What follows next is one of the biggest misconceptions of our times. Ask any average executive on what can be done to grow his/her business or startup and most likely, you will hear a version of the following:

• We need to do an aggressive marketing campaign
• We are not creating enough noise, I met so and so in my family or community, and they don’t even know that our company even exists.
• I spend my time on this or that channel but I don’t see any of our ads out there, If only we could do it like Brand ABC on the same channel.

All of them are nothing but saying simply

• More Reach
• More Reach
• More Reach

However getting the reach comes at a cost, and reach is not always proportional to growth in Business.

One of the fundamental assumptions which creep in when we see an Ad Campaign out there is that “it is working”

When we see Billboards and TV Commercials of large Corporations there are only two ways of analyzing them given that you don’t have any insider information on these firms.

• These guys have got, how to leverage these Ads and as if they are working great for them. In fact, everyone I know has seen that Ad, and therefore this makes a lot of sense.
• Maybe these Ads are not doing well and are just a desperate attempt to get the market share, growth, etc. But how can this be, since that company has so many smart people and they are around for a really long time?

We mistakenly correlate the success of a company entirely with their Ad Campaign and thereby derive the reverse corollary that if the successful company does Ads and Marketing in a certain way, then we should go ahead and copy that. What we fail to understand is that it will most likely not work in our scenario.

Every Startup whose GO BIG plan is to buy that Billboard on the main junction, without thinking hard, is not going to work, and the cost of failure is going to burn a hole in their pocket and time.

Here is a framework we can use for reminding ourselves on what we should be doing vs not.

While most of the ideas we discussed, in the beginning, lie in the blue circle above, the key to scale is to make sure how much of it we can actually test and if we can do it fast and cheap.

Where should you then focus if you were to acquire customers in large and large numbers?

While we all have been brought up (read trained) to think of growth in terms of the funnel on left. But it makes absolute sense to also traverse the path reverse for your power users, especially if you are a small company. The same has been deployed by most successful companies when they were small, and before they had Big money to spend on Marketing. The same concept is explained beautifully in this article by 

Brian Balfour— Growth Loops are the New Funnels

Invest in things that will give you definite returns over things that you just think will work.

1. Cost structures of your growth marketing spends:

Broadly there are only two ways to generate more business.

• Business from new user acquisition
• Repeat business from existing customers

Therefore the cost is also spread within these 2 buckets itself.

• New user cost, Ex: Cost of acquisition (CAC), Net revenue from new users, percent revenue from new user acquired from paid etc.
• Repeat user cost, Ex: Incentive structures (How much you are willing to incentivize the repeat purchase), Transaction costs (fixed cost of transaction) etc.

One key thing to remember would be to identify the performance of the New user cost vs Repeat user cost separately. They are very different when it comes to a Measure of Success.

While in layman terms CAC could be as simple as total cost of acquisition / total paying users acquired. Its always better to keep the final paying customer under CAC, anything short will lead to optimizing for a vanity metric, which will eventually give away.

ROI = Total business from new users / Total cost of acquisition

CAC = Total cost of acquisition / Total paying users acquired.

How to calculate the ROI ?

It makes a lot of financial sense for the company to understand what are the avenues to spend the money and get a return on investment. There are basically new user costs and transaction costs. In the two scenarios as shown in cost structure, the ROIs are very differently evaluated. (definition: Return on Investment = What you get back per dollar invested)

ROI for new customers = Total business generated from the customer over their lifetime organically

ROI for repeat customers = Total incremental business generated from the existing customer by giving transaction incentive A vs No incentive.

Please note the words in the definitions Lifetime and Incremental

Lifetime = Depends on the company and the use case. Typically should be kept reasonable such that the sensitivity of this number should not be affected too much by the overall change in the environment.

For ex: If you are a CRM Software company then the lifetime of 5 years does not make too much sense, a more realistic window would be like 2 years. In which case, the horizon is still clear and chances of an inflection point or technology disruption are relatively small. If you have to choose between a long and a smaller one, go with the smaller.

Incremental = Here we try to assess the opportunity cost of taking an action versus not taking that action. This would call for test versus control in a strict statistical sense. But even practical approximations like doing Action A in say state of California, vs not doing it in State of Texas, can give a good sense, provided all other factors stay the same.

Conclusion:

1. Think hard in terms of which Growth lever works for your company vs which doesn’t. Don’t do something for growth just because everyone else does it. Every company has something unique working for them, Find yours.
2. Choose between funnel and growth loop s effectively— 100 repeat users who are wildly positive about the product are better than 10000 who barely remember it in the name of awareness.
3. If you are going to spend a dime or a fortune on Ads, better measure the outcomes objectively. Everyone makes mistakes, but the key is to learn continuously and evolve fast.

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