Marketing for Startups
Objectives
This section on marketing for startups provides resources and materials to support the following learning objectives:
- Understand the strategic levers of growth.
- Manage (startup) marketing as conversion funnel.
- Design appropriate marketing methods for specific conversion problems.
- Interprete measures and metrics of marketing effectiveness and return on investment.
- Calculate Customer Lifetime Value.
When and How to Grow
YCombinator on Growth
Key take aways:
- Invest in growth only if you have reached product market fit, measured by retention!
- Try things that don’t scale.
- Growth means (1) attracting attention through external channels and (2) inceasing conversion on your site.
- Optimize the use of only one or two external marketing channels.
- Growth requires a culture of is experimentation.
Three Engines of Growth
Marketing as Conversion Funnel
Customer Acquisition Channels
- Paid, Owned and Earned Channels
- Challenges and Choices
Customer Lifetime Value (CLV)
Customer Lifetime Value (CLV) is the total gross profit (contribution) a single user generates over the course of his or her use of a firm’s service to cover R&D, G&A and other overhead. It is an important metric to determine marketing effectiveness and efficiency. CLV depends on:
$CAC$ : Customer Acquisition Cost is the upfront investment in terms of marketing cost to acquire one customer.
$P$ : Annual (or monthly) profits one customer generates for the firm. Often measured in terms of
- Average gross margin per user (AGMPU)
- Contribution margin: $P =$ Revenue – Variable Cost
- Gross Profit: $P =$ Revenue – Cost of Goods Sold
- Revenue can include one-time and recurrent streams. For one-time revenue you need the lifetime of the product and its replacement probability, i.e. the likelihood that the customer purchases a new product version.
- $L$ : Lifetime of one customer, i.e. number of years (or months) he or she is purchasing from the firm. Then the basic formula becomes:
$$CLV = P * L - CAC$$
Useful metrics to measure lifetime are:
$CR$ : Churn rate is percentage of customers leaving in a given year (or month).
$RR$ : Retention rate is percentage of customers staying in a given year (or month).
$$RR = 1 - CR$$
- $s_{t}$ : Survival probability is the chance that a customer is still around in year (or month) $t$.
Assuming that $s_{1} = 1$ and $RR_{t} = RR_{t+1}$ implies:
$$\begin{aligned}
s_{1} &= 1 \\
s_{2} &= s_{1} * RR \\
s_{3} &= s_{2} * RR \\
&… \\
s_{t} &= RR^{t-1}
\end{aligned}$$
The expected purchasing life $L$ is then given by:
$$\begin{aligned}
L &= \sum_{t=1}^\infty\ s_{t} \\
&= \sum_{t=1}^\infty\ RR^{t-1} \\
&= \frac{1}{1 - RR} \\
&= \frac{1}{CR}
\end{aligned}$$
The $CLV$ formula can then be expressed in terms of survival, retention, and churn, respectively:
$$\begin{aligned}
CLV &= P * L - CAC \\
&= \sum_{t=1}^\infty\ (P * s_{t}) - CAC \\
&= \sum_{t=1}^\infty\ (P * RR^{t-1}) - CAC \\
&= \frac{P}{1 - RR} - CAC \\
&= \frac{P}{CR} - CAC
\end{aligned}$$
The time value of money can be incorporated:
$$CLV = \sum_{t=1}^\infty\ \frac{P * RR^{t-1}}{{(1 + i)}^{t - 1}} - CAC$$
which can be simplified with a geometric series to:
$$CLV = P * \Bigl(\frac{1 + i}{1 + i - RR}\Bigr) - CAC$$
Investors often also want to know the following ratio:
$$\frac{CAC}{P}$$
which is the payback period, i.e. how many years (or months) it takes to recover the $CAC$. Instead of the difference between $P * L$ and $CAC$, investors also want this ratio to be larger than 3 as a sign of a sustainable growth model:
$$\frac{P * L}{CAC} > 3$$
The $CLV$ for an entire customer segment is simply the average customer $CLV$ multiplied by the number of customers in a segment:
$$CLV_{segment} = CLV_{average\_customer} * Customers_{segment}$$