The cost to acquire new customer/users will change over time, particularly if you are using the web to acquire users. Companies I meet with often have difficulties projecting what their cost to acquire customers will be as they first launch their product. It’s a lot like riding a roller coaster in the dark. This is completely understandable – if you are doing something truly new you’ve got to make a number of assumptions based on really loose information. Experienced executives operating in their native industries can make very good guesses at customer acquisition cost, especially if their companies have a sales force component. Younger internet CEOs are often playing in a completely new environment, so experimentation is usually required to develop better visibility.
(I’ve gotten some feedback that a few of my posts are a bit long, so I’m going to break this one up into two posts. This is part 1)
I am lucky enough to work with a number of startups over an extended period of time and I get to see some pretty similar patterns emerging around customer acquisition costs. These patterns tend to be accelerated for internet companies but also seem to hold for other technology startups. I’m sure there are plenty of examples that do not fit into the framework I’m proposing below, and welcome comments from readers! I could also be ripping off some theory I was taught in business school – if so, sorry for restating the obvious. Since this is a blog about events early in a startups life-cycle, I’m talking about the cost to acquire a new customer during the time frame of a company’s early launch.
Patterns in customer acquisition costs:
Launch phase– your startup is experimenting with marketing tactics. You’re trying to find out what will bring people to your business and what will result in sales/user registration/conversion. If you were a restaurant you’d put up a “Grand Opening” banner and try to get reviews in the local papers. This experimenting costs money, but hopefully the experimenting will hit upon tactics that work.
Where have you been all my life phase– you’ve started to figure it out. Your experimenting phase is bearing fruit and reaching converting customers. As you refine your strategy your acquisition costs decline. The question is 1) are you pulling from a finite pool of customers who are active seekers of your solution; or 2) is your solution somehow viral or self-reinforcing. If the answer is #1 and you are pulling from a finite pool, they you will eventually run out of the active seekers and begin to have to spend more to reach people who need your solution but who don’t realize that they should be searching for you. This causes your customer acquisition costs to rise. Sometimes, however, you’ve hit off a truly viral solution where you are able to grow quickly at lower customer acquisition costs. I wish I understood the how to easily distinguish between these two scenarios, but it is not easy. Venture investors spend a lot of time debating this question (here’s where good tracking of your leads and closed deals helps – “how did you find out about us?” surveys can be very helpful.) Venture investors try to find data driven answers to this question by talking to customers, and for internet businesses tracking converted user source data.
Expect a second posting on this topic later… and I welcome your comments!
May 3rd, 2010 at 9:17 pm
Thank you for sharing, Healy.
My 2 cents… Cost to acquire new customer depends on the media plan and overall marketing mix that the startup have selected.
If one decides to go with traditional TV ads or buying leads from 3rd party, the costs might skyrocket, while by utilizing an affiliate network with a new Pay Per Deal advertising model marketers can expect very high MROI.