Tuesday, July 2, 2013

Why I like 12 Month Break-Even as a Hurdle for Paid Marketing

A lot of people ask me how much they should spend to get a customer.  And I tell them there is no one magic number.  In the early days of a startup you might use one number, but that is only because there might not be enough volume to segment your return measurements meaningfully yet.  But as soon as possible, you would like to measure the return and cost of every campaign you run so long as you can do so at negligible cost, which you should be able to do with modern tools.

Anyway, as a rough rule of thumb, I like to suggest that startups might like to use a 12 month break even for a spending hurdle, so long as it is applied on a campaign by campaign basis and not an average for all channels and campaigns.  There are three reasons I think a roughly 12 month break even is a very comfortable place to start.

1) There is so much spillage in marketing measurement that I am certain that even in pretty tight channels, you are going to get a bunch of customers that you are not able to attribute to the spend.  Want to learn about channel interaction and spillage?  I think my friend Dave Schwartz is going to share some of his immense knowledge and experience at this month's Agile Marketing Meetup, so follow it and sign up when his talk is announced.  But basically, for every account that clicked through on your banner ad, setting a utm (urchin still really?) tag, there was another that just typed your domain into their browser or a google search bar that showed up as branded search or direct type in traffic.  And unless you have a solution that can nail down every banner impression to later traffic like Cold Creek Tech's or you are paying an agency like AdRoll that can do something similar when they serve your ads, you are going to identify that customer as direct type in traffic or branded search if you are on your game enough to track granularly with blunt instruments like Google Analytics.  Similarly, even if you are using a best in class conference lead tracking solution like Bloodhound, there will be some people that saw your booth, maybe even talked to you or approached it while you are busy, and they Googled your brand later.  So you won't be able to attribute every lead to their source.  The same can be said about every channel.  I will write another post sometime about measuring spillage.

2) There will likely be many customers that continue to generate revenue beyond 12 months.  So if you break even at 12 months, you will be building out the gravy train for all those longer term customers.  That will help you put snow on the revenue snowball and barrel down the hill.

3) Using the value that a new customer brought in over the trailing 12 months should be conservative.  I hope that any startup worth their salt can provide immensely more value and extract more revenue out of customers in the next year than they did in the last year.  If you can't, stop reading this blog and go fix that before you figure out how to ramp up paid marketing : )  In my favorite vernacular, I would say that your forward looking cohorts should be a lot better then your backward looking ones.  So if you spend to break even on your backward looking ones, you should be fine.

Now if you know you can beat these things, I would say do whatever you are comfortable with.  For instance, if you know that you have 50% spillage on a banner campaign, then consider relaxing even more to account for that.  And if you know that over the next twelve months your cohorts will generate 50% more revenue than the past 12 months, consider raising the bar 50% higher.  And if your attrition is really low and only getting lower, consider using more than 12 months of revenue for a customer.  Heck, consider discounting a long tail of years of revenue if you can model it and feel confident in it.  If you can make investors confident in it then more power to you, right?  And if 90% of your revenue arrives in the first 7 days of a cohort, then there is likely no need to wait twelve months to call it.  But I have seen 12 months applied to a lot of different industries and it has worked out pretty well as a rough starting point.

What?  You can't wait 12 months to see if something worked out or not?  I will write another post about working out proxies for 12 month value.

Happy distribution and growth engineering  : )

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