Last week, a friend from college emailed me asking advice for her new startup. I was able to offer some user experience advice for user retention, which I’m excited to see once they have implemented it. I also passed along a high level overview of how to get started with user acquisition. The rest of this post is a slightly modified version of that email.
Broadly, user acquisition fits into a couple of different categories (acquisition, activation, retention, referral). Different startups use different techniques, it’s very dependent on the company / product. What follows are some of the most common examples from each category.
SEM (search engine marketing)
SEO (search engine optimization)
Apps & Widgets
PR (public relations)
CPM ad campaigns (cost per impression)
CTR ad campaigns (cost per click)
Biz Dev relationships
Direct Mail, Telephone, TV
Homepage / landing pages
Email & Alerts
System Events & Time-based Events
Emails & Widgets
The general idea is that there are all these different sources (funnels or levers) of traffic; each source has a different cost and a different conversion rate. The exact cost to acquire a user through each of these different funnels is measurable.
Let’s use email as an example with some very round numbers to keep the math easy. Assume you’re operating a web site, which sells coffee cups and you want to market via email.
Let’s say you buy an email list for $1000 and it has 10,000 people on it. You’re trying to sell coffee cups, which cost $10 ($5 margin after shipping and manufacturing costs). You really think that the people on this list would be interested in your coffee cups (good user intent). You send out an email to this list. 5,000 (50%) of the people open the email. Of those that opened the email, 2,000 (20%) clicked on a link. Of those, 1,000 (10%) browsed coffee cups for a while. Of those 250 (2.5%) added a coffee cup to the shopping cart and of those, 100 (1%) completed the purchase.
In this model the cost to acquire a user from this particular funnel is $10. With a product cost of $10 and only a $5 margin, you would think you are losing money, but that might not be necessarily true (although it probably is true). There are other factors here like CLV (customer lifetime value). For instance, what if I know 50 (50%) of these users will eventually come back and purchase another coffee cup at $10? Is this funnel now worth investing in?
It’s probably not worth investing in this funnel further because we spent $1000 and made $1000, but of that $1000 in revenue, only $500 is profit (before calculating CLV). However, you should track everything in spreadsheets because in the coffee cup scenario we ran a campaign and almost broke even (or maybe made money if we know CLV). But, I can now look back at the numbers and figure out if by adjusting some numbers (the price of the coffee cup, cost of shipping, etc.) I might be able to make this particular funnel worth continuing to invest in.
You basically have to run this exercise for every single funnel and figure out which ones work and which ones don’t. Sometimes startups spend tons of money on funnels that aren’t the best, knowing that if they literally spend millions to make the funnel really big, they can then cut costs (or costs will reduce at scale) and make it really profitable. This is the mindset behind raising and spending tons of VC money to get really big (we aren’t profitable today, but at scale we will be).
The most important takeaways are:
1. Absolutely try, track and measure everything
2. Many of these methods should be built into your product
3. This is hard and takes a ton of work, especially at the beginning
Hope this was helpful, if have any questions or are a startup in this same position looking for more specific advice (especially about how to incorporate these things into your product), don’t hesitate to reach out.