One of the most common causes of failure for new startups is that entrepreneurs are too optimistic about how easy it will be to acquire customers in the real business world. They assume that as they will build an interesting website along with a product, or service and it will immediately attract customers to beat a path to their door. That may happen with the first few customers, but after that, it rapidly becomes an expensive task to attract and win over new customers, and in many cases the cost of acquiring the customer (CAC) is actually higher than the lifetime value of that customer (LTV). This is called business model failure.
In order to avoid business model failure, you must consider the following two questions and whether you’re content with you answers.
Can you find a scalable way to acquire customers?
It isn’t enough to gain a couple of customers and make the assumption that To answer this question, here are three strategies to consider in order you acquire customers in a scalable model.
1. Investing in advertising
Paid ads include Google AdWords, Facebook ads, Instagram ads and numerous others. Ideally, you should have a Customer Lifetime Value (LTV) to Customer Acquisition Cost (CAC) ratio of 3:1 or better. This a rule of thumb to avoid bleeding yourself dry before your customers pay up.
2. The exponential growth of paid ads:
Ad Spend > More Customers > More Revenue > More ad spend
Paid advertisement channels are growing. Businesses can theoretically reach over a billion customers through today’s ad networks. That number will continue to increase as the number of paid advertising channels (as well the total number of Internet users!) increases.
3. Incentivizing word-of-mouth
While word–of–mouth is a natural process, it can be managed and amplified with the right tools. You should optimize viral growth in any way possible. Word–of–mouth can be amplified by introducing incentives, and by A/B testing all sorts of elements along the customer experience. The holy grail is a viral factor exceeding 1.0: Every customer brings at least one friend aboard, causing the covered ’hockey stick’ growth.
4. SEO with unique content
If your product creates a substantial amount of unique content, (articles, infographics, interviews, etc.), it’s worth using SEO to acquire customers through their search engines queries. There are hundreds of billions of new search queries every year, making SEO one of the most scalable strategies of all. Rapgenius, now simply known as Genius, is one of the most visited sites on the Internet. The site is home to millions of pages of content which show up favorably on Google search. Their SEO accounts for a whopping 47% of the site’s pageviews!
Can you monetize those customers at a significantly higher level than your cost of acquisition?
Once you have a clear view about a scalable way to acquire customers, you must also consider how much you will realistically make from each customer. If your value gained from each customer simply isn’t sufficient to cover your costs from each customer and make a profit, it won’t matter how many customers you aquire. The following three steps will help you put this process into a clear perspective.
CAC (Cost of Acquiring Customer) – LTV (lifetime value of a customer) = Potential Profits
1. Compute CAC
You should take the entire cost of your sales and marketing functions, (including salaries, marketing programs, lead generation, travel, etc.) and divide it by the number of customers that you closed during that period of time
2. Compute LTV
You will want to look at the gross margin associated with the customer (net of all installation, support, and operational expenses) over their lifetime.
The only way to truly project how much money you will be making in the future and whether it is sustainable enough is to carry out these investigations into your costs and revenues. It’s not enough to simply rely on your optimism that business will grow to the extent of your dreams, even it does it’s possible that it still won’t be enough if you haven’t accounted for all of your costs accurately. Take the steps now to ensure your future success.
If you are still confused about what your best business model should be and are struggling to acquire enough customers, Solutions For can design a suitable business model for your start-up company that is unique to your company and situation.