understanding customer acquisition costs - a vc's view

Understanding Customer Acquisition CostsA VC's view

Rob Moffat @robmoffSeedcamp October 2015

• VC view on understanding customer acquisition costs

• Challenges in marketing attribution

• A quant marketers’ approach to ATL advertising

Q&A throughout please!

Agenda

Invest $0.5M - $15M into tech companies

with $B potential

Invest across Europe, help businesses go

international

Have invested in ~150 companies over

last 15 years3

ACQ.

$1B

IPO$2B

IPO$2B

ACQ.

$0.7B

Me

4

2000

2004

2007

2009

Cameron StevensProdigy Finance

Balderton Marketing Group

5


• Challenges in marketing metrics



Agenda

We are raising €15M to scale up marketing

We know our economics work

Last quarter we acquired 2000 customers at a CPA of €18.50

Average value of a customer is €25

The problem

Total customers

2,000 customers€18.5 CPA

New customers

Repeat customers

1600€20 CPA

Total customers

400€12.5 CPA


New customers

Repeat customers

Paid channels

Free channels

Paid channels

Free channels

1600€20 CPA

Total customers

400€12.5 CPA


800€35 CPA

100€35 CPA

800€5 CPA

300€5 CPA

New customers

Repeat customers

Paid channels

Free channels

Paid channels

Free channels

1600€20 CPA

Total customers

400€12.5 CPA


SEM(excluding SEM on brand)

Affiliate

Offline ads

Direct to site(including SEM on brand)

SEO

SEM(excluding SEM on brand)

Affiliate

Offline ads

Direct to site(including SEM on brand)

SEO

CRM

800€35 CPA

100€35 CPA

800€5 CPA

300€5 CPA

600, €35 CPA

100, €25 CPA

100, €45 CPA

50, €35 CPA

25, €25 CPA

25, €45 CPA

400, €1 CPA

400, €9 CPA

100, €1 CPA

100, €5 CPA

100, €9 CPA

1. Better to track CPA than CPV, as conversion rate from visitor to customer often varies dramatically by channel.

2. Don’t include brand SEM in your SEM CPA.

3. The only truly free channel is people directly typing in your URL. Other ‘free’ channels (SEO, CRM) have some variable cost.

4. Differentiating between acquisition costs of new vs. returning visitors requires investing time and money into your web analytics system.

5. Customers which take time and multiple steps to convert are tricky. Need to monitor both ‘Cost per Sign Up’ conversion.

6. Discounts need to be included in CAC and assigned to correct channel.

Best practice

Audit:

• What is my CPA by channel, what can I decrease this to?

• What can I increase my customer value to?

• Would each of my acquisition channels make sense at this CPA and value? If not, turn off the ones that don’t. high.

From analysis to action

Growth:

• How do I grow ‘free’ channels? (top tip: start with CRM). What is a realistic target for this?

• How far can I scale up paid channels before they increase to uneconomic levels?

• What other marketing channels should I look at? (10-20% of budget on tests)

• What growth hacks are not too hackneyed?

• Start layering in paid acquisition, starting with the cheapest channels, until you hit your maximum budget or CPA creeps up too high.

This is still a simplification

Caveats

Ignores halo effects, attribution, difference in values of customers, return rates, increase in acquisition costs as

channels get tapped out, decrease in acquisition costs as conversion rate improves, seasonality etc etc etc

If your marketing budget goes above £10M, worth hiring an econometrician to figure these out

But it is probably the right level of detail for a startup at Series A stage





Agenda

“The dangerous seduction of lifetime value”

http://abovethecrowd.com/2012/09/04/the-dangerous-seduction-of-the-lifetime-value-ltv-formula/

Challenges / watch outs:

• Lifetime values beyond year 1 are speculative at best

• You don’t know what your churn rate will be. Low sample sizes fom early cohorts, not representative

• Need to include all variable costs

• The values ‘tug at one another’: e.g. increasing price increases churn

Attribution

• If a user touches multiple marketing channels before becoming a customer, which one do you attribute the sale to?

• Best approach starting out is last-click attribution. Watch outs:• Overstates impact of affiliates and retargeting, by ~30-40%• Understates impact of SEM and SEO by 10-20%• Understates ATL advertising and PR

• Google Analytics is a good enough tool to start with

• As business gets more sophisticated can go for weighted first click / last click, or weight equally through purchase cycle

• At scale worth building full attribution model. Need to do in-house, avoid black boxes and agencies

Direct traffic

• Direct site visits (brand searches / app store downloads) are often a big % of conversions

• They don’t happen by magic, but how do you attribute?

1. Make sure your analytics is set up properly and you are tracking everything you can (e.g. clicks from emails)

2. Track referrals (e.g. with MentionMe)

3. Strip out all attributable traffic

4. Strip out repeat customers

5. Look for spikes in sales, link back to PR (or app store featuring, promotions or brand advertising)

6. Assume a ‘halo effect’ of paid advertising, 10-20% more conversions

7. Remainder is genuine word of mouth. If it is increasing congratulations – you are viral!

Direct traffic

• Direct site visits (brand searches / app store downloads) are often a big % of conversions

• They don’t happen by magic, but how do you attribute?

1. Make sure your analytics is set up properly and you are tracking everything you can (e.g. clicks from emails)

2. Track referrals (e.g. with MentionMe)

3. Strip out all attributable traffic

4. Strip out repeat customers

5. Look for spikes in sales, link back to PR (or app store featuring, promotions or brand advertising)

6. Assume a ‘halo effect’ of paid advertising, 10-20% more conversions

7. Remainder is genuine word of mouth. If it is increasing, congratulations – you are viral!

Conversion optimisation

• The most important thing you can do to reduce CPA

• Always be testing

• Without action conversion tends to slightly decrease over time

• Be careful with A-B tests:

• Results may not be significant

• Positive results are not cumulative

• Need to go back and retest as business evolves

• Doesn’t take into account long term effects (e.g. ad blocking)

http://www.qubit.com/research/most-winning-ab-test-results-are-illusory

Balderton portfolio: Marketing analytics tools used

22

Chartbeat

Managed in-house

RJ Metrics

Qubit

Flurry

Adobe Omniture

Optimizely

Google Analytics

0 5 10 15 20 25

Other mentions:• Mixpanel (x4)• Chart.io (x2)• Kissmetrics (x2)• Intercom• netstat

Number of respondents who have used each approach

Rating (/5):

5

4

3

2

1





Agenda

2001 - 2012: TV ads are a waste of money

TV advertising: the VC view

2012

2013 - 2015: TV is the best marketing channel

Balderton portfolio: experience with ATL channels

25Display ads Video ads TV Print

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Status:

Scaled up, significant marketing channel

Tested, positive results, yet to scale up

Will test in 2015

Not tested, don't plan to

Tested, disappointing results

Other channels used:• Industry-specific events (x4)• Outdoor/ Tube (x3)• Direct Mail• Community meetups• Personalized merchandise

Two approaches to measure impact of TV advertising

• Measure immediate impact of each TV ad slot

• Adjust upwards for:

• Delayed site visits

• Delayed conversions

• Improvement in click through and conversion rates due to brand familiarity

Bottom up Top down

• Compare overall customer and visitor numbers to organic baseline

• Strip out trackable marketing channels, and adjust for seasonality

8 + 8 + 8Bottom up

20:08Ad shown

20:00 20:16 20:24Sales

Time

8 + 8 + 8Bottom up

20:08Ad shown

20:00 20:16 20:24Sales

Time

Impact of TV

TVSquared and similar tools can help with this

• Compare overall customer and visitor numbers to organic baseline

• Strip out trackable marketing channels, and adjust for seasonality

Top down

VC view on marketing

30

Top down

Watch outs on TV advertising

• “Media for equity” TV is not free. Account for it at what it would cost in the market (~20% of list price)

• Creative counts. Test it. Don’t be afraid to make it brash: say your brand multiple times

• Track independently from your agency e.g. with TVsquared

• You can test TV with €100K, but the answer will always be ‘it doesn’t work’. Proper test more like €500K

• TV advertising doesn’t work for every company

kaushik.net/avinash

blog.hubspot.com/marketing

lunametrics.com/blog

simoahava.com

analyticsdemystified.com

michelekiss.com

Further reading

medium.com/@robmoff