Worried About Customer Acquisition? Worry About This First.

Too often we hear investors or advisors asking young companies about customer acquisition strategy. While acquisition will ultimately be important, most startups are told to worry about it too soon. Don’t get us wrong; you need to worry about it sooner than you might prefer to. But you almost certainly shouldn’t waste one second of your time thinking about large scale acquisition until you’ve agonized over and improved customer retention/engagement.

Cart Leading Horse

Customer acquisition costs are going to be what they are ultimately. Whether you leverage SEO, paid search, social media adds, mobile PPC, blogger outreach, or any other approach, you will eventually find the right mix. These aren’t easy to tackle, but there are literally thousands of companies and consultants that can improve acquisition. Acquisition is often put off by entrepreneurs because they underestimate the difficulty of doing it. Please don’t put it off. Just don’t feel like you have to achieve one million users before you make other important decisions.

Retention is cheaper than acquisition, and you will find it easier to drive revenue growth by growing revenue per user (RPU) rather than by growing the number of customers. If you cannot keep your customers long enough to generate revenue from them, your customer acquisition will mean nothing. So make sure that once you have a statistically meaningful number of customers (let’s say 25 to 100 to keep it simple), you understand what percentage of these users keep using your product. Get feedback. Watch them use your product. And then improve the product and get more feedback. Iterate until you are happy with the number of users that continue to use the product. Then and only then should you work on large scale acquisition; until then most acquired users will “fall through the funnel.”

As an example, consider the following scenario. You can acquire customers for $1.50 per customer. A power user is worth $5 for you and all other customers worth $0. If 10% of your customers move into power user territory, then you will be spending $15 per power user to earn $5 each, or you are losing $10 per power user on average. You will not be able to afford to stay in business for long at this rate. However, if you can turn 50% of your customers into engaged users, you will be spending $3 per customer in return for $5. Turn the crank and count the money.

This clearly is a simplified example but it should help illustrate why customer engagement is an important lever that can literally be the difference between success and failure. Once you get it right you should focus heavily on scaling your acquisition efforts, but only after you are happy with engagement.

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