CMO toolkit

The customer acquisition journey – 5 common mistakes

So you started a business that your family and friends (friends include free beta testers) love. You’ve been smart and easily acquired your first paying customers; in fact, it was as if they had always waited for your product to be on the market.

You believe this will be a big hit, but you also know you need to scale, and that each new customer you’ll have to convince, as more remote from your target market, will cost you more than the previous one.

In order to adjust your marketing spending, you have read about customer lifetime value (CLTV) versus customer acquisition cost (CAC); in other words, how much can you get from a client versus how much you’ve paid for him to get to know you and actually buy something from you.

This post is not a lecture you about CLTV and CAC, topics already well documented.

Reminder: both are subtle notions and should not be calculated before being understood – having said that, CLTV looks like: average basket x buying frequency x lifespan, whereas you’ll get an idea of your CAC with: direct marketing costs/ number of new customers.

Rather I’d like to point 5 mistakes related to this topic.

1/ The lower the CAC the better.

This reasoning will most likely be counterproductive: with this in mind you will slow and limit your acquisition. If you are in a market with strong emerging competitors your priority might be to aggressively preempt the market, which has a cost. If you are in a market where the winner takes all and switching costs for customers are high (yearly subscription model, solution with hardware installed, data related business…) you might not want to put yourself in a position where you will have no choice but  to buy customers from your competitors. So define your target audience first, be ready to pay the price to address this segment, then and only then, try to reduce your CAC on this segment with a few tricks (find the best channels to focus on, improve conversion rates,…).

2/ Ok, let’s not be skinfit with the CAC, but let’s keep it below the average basket of my customers, otherwise I’m doomed.

This seems rather common sense; one will never generate profit if the cost for having a client buy something is actually higher than the price the client pays. That is only partially true. The best evidence of this is that this rule is not observed by successful companies, some of which I funded. The reason is they have a high level of repeat. In fact a very few models are designed for one-shot selling. For many businesses, the average basket size is not the customer lifetime value, therefore you have to consider that your customer acquisition cost covers the numerous sales your customers will bring. Always figure out a reasonable payback of your CAC (12 month is usually a maximum) and deduct your CAC from this payback, your repeat and average basket size.

3/ One euro is one euro.

This one is tough, but I’ll demonstrate this actually is a mistake when talking about CAC. Not all acquisition channels where created equal. Retargeting, TV, coupons, friend sponsoring, do not leverage the same instincts, do not reflect the same image of your brand. While one euro in customer acquisition can be used to reinforce your brand awareness, reinsure your reticent customers, reward your ambassadors with friend sponsoring or sponsor an event, it can also be used to aggressively retarget a timid customer or promote giveaway prices. Do not forget that acquisition is part of the selling process and influences your customer satisfaction! That is my first point: your marketing spending should be spent to please your customers, not force them into buying. The second one is that the different acquisition channels do not attract the same clientele. Depending on which channel the customers are coming from, as they came with different dynamics and motives, they might not have the same behavior in the future: basket size, loyalty, virality… My second advice would be; if you are to spend one euro, spend it to buy a customer, not a one-shot sale.

4/ Optimizing my CAC is finding the best performing customer acquisition channel.

It is always a bad idea to focus your marketing investment on one single acquisition channel. First, because a lot of them are not scalable: you can have a hard time trying to scale with content marketing, sales, or…”virality”. Also because as your business is becoming more mature, other acquisition channels can be better adapted (retargeting for instance) and the best channel might have changed. This you will know only if you keep continuously testing a few acquisition channels in parallel. And always keep in mind the exogeneous factors such as competition (what are they doing in marketing?) or the evolution of the advertising industry (print media advertising really? adblock? any google update?). Having said that, do not oversplit your spendings as there are threshold effects to consider (critical mass).

5/ Double counting

Your adds will be seen by future and existing customers.Two different devices can belong to the same customer. People buy for themselves…and for others (children, gifts). Some of your budget will be used for retargeting, directly or indirectly. Take this into account when calculating your CAC.

I hope this will enlighten some of the subtleties related to the use of CLTV and CAC ratios. I’d like to conclude with a word from Kevin Hale, founder of Wufoo, speaking at YC : “My feeling is marketing and sales is a tax you pay because you haven’t made your product remarkable”. Here is the lesson; customer acquisition is not only about marketing spending; it starts with your product. A little spending on product can save you bigger investments in marketing. And I believe it continues with the quality of the buying experience you offer (delivery, mailing,…), and that of your customer support. Every interaction with your customer is an opportunity to tell him a story he will like. Kevin Hale again :”Word-of-mouth is the easiest kind of growth, and it’s how a lot of the great companies grow. Figure out how to have a story that people want to tell about your product where they are the most interesting one at the dinner table. And then that person is your sales person. That person is your sales force for you.”

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Congrats, the money is in the bank now! Focus on key hirings if you want to meet your next milestones!

Here we are, the money is in the bank now and you need to execute your plan and start working on your next objectives (validate your model, secure the first key customers, scale your KPIs or just meet any operational milestones).

To do so, the first key hirings in your company are likely to be the most important ones or to put it differently, a bad hire could make you miss your next important objective.

First of all, you have to define the exact profile you are looking for – you can use Linkedin and other more recent platforms (eg Qapa, Breaz.io, Kudoz, etc)  in order to fine-tune your candidate profile. For tech profiles, external online and offline search firms (eg Stackoverflow, Urbanlinkers, etc)  as well as CTO meetups can be an effective tool and, if you do not have a tech background, get some extra help at least in this phase.

Let’s try to transform the famous ‘hire slow fire fast’ mantra into 5 good tips to keep in mind when you are hiring:

  1. Right fit: your company is like a human body and any key hiring must fit with your existing team and share your company culture (there is always one!); take the time of letting your candidate meet with your team and of collecting a complete feedback
  2. Best salary in the company: key hirings might get better salaries than founders: do not be afraid of paying a higher salary and pushing CEO and co-founders out of the top 3 ranking of best salaries in your company
  3. Pitch your stock: any key hiring will probably join your company because of the stock option upside rather than base salary. You must explain the potential value of the stock option package by providing the company potential equity value over a given time horizon, and how you get to such value (M&A multiples for example) from the numbers of your business plan
  4. Independent reference checks: it is of paramount importance of getting an independent cross-reference on your key hiring. There must be in your networks (social, business, education) somebody that can provide you with a complete unbiased feedback on the person you are going to hire
  5. Official reference checks: try always to talk to all the people in the reference list provided by your candidate and listen to the various feedbacks in detail; focus on weaknesses rather than strengths as we all tend to overlook weaknesses in favor of qualities when judging other people

Congratulations! You should have by now your new hires ready to join. Even if you are a startup, there is no reason not to make the onboarding professional and smooth. Everything has to be ready (desk, PC, business cards) from day one to put him/her into the action. Remember that you will probably benefit from a 1-2-month honeymoon, that you have to exploit the best you can.

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First fundraising… When? and How much?

If you decide to build your own company, one of the first decisions you are going to face is the right timing to raise your first round. The sooner you raise the fastest you’ll be able to go to the next phase but the more you’ll get diluted.

The right balance between what you can show about your business and the price (dilution) you’ll pay to finance the next stage is at stake.

When you have to decide on timing, first have a look at:

1/ What can you show today

Alpha product, early validation, KPI,…

2/ The macro trends that will impact your business environment

(e.g. for a gaming company in the early 2000, the arrival of the Facebook ‘ecosystem’ was this kind of macro trend you would have considered)

Are there any macro trend that must be taken into consideration? Any market timing fit?

3/ The competition

Does competition exist? Which can be either a threat, or an opportunity to open the market for you…

If you have a good answer on the three items above and feel that the impact in one year is positive, you’re likely to be at the right place at the right time with the right product.

Once you have decided to raise –thus open your captable (please refer to my other post http://www.emanuelelevi.com/?cat=6), you’ll have to identify the right amount you need. Because raising money has an opportunity cost. It will take you time and energy, and mobilize key people in your company; generally speaking, the whole fund raising process (from deck preparation to money wired to the company bank account) can last between 10 and 18 weeks.

On the question “how much?”, always start thinking from the end: What does my company’s next stage looks like? Where do I want to get?

A 12-month horizon is a reasonable projection for a seed round. Why 12 and not 24? Well one year is probably the best bet 1/because you can do much within one year at that stage and 2/it is a good time horizon for investors; plus 3/if you haven’t proven anything in 12 months you might be better off not wasting your time for one additional year.

Once you have a clear idea of what your best-case 12-month forecast looks like, ask yourself what will be by that time the indicators of success. It will be a combination of KPIs and monetization.

Don’t go like “I’ll use the money to break-even this year, for growth let’s wait for the next round”.

Instead, focus on traction, and on the great KPI you want to reach. Can be either a x% paying users (freemium model), a y% churn, or a z% repeat customers. In the meantime, it’s ok to only be breakeven on a small segment of your market (geographical area, specific community, etc), knowing that you can replicate it on a larger segment later.

Then do the maths: money raised should be providing the means to match up to the goals.

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Founders, co-founders – The right way to build you initial captable

I have met a lot of founding teams in the last 10 years that seemed to have set the initial captable without really thinking about it. Indeed the topic can be taboo or to say the least a very sensitive discussion to have. That’s how the typical ‘soviet way pitfall’ is often adopted: let’s all put the same amount of money in the company, share the capital equally no matter what our specific roles and leadership positions are, no vesting rule/bad leaver provision (!), and let’s rock, we’ll fine tune later.

We have several examples of successful companies co-founded (2 or 3 equal co-founders) such as Google, Youtube in the US and Criteo, Jamba and Alando in Europe but it does not mean that because this model has worked in the past (we forget all the cases that turned sour) it always does work. Co-founding helps you in getting the right mix of business and technical know-how for example, but things can become very complicated as people change overtime and change their priorities. And the later you tackle this issue, the more it will cost, as the price per share is lower at the beginning than in seed round, A, B rounds.

So everybody’s role should be reflected in the cap table since day one. It makes sense to see a CEO having 2x the stake of the largest co-founder. Something like 40% and 3×20% for a 4 people team of co-founders (you can recruit the best talents with much less than 20% share of the company). By the way, I have discouraged people to have more than 4 or 5 co-founders at the beginning. Neither is it wise to have a part-time cofounder that might be operationally passive in a few months with a large piece of equity -why not a BA or someone at advisory board instead?

So back to the very first discussion, what should a CEO offer? Well, when you want to incentivize people, you also have the stock option tool. It works either for the team that initiated the project, or people who join down the road (say for instance senior people at cheaper price). As stock options are exercised most of the time at exits, it leaves the captable clean until then. And in case you’re not sure how long your co-founders will stay in the boat, remember options of someone who’s leaving are much easier to manage than stocks!

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Non classé

A quick intro on Venture Capital

I have been a venture capital investor for 12 years and I have lived the ups and downs of this industry.

As I was trying to explain to my 11 years old son, who was looking at me doubtfully, my job is to help entrepreneurs (usually younger than me) realizing ambitious dreams. I know that this could sound to you too romantic and far away from the real word, but all success stories need, in my opinion, a unique and resilient passion to overcome the obstacles on your route to success.

Venture Capital is a relatively young industry in Europe (15-20 years old) and needs, in order to work properly, a unique combination of : visionary entrepreneurs, experienced investors, a favorable environment for research and innovation as well as a set of legal and fiscal rules to boost innovation financing.

The good news is that such an ecosystem is leaving its infancy stage to enter a more mature phase. This means that sustainable companies can be built more easily with a significant contribution to the real economy both in terms of employment and wealth created; such contribution becomes particularly critical for most of the European economies which are currently struggling to identify effective solutions to generate growth and which see a dramatic decline of their traditional industries due to the globalization.

That’s the reason of this blog, which I will try to keep alive: write and discuss about venture capital and its ecosystem, probably the most important driver to boost economic growth in European economies.

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