I saw an interesting video by Garry Tan where he mentioned that startups spend as much as 40% of the funds they raise on Google & Facebook ads. That is a lot. In other words, 40% of all VC money is going to those 2 companies. This is obviously going to reduce in the coming months and so we could expect this to reflect in the earnings of these 2 companies.
During the upcoming recession caused by the COVID-19 pandemic, the advice that seems to be coming from everywhere is to have cash runway that lasts 18 months.
In order for this to work, many startups are going to reduce their spending or risk survival. One option that all startups have is to allocate more time and resources to retain more customers instead of acquisition, as the former is often cheaper.
The startups that are going to continue to invest in customer acquisition need to know that the lifetime value of customers would most certainly be lower than what they were accustomed to. Because of this, an immediate recalibration would be required for ROI metrics. Acquiring customers on a better a ROI than before should be the norm for the next few months.
These are difficult times for everyone including us but looking into pandemics of the past suggests that all this should be over soon.
I feel a lot of founders, especially when they are running their first company, don’t have their priorities straight when growing a company.
Let me start with an example. When losing weight, you create a calorie deficit. You have two options to do it; you can either burn more calories or intake lesser calories. For wealth generation, you can increase your earnings or reduce your expenses. And for your business growth, you can increase your users, or reduce the number by which they are leaving your business.
Most first-time founders focus on increasing the user-base as a way to grow their business. It shouldn’t always be the top priority. In fact, I believe the top priority should be to reduce churn. Let me give you another example to explain what I mean.
Suppose your business generates $100,000 in annual recurring revenue and your churn rate is 50%. It means every year your business will need to replace $50,000 worth of customers in order to achieve the growth rate of 0%.
A lot of businesses continue to focus to add more users. They would focus to add 50% more users every year. They would spend a lot of money for this much customer acquisition and in the end achieve a 0% growth rate.
The right, easier and cost-free strategy requires working on cutting down the churn rate. If you’re able to bring the churn rate down to 25%, you only need to add 30% more users in order to see a 5% growth. You would spend lesser money on customer acquisition and will eventually achieve a steady growth rate.
We always have two options, and we often focus on the wrong one.