Last Updated: August 23, 2016
I come from the direct response marketing world.
The world where if you don’t get to CAC < LTV VERY quickly you need to move on.
In fact, that’s the reason most startups die and the reason why most direct response marketing campaigns die even faster.
But, over the years as I’ve become more interested in startups, I’ve been fortunate enough to coach and mentor 30+ companies, consult for more startups, teach a pre-acceleration course at 500 Mexico and make a handful of angel investments.
This contact with the startup community allowed me to explore how effective the the direct response marketing mindset is when you apply it to the ever-changing reality of the startup world.
This post shares the unit economics playbook that I developed while helping dozens of startups gain traction by working with their unit economic metrics.
SO WHAT THE HELL ARE UNIT ECONOMICS ANYWAY
Here’s a great answer on Quora with a definition I fully agree with.
Unit economics are the direct revenues and costs associated with a particular business model expressed on a per unit basis.
For instance: in a consumer internet company, the unit is a user. The fundamental unit economics in this case are:
- Lifetime value (LTV): the amount of revenue a single user generates during the entire duration of their usage of your service.
- Cost per acquisition (CPA): How much it costs to acquire a user.
To the extent that LTV exceeds CPA, you have a business.
SO WHAT JUAN?? WHY IS THIS IMPORTANT
There are a few reasons why a closer look at unit economics is worth your time, NOW:
- It allow you to predict how many customers you’ll need to get to get to break-even point (active customers if you sell subscriptions or per month, per year if you sell one-time things). If that number is too big, or if it’s a huge percentage of your total addressable market, then you have a way to know very early in the game that you’ll be in trouble.
- It’s at least one data point that can show any third party that your business is not a hobby: and that you can make money out of it. Maybe still you can’t make net profit from the business because salaries and overhead are greater than the customers you are attracting and servicing right now. But, once you scale there will be enough “gross margin on per unit basis” to pay for all of those fixed costs and then keep some.
- Raising Money with Excel is easier than Raising Money with Powerpoint: If you get to the point where you can show profitable unit economics to an investor, to the point where you can say “for every $x that I spend I get $2X or $3X or $4 or $nX back,” it will be a lot easier to raise money. The startup narrative, aka the “I’m going to change the world” slide, has its place in your pitch deck — but if you show traction and good unit economics in your Excel sheet, then that’s even better.
OK COOL… SO WHAT’S THE PROBLEM AND WHY DO I NEED 20+ CAMPAIGNS?
Here’s what I normally seen happen during an “incubation/acceleration period”
Entrepreneurs and their teams have 3 to 6 months to achieve a certain set of outcomes:
Typically this means getting your product off the ground, or at least accelerating your success so you can “get to the next round.”
What most people do with the money they get from the “incubator / accelerator provides” is to setup a Google Search Campaign so they can “validate” the product, feature, etc.
For example, if they are selling a “CRM for small teams” type product, then they’ll buy the associated keywords from Google, create an ad, send it to a Landing Page and be done with it.
No matter what their market is they’ll probably encounter some competition and they won’t get as many clicks as they wanted… but hey, they are already up and running. Or, they may pursue the equivalent in Facebook Ads, which target a very small bucket of people with the Or, they may pursue the equivalent in Facebook Ads, which target a very small bucket of people with an ULTRA targeted approach that is not scalable “at all”. The metrics, learnings, costs and ROI that they will get will vary A LOT after they get past a few 100 signups a month.
After a couple of hours/days/weeks (this varies based on the anxiety level of the entrepreneur) they check their stats.
If they’ve done their homework (and have some sort of analytics properly set up, which in my opinion is RARELY the case), they’ll have some stats to analyze.
Assuming the campaign was properly set up, the bid was high enough, and they got traffic (not always the case), then one of these things will happen next:
a) They see some reasonable amount of leads, conversions or even sales. They check how much they spent, how many conversions or sales they’ve closed, and now they determine their cost-per-lead, customer acquisition cost, or whatever other metric they’re after.
b) They see that they are not getting enough traffic. Typically, this happens because they are bidding on a highly competitive term. Or, they might see traffic, but it’s not converting well because their funnel is not optimized. The team will think they need to change something. Sometimes it’s the landing page, other times it’s the whole approach… and now they’re at risk of an (almost random yet significant) pivot towards the next “CRM for Freelancers.”
c) If they are aware that you can’t make that decision with only a few clicks as your entire sample size, they may decide to let the campaign run for a few weeks to amass more data to make a decision, thus wasting valuable “incubation / acceleration” time.
I’m sure there are other cases but these have been the most common issues in my experience, especially when the team is comprised of “1st time driving traffic” entrepreneurs.
Nothing wrong with being super targeted and starting small but there are a few core problems with all of these cases:
a) They are ignoring that media rarely gets more efficient as you scale. (here’s a good read on that) In general, they are starting with what it’s call a “Demand Fulfillment” play where they are showing ads to people that are really searching for what they have. The conversions are good, affordable, and everything seems fine. The problem? There’s not much volume out there from this “super tight related to your product hungry buyers” keywords. And that’s if you’re doing something that the market is already looking for. What about new product categories? Where you are solving problems that people don’t even know they had? Demand Fulfillment is not going to cut it. You’ll need to generate Awareness and Curiosity.
b) they are making huge decisions (like changing their market or product features) with very little traffic and traffic that doesn’t represent the “whole set” of users they would get once they scale.
c) they are right not to make a product roadmap decision with little traffic but sitting idle or doing other “busy work” rather than figure out what product and what channels will scale my company in a “time-constrained experience” like an incubator/accelerator program is not the best choice. You can’t get back the time you waited because you did not have enough clicks to learn.
Also the problem with all these 3 approaches, which again in general I’ve seen happen a lot of times, your volume is SO small that is hard to see trends in dimensions. Are women signing up at higher rate than men? Are people searching for CRM for Freelancers loving it more and activating more than the ones that landed with CRM for Small Teams? You can’t make that call with only a few conversions on each version. It’s just not statistically significant. If you want to do that you’ll be better off flipping a coin. It’s faster.
SO HOW DO YOU SOLVE THIS PROBLEM?
There IS a way to solve the media-at-scale / volume / sample size problem.
Next, I’ll walk you through how to create 20+ Campaigns that will give you the most accurate picture of what your campaigns will look at scale.
You’re going to do this by combining these 2 concepts:
1. Channels. Where your ads will show? (Google Search, Google Display Network, Gmail, Youtube, Facebook, etc.)
2. Approaches. When / under what conditions will your ad show? Here are the main approaches I start with:
- when somebody is interested on my brand
- when somebody is interested on my competitor’s brand
- when somebody is interested in my “main demand fulfillment keywords”
- when somebody is interested on “things” that give me a signal that they could need my product. This requires a lateral thinking approach.
- when somebody “raises their hand” by clicking on my ad or visiting a particular page on my site.
These campaigns combined will accomplish what I call a “Full Contact Strategy.” If there is somebody remotely interested in your product or service or that should be interested in your product or service…he’ll know you exist.
You won’t necessarily want to have dozens of campaigns in your AdWords account; the idea is to set up your campaigns to achieve as much “full contact” coverage as possible. So, you may want to run these in 2 or 3 campaigns and split the your approaches into different ad groups. How you structure your account, is your call.
With that, here are the 20+ campaigns you can run to get unit economics and gain immediate traction.
Campaign #1: Google Search – Main Keywords
Let’s get back to our CRM example. Suppose you own the company “PowerCRM” it’s a CRM for small teams. So normally the keywords I’ve seen in this type of campaigns are: CRM, Customer Relationship Management, Buy CRM, CRM Reviews, etc.
If somebody is a little more experienced he might add ad groups for:
CRM for Small Teams, CRM for Freelancers, CRM for Design Studios, CRM for Software Development Companies
And he will get insight on the volume out there for each sub-niche.
Normally this is what everyone does. But look below (yeah, this article is long) there is SO MUCH MORE you can do.
Campaign #2: Google Search – Branded Search
An important first question here: Why are you going to do a “Branded” campaign if: (a) you don’t have a brand yet, nobody knows about you; (b) you already appear first on the results. Why spend that money?
Here is my answer to why you should still consider branded search:
1. Smart competitors will bid on your brand name in order to appear “above” your result because PPC appears on top of organic results. I’d rather be first for my own term.
2. If you could get all of the search results positions when somebody searches for your name would you want them? The answer, of course, is YES because you recognize that having more exposure is better than less. Likewise, being on Paid Ads and then Organic, is better than being in just one.
3. You are not that famous! I promise you a branded campaign won’t cost you as much as you wish it would. After all, you just told me that nobody knows about you! So nobody will be searching for you, don’t worry.
Campaign #3: Google Search – Competitors
Ok… Now, I want you to put yourself in the shoes of smart competitor in your marketplace.
If you are in the CRM space and someone is searching for:
Salesforce Reviews, Salesforce Coupon, Salesforce experiences, Salesforce Free trial…
Guess what that person is trying to do? You got it: Buy a CRM.
You can force them to consider you by showing ads like “Take a look at PowerCRM before buying the one you are looking for”.
What about people that are searching for: Salesforce vs Zoho, or Zoho vs. vTiger? Even better — they haven’t decided yet.
But wait a minute? Maybe Salesforce is not your competitor. Maybe they are little too enterprise.
So you might skip “Salesforce.” But “Pipedrive,” “PipelineDeals,” “Close.io” or maybe “Zoho” could be good keywords for you.
Note that competitors’ branded keywords are usually not very expensive because there’s typically only the brand bidding on it, plus maybe a few other smart competitors. In this example, a competitor’s branded keyword won’t be as expensive as “CRM” but is just as targeted — you know that people searching for “Salesforce” probably want a CRM.
Campaign #4: Google Search – Lateral Thinking
This approach is the one you’ll have the most fun with.
What are other keywords that my “ideal customer/prospect” might be searching for?
Here’s an example. I used to sell a “Weight loss” info product.
The main keywords — “Diet”, “Lose Weight”, “How to Lose Weight” — were out of budget for me. I was competing with “Local Clinics” selling treatments that could pay $5+ bucks a click, and competing with people selling pills with a huge lifetime value (and magical results). It was a market where I couldn’t pay that much per conversion with my little ebook.
So I had to figure out a smarter way.
If a searcher is looking for a “wedding dress,” then I know she doesn’t want to be “fat” at her wedding.
If someone’s looking for “wedding presents,” then I know he probably doesn’t want to be the “fat guy” at the wedding / social reunion he’s going to.
If somebody is looking for “diapers for one month old,” then I know she’s been pregnant recently and might be thinking about weight loss.
Those were my “lateral thinking” keywords — untapped and therefore cheap enough to allow me to make a profit.
Back to the CRM example, the “ideal customer/prospect” is probably a sales manager or even better a founder or CEO.
What are some possible lateral searches?
“How to motivate sales teams” —> Your ad: Our CRM Motivates your Sales Team for you.
Try it out. Or you could offer a White paper or a downloadable report.
“KPIs small sales teams” —> Your ad: Our CRM gives you KPIs out of the box. Or, you could offer a webinar or blogpost here too.
You get the point.
So let’s move on…
Campaigns #5,#6,#7,#8: Google Display Network
Q: What happens to people don’t click on the Sponsored Ads in their search results?
A: They go to organic results. And guess what? Some of those results have AdSense on them.
This means you can speak to those searchers while they’re reading other sites. That’s the magic of Google Display Network.
To recap, here’s how you’d apply the 4 approaches to your Google channel:
1. You’ll show ads to people who are reading / searching about your main keywords (Campaign #5: GDN – Main Keywords)
2. You’ll show ads to people who are reading / searching about your brand. Yeah, maybe some blogger covered your startup. Maybe you CRM gets featured on GetApp(Campaign #6: GDN – Branded)
3. You’ll show ads to people who are reading / searching about your competitors. Maybe a blogger covered them and you want to show an ad with the picture of one of clients saying “I almost signed up with some of the famous CRMs and that would have been a mistake, check Power CRM out” (Campaign #7: GDN – Competitors)
4. Lastly maybe your prospect is reading / searching about “Sales Teams Metrics” or “KPIs for Sales People” and you want to show them ads that say “Our CRM automates metrics”, or a whitepaper or a webinar that establishes you as an expert in their problem. (Campaign #8: GDN – Lateral Thinking)
There are also different ways of targeting. For example, instead of “Keyword based,” you could target “Sites that you know your prospect reads.”
Campaigns #9,#10,#11,#12: Youtube Campaigns
Do you know what’s the 2nd largest Search Engine? Yahoo? Bing? Nope.
While you can show ads via GDN in YouTube, YT’s traffic is so massive and behaves somewhat differently, so I prefer to split it into a separate campaign and channel altogether.
Specifically, I “exclude” YouTube from the campaigns of GDN and create GDN campaigns where the only targeted placement is YouTube.
Here are some possibilities for YouTube:
- Show ads to people who are “watching videos” about your Main Keywords (Campaign #9: Youtube – Main Keywords)
- Show ads to people who are “watching videos” about your Brand: Maybe they are watching a review someone did, some of your training videos or webinar recordings, etc. You could offer them a coupon, a free trial, a free consultation or implementation session (Campaign #10: Youtube – Branded)
- Show ads to people who are “watching videos” about your Competitors (Campaign #11: Youtube – Competitors)
- Show ads to people who are “watching videos” about your “Lateral Thinking” approaches (Campaign #12: Youtube – Lateral Thinking)
You have quite a bit of flexibility with the ads themselves because this could be: banners, text ads, pre-roll ads, etc.
Campaigns #13,#14,#15,#16: Gmail Campaigns
These same 4 approaches also apply to Gmail. Like YouTube, Gmail can be accessed via GDN. As with YouTube, I typically also exclude gMail from the GDN and instead create campaigns with Gmail as the only placement.
If you’ve followed me this far, you probably get the point by now.
The best part about this is that running Gmail campaigns is like hijacking your competitors’ email list.
You can even try more fun experiments like targeting email receipts from “Amazon” with “How to Lead Sales Teams”… the possibilities are endless.
These campaigns can yield a lot of volume BUT remember that we are going for “Full Contact.” If your customers are searching for a CRM or should be searching for a CRM, we want to be right there. At least for some time. And again, this is cheap! Not too many people will click on your ads…but the ones who do are SUPER targeted.
Campaigns #17-#23: Remarketing on Adwords and Facebook
With all of this going on you’ll start getting tons of targeted traffic to your site.
Unless you’re a major exception, you’ll need multiple touch points to convert a visitor into a user or a client.
That’s where remarketing comes in.
I want you to run the following campaigns:
- Campaign #17/18: Target People that Visited but did not Signup (Adwords + Facebook remarketing)
- Campaign #19/20: Target People that Signed up but did not Activate —> “Hey…Finish what you started!” (Adwords + Facebook remarketing)
- Campaign #20/21: Target People that Activated but did not Purchase —> “You are missing this features!” (Adwords + Facebook remarketing)
- Campaign #22/23: Target People that Went to your Checkout Page —> “Here’s a coupon?” (Adwords + Facebook remarketing)
Of course you can test several ads, copy, etc. but make your ads highly interesting to people who see them, and make sure to send them to relevant step of the process.
Campaigns #23+: Facebook
Finally, as the CRM for small teams, you can target people that are part of the following buckets:
- People who are interested in topics like: Sales,
- People who are part of some Sales Groups, etc.
- People who are CMOs, CSO, Sales Manager, CEOs that also are in Sales Groups, etc.
- People that are fans of some of your competitors or complementary products
- People that read books // authors about: sales, managing sales teams, kpis for sales, etc.
- Create Similar Audiences of your Leads
- Create Similar Audiences of your Customers
- Create Similar Audiences of the Audiences above that worked well
Campaigns #(shall we stop counting?): Bing and Yahoo
If you want, you can port some of your winners to Bing and Yahoo. Once you’ve identified some winning campaigns, you can clone them for other search engines. You can expect about 10 – 25% of more traffic depending on your niche.
“OK JUAN, SUPPOSE I DO THIS… WHY IS IT BETTER?”
- You’ll never have a “traffic problem” again.
- As you are trying different things you’ll be a lot more likely to find one, or two or three combinations of channel/approach that work.
- You’ll get the compounding effect of people in your target market seeing you EVERYWHERE! That creates awareness and trust.
- You WILL get more accurate unit economics… the average of all this will be a lot more representative of your unit economics as you scale. Remember, media rarely gets more efficient if you want to scale really big.
- You won’t make product decisions based on little or no traffic or on hunch alone. You can still use intuition, but now you’ll have the data to back it up.
- With traffic it is a lot easier to run split tests and get conclusive results.
- This doesn’t have to be expensive. I’ve seen startups succeed with this approach with as little as $100/$200/$300/day.
- It’s easier to get to what I call “Distribution/Learning Balance.” You need the right amount of traffic to learn and make changes, and no more. So for example, you will run these campaigns and get, let’s say, 1000 signups. You then stop the campaigns, so you stop spending money. Now you get to watch what happens to this cohort. You reach a few key conclusions, build a new funnel / feature / change copy… and you restart the campaigns, once again kicking off the distribution-learning cycle.
THAT’S ALL FOLKS!
I hope you find this approach valuable and you’ve pulled some new ideas from it.
I’d love to hear your comments or questions at @juanmartitegui.
Like this post? GET THE 500 DISTRO NEWSLETTER!
- 500-style Case Studies and How Tos on startup growth
- useful updates on meetups & events
- no spam obviously