Scalable customer acquisition channels are crowded. Competing for the mindshare of consumers and businesses is tough and not getting any easier. No matter what growth channel or tactic you are using, you will always be surrounded by others competing for that same attention. A large part of the growth process is figuring out how to gain a customer acquisition advantage. What I hope you will learn in this post:
- Growing faster is much more than what you do at the acquisition layer of the marketing funnel
- The three ways to gain a customer acquisition advantage (plus a bonus fourth)
- The common pattern successful startups follow in seeking faster growth
- Establishing defensibility
More Than One Way To Gain An Advantage
When I advise companies on growth I have often found a lot of time has been spent thinking about the acquisition layer of the marketing funnel. But, what you are able to do at the acquisition layer is often dependent on how your metrics compare to competition at other layers of the funnel (Activation, Retention, Revenue, Referral). As a result, there are multiple ways gain an acquisition advantage.
A Hypothetical Example
Let me walk through a very simplified example. First some assumptions:
1. There are two CRM SaaS companies that compete with each other. Company A and Company B
2. These two CRM companies comprise the entire CRM competitive space.
3. They both have equal LTV’s of $1200 ($100/month, 12 Month Avg Lifetime)
4. They both are willing to spend 100% of LTV on CAC, therefore they have equal CAC’s of $1200
(I realize these assumptions are not representative of the real world, but hang with me as I illustrate my point)
Example #1 - Company “A” Retains Better
Lets say that company A improves their retention 2X (24 month average lifetime) while company B remains the same. By retaining their customers 2X, company A’s LTV is $2,400 compared to company B at $1,200. Holding everything else equal, the change in retention will give Company A an acquisition advantage. Company A could:
1. Out bid Company B in all paid acquisition channels
2. Devote more resources to non-paid channels (i.e. Content Marketing)
3. Potentially afford new acquisition channels that were too expensive before (and are still too expensive for Company B)
Example #2 - Company “A” Activates Better
In a different example, company A figures out a much better on-boarding method that activates customers 2X better than Company B. Holding everything else equal, their CAC drops from $1200 to $600 while Company B is still at $1200. Once again, because Company A is willing to spend 100% of their LTV in acquisition costs Company A could:
1. Bid more than Company B in all paid acquisition channels
2. Devote more resources to non-paid channels (i.e. Content Marketing)
3. Potentially afford new acquisition channels that were too expensive before (and are still too expensive for Company B)
Three Ways To Gain An Advantage
Again, my point on the examples above is that what you are able to do at the Acquisition layer of the marketing funnel depend on how your metrics compare to competition at the other pieces of the funnel. So what are the different ways you can find an advantage at each layer of the funnel?
1. Explore Brand New Strategies
The first way to gain an advantage is to explore the unexplored. For acquisition, that might mean being early to a completely new channel For revenue, that might mean trying a freemium model while all your competitors charge directly up front. Exploring new land is definitely the riskiest method to gain an advantage, but nailing it can create exponential growth.
2. Explore New Tactics Within A Similar Strategy
Competing companies may have similar core strategies at each layer of the funnel (i.e. They use the same marketing channels for acquisition). They tend to cluster around the same tactics within that strategy because they are constantly watching each other and replicating each others tactics. The second way to gain an advantage is to explore new tactics within that core strategy. For example, if two competing companies are using search as a marketing channel, one company could decide to explore new tactics (long tail keywords, single keyword ad groups, extended ad formats, etc).
3. Do It Faster and/or Better
The third way to gain an advantage, is to just execute the same strategy better and/or faster. Maybe your landing pages have better copy so they convert higher, your on boarding is more effective so you activate a greater percentage of users,or your retention campaigns are more effective increasing your LTV.
Bonus #4 Way To Gain An Advantage
There is one more way to gain an advantage. My friend, Rob Go originally mentioned it in his post about Distribution Advantages. I hesitate to write about it because I think it can cause sloppiness within organizations. But here it is…
4. Access To Capital
Lets go back to original example. Instead of each company willing to pay $1,200 up front for CAC, they each are only willing and able to spend $300 because they have limited cash and budget for marketing (this is more representative of the real world).
Company A decides they want to be aggressive and gain market share quicker. They convince a VC (probably A16Z) to give them a boatload of cash…$100M sounds right. With this new amount of cash, Company A’s CAC tolerance increases from $300 to $600 while Company B stays at $300. Company A will once again be able to:
1. Out bid Company B in all paid acquisition channels
2. Devote more resources to non-paid channels (i.e. Content Marketing)
3. Potentially afford new acquisition channels that were too expensive before (and are still too expensive for Company B)
How This Typically Plays Out In Startups
Startups tend to follow a similar pattern:
Explore New Strategies -> Explore New Tactics Within Similar Strategy -> Do It Faster/Better -> Access To Capital
Most startups start by exploring new land by necessity. They don’t have the knowledge or resources to compete head to head by doing existing things better. A startup might try a new emerging acquisition channel, business model, or audience segment.
Over time though competition always enters. To stay ahead, a successful startup has to start swimming where others aren’t swimming and/or sharpening their blade. The transition from exploring new land to the next part of the cycle, is the most fragile time of a startup. This is the place where they can be most easily leap frogged by a fast follower.
Eventually startups get to the last stage and access to capital becomes the advantage. At the moment, we are seeing this play out in on-demand ride space (Uber and Lyft’s massive rounds of financing). In some cases, access to capital is moved up in the cycle by investors wanting to take a bet on spaces that typically only have one winner (marketplaces, networks, and platforms).
Defensibility
Some advantages last longer than others. As a general rule of thumb the farther you move down the funnel, the longer the advantage will last because the harder it is to copy. In other words, advantages at the retention layer tend to last longer than advantages at the acquisition layer.
Certain business models (networks, platforms, and marketplaces) gain advantages across the entire funnel from critical mass. As an example, when marketplaces reach critical mass they gain greater liquidity. With greater liquidity they are able to activate, retain, and monetize users better. This is why a company like eBay is so hard to unseat even though everyone complains how crappy their product is.
But no advantage lasts forever. You always have to be driving forward. The best growth strategies have internal processes that drive never ending improvement on proven tactics (sharpening your blade) but leave room for creative risk taking (exploring new land).
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