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The Launch Path: Step 7

Frame a funnel.

Sales and marketing (aka customer acquisition) is the most important function of at any company — if you don’t get customers, nothing else matters.

Sidebars:
CAC < LTV
The name and logo dilemma.

Most startups die from a lack of customers. Period. Others die because they realize too late that the economics of their customer acquisition process don’t work.

And so one of the key goals for any early-stage startup is to begin early with the process of designing, testing, refining, and improving the process by which we acquire customers.

One equation to rule them all.
As we’ve discussed previously, every venture of every kind distills down to one simple equation: CAC < LTV. Customer acquisition cost (CAC) has to be less than the lifetime value of a customer (LTV). In other words, we have to have a scalable and replicable process by which we get new customers at a cost less than what we make from them. Every venture starts off with a high CAC that hopefully comes down, and a low LTV that hopefully goes up, and the point at which those two lines cross is the point at which the venture is an engine which generates economic profit. Simple.

Every venture is different in terms of the marketing mix that works, but here are some general principles to think about as you create a customer acquisition plan for your startup.

It’s always a funnel.
For pretty much every business, customer acquisition can be visualized as a funnel. You need a whole bunch of leads coming in the top of the funnel and then you slowly work those leads, and a certain percentage of them end up coming out of the bottom of the funnel as paying customers.

Each of the stages in the funnel represent a conversion point. So, in the example above, once we get them in the funnel we need to convert them from “aware” to “interested”, and then we need to convert them from “interested” to actually “considering” our product, and then convert them from “consideration” to “purchase”. You want to have ways of measuring your conversation rate at each point so that you can optimize.

Let’s look at how the math works: If 100,000 leads come in the top of the funnel and 20% of those convert to “interested” and then 10% of those convert to “consideration” and then 5% of those convert to “purchase” then our campaign yielded 100 new customers. But what if we worked to optimize each conversion by just two percentage points (to 22%, 12% and 7%)? Now our yield is 185 new customers — an 85% increase in new customers!

If we spent $1,000 on this campaign, then our customer acquisition cost (CAC) for 100 customers is $10.00 each, but with the optimized funnel our CAC is $5.41 — that’s a huge difference!

So setting up your funnel, having ways to measure each conversation point, turns out to be a key factor in the success or failure of any venture.

Not all customers are equal.
In Malcom Gladwell’s excellent book, The Tipping Point, he talks about how some members of any social structure are more influential than others. And so it is with the universe of potential customers for your startup. Some are more influential because they are respected by the community or because they are well-connected or because they are considered thought leaders that everyone looks to. So think about who the most influential people are for your product or service and target them. Targeting the right people can dramatically improve the efficiency of your customers acquisition efforts.

Write personas.
When you prepared your Business Model Canvas, in the far right column you listed your customer segments. Now sit down and write a description of a fictional character that is representative of that customer segment. Here’s an example:

Mary the Mommy: Mary is a 38-year old working mom. She’s passionate about providing her kids with a healthy lifestyle — no sugary snacks! She’s also dedicated to her career, and balancing being a great mom with having a career is not an easy thing. She and her husband make a good living, so she’s less constrained by budget and more constrained by time.

Write one of these for each of the market segments you think your startup will be targeting. This will help you tremendously as you plan how you will reach and message segments differently. The persona above suggests that people like Mary care more about healthy than they do about price — that’s a key insight. It may be that the messaging for “Daniel the Dad” may need to be slightly different.

With many business-to-business ventures, they are multiple personas who will be involved with a purchase decision. Maybe we’re selling our SaaS solution to the Sales Manager, who just cares about getting more sales, but it needs to be approved by the CTO, who cares about software security. Writing a persona for each of them will help you to develop benefits messaging targeted for each.

Owned Media, Earned Media, Paid Media
With many kinds of ventures today, the customer acquisition process is all about online content. People read about your product in an online article, they see others sharing it on social media, they end up on your Facebook page, and eventually they end up on your website and (hopefully) make a purchase. The media that is involved in this journey can be broken down into three large buckets:

  1. Owned Media is the stuff you own and have complete control over: your website, your landing pages, your Medium posts, your social media pages.
  2. Earned Media is the added exposure you get because you’ve “earned” it. Social media likes, shares, and retweets of your owned media. Newspapers, magazines, and blogs who write about you because you’re so awesome. Mentions on LinkedIn. Speaking slots you’re offered at conferences because you are considered a thought leader.
  3. Paid Media is all of your paid advertising. Your paid search campaign on Google, your display ads on social media, your magazine ads, sponsored content, and the “influencers” you’ve paid to post about your product on Instagram.

You will need all three of those media types going on, and it you do it will they will all help to drive each other. Remember, metrics matter, so you’ll want to have a way of measuring where the leads into the top of the funnel are coming from, so that you can optimize, optimize, optimize.

Summary
Every venture will require a slightly different process for acquiring and keeping customers. For some it will be more about a direct sales team out making sales calls, for some it’s more about Instagram influencers, for others it’s more about Google search ads. But the funnel metaphor always applies, so think about how you will bring leads into the top of the funnel, and how you will move those leads down through the funnel and turn them into paying customers. Most importantly, have processes in place by which you can measure and optimize the process. In the end, your venture comes down to one simple equation: CAC < LTV. Focussing on the continuous improvement of your CAC is likely the single most important factor in making your startup a success.

Silicon Valley guy. I teach entrepreneurship at Stanford, run the 4thly Startup Accelerator, and coach startup CEO’s at Miller Center.