Photo: ronnieliew via Flickr
The other day, Josh and I met with a very cool company that has some serious traction. They’re more than doubling revenue every quarter and will soon be on track for a million dollar run rate.The only concern was that they didn’t know what their cost of customer acquisition was, nor did they which channels would be most effective, or how much they could acquire out of each channel. That makes it pretty tough to know how scalable the business is.
The good thing is that customer acquisition is a pretty easily testable thing. You can spend the next six weeks trying out a bunch of different channels and seeing what works, which is what we recommended. It’s not about the traction—it’s about the information that de-risks your business and increases it’s enterprise value. It’s a very different animal than an enterprise sales strategy.
The difficulty is that you don’t start out day one being an expert in any particular channel—and it’s a little bit tougher to pick up than learning how to sell. We experience good and bad sales tactics as customers, and that might make us better or worse salespeople. However, experiencing good customer acquisition strategies, like a well placed AdSense ad, doesn’t make us better at buying them. There might be a great long tail Google keywords strategy in there somewhere, but if you’ve never been a marketer for an online business, you’re going to start out buying the obvious words, testing the few combinations you can think of. That’s quite a stretch from what a skilled SEM expert would do—one who starts tinkering around with time of day, geolocation specific terms, buying hundreds of keywords at a time, etc.
Same thing with direct mail. How good are you going to be on your first direct mail campaign compared to an agency who specialises in it? Of course, it’s tough to get an agency with a small batch or on a small budget.
In thinking about helping startups build the skills necessary for building great customer acquisition strategies, I started thinking about the idea of a Customer Acquisition Meetup. I told Dave McClure about it today at lunch, to which he replied, “Isn’t that kind of like having a Meetup about Oxygen?”
It’s true. If you’re not focused on how you’re going to acquire your customers—and more importantly at what cost—then it’s going to be very hard to build a business, and even harder for us to access whether or not you even have a business.
How important is it to an investor? It should be critical. Although, a number of investors were so enamoured with the revenue growth that they weren’t as interested in the cost of continuing up the hockey stick. Josh commented that it was so important that he’d rather the company stay flat or grow just a little bit for a quarter and answer these questions than double revenues again.
These are critical questions that any startup should know:
- What do you think an average customer is worth to you?
- Which channels will be most effective in acquiring customers?
- How much will each of those channels cost and at what volume? (Because you can’t do more than two Groupons a year, for example.)
I think I’m definitely going to start that Meetup, but I’d love to anchor it with some folks who really know what they’re doing. I’d love to figure out who the top 10-20 folks are in the customer acquisition world in NYC. Companies that come to mind are Knewton, TheLadders, Gilt, and Thumbplay…perhaps I’ll start looking there.
Also interesting to know is why, speaking of Oxygen, the little bag doesn’t inflate on the mask in an aeroplane. I looked it up. Turns out that it does inflate—just when you exhale. It’s a holding chamber for the continuous flow of oxygen that obviously has nowhere to go when you’re exhaling. It releases the air after it gets to a certain point. It doesn’t, however, help you acquire customers in a scalable way.
Charlie O’Donnell is entrepreneur in residence at First Round Capital. He is also co-founder of Path 101, a NYC-based startup, and founder of NextNY, a tech community group. He blogs at This Is Going To Be Big, where this post was originally published.
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