aid of testing and expertise. Seek out marketing experts… and take their pulse. And if they pitch their consulting services before giving an opinion (or along with their opinion… and obviously relatedly so) find another unbiased expert who comes more highly recommended. And understand what your business is truly capable of from a DR perspective.
It’s not in so many cases can a company bring down Cost of Acquiring customers to 20% and/or increase 2x their current rate.
The only way costs come down is if you reduce all costs. Scale doesn’t make a difference unless their is major decreases in the variable costs and fixed costs are very low initially.
I totally agree. That’s why I think Sean Ellis’s startup pyramid needs adjusting to include Customer Acquisition in the “foundation”.
I’ve updated the Startup pyramid to include it- http://bit.ly/88D5fa
Hi Justin, the Promise, Economics, and Optimize layers of Sean’s pyramid are about creating positive ROI customer acquisition channels. I don’t think it makes sense to focus on customer acquisition until you know what the product is.
Well, that’s why one of the vital success projection criteria for any startup is the level of utilization of performance marketing models – tradition, such as CPA / CPL / CPS as well as new models such as PPD (Pay Per Deal that we have pioneered).
How to acquire customers with the highest MROI is the key strategic and tactical question to be asked.