I had an interesting discussion on continuity acquisition strategy yesterday, which boiled down to two questions:
- Do we spend profitability, at break-even, or to penetrate (i.e. at a loss) at the margin?
- By profit, do we mean gross margin, marketing contribution, or some other measure?
These are great questions that the leadership team of your company, whether a start-up or established player, must agree on when finalizing strategy and building business models. When you start acquiring customers it’s too late to decide, as the systems and people required to optimize for scale or profit are different.
I’ve worked in both the “maximize for profit” and “maximize for scale” types of continuity businesses. In the former, I could optimize performance at a detailed level and forecast customer growth and profits with a high degree of accuracy. However, if I suddenly had to spend more than a couple of million dollars to take advantage of an opportunity, it was difficult to do so. In the latter, I could act on tens of millions of dollars of contingency spend in days, but profitability at the margin was hazy and customer counts were harder to predict with accuracy.
Both systems are OK. You just have to decide what you want.
If you’ve got a business with relatively high fixed costs, and the product has some acceptable substitutes, there’s no question in my mind that you have to go for scale and get big fast. That means acquiring customers on the margin that are unprofitable.
Unprofitable customers? Why?
- You have a larger pool to test with. You have more inquiry non-buyers (INBs) to test with, seed models, etc. You’ll also have more cancels with which to get expert on winback and reach-back marketing.
- You’ll have more data on customer usage. You’ll be able to figure out what features the best and worst customers like and don’t like and increase the speed at which you can feed your product development organization with good data.
- You can turn on more profit more quickly. It’s easier to defray your fixed costs over 10 million rather than 1 million subscribers. You’ll also know exactly where to put the next dollar to generate more profit.
- Your competitors are going for scale too. Therefore it’s important to get inside their OODA loop. If they learn faster than you, you’re cooked.
I’ll leave it to you, your CFO, and your investors to decide when it’s the right time to move to profitability and how you define it.
Takeaway: Agree on your marketing strategy before building your marketing platform. Understand what “profit” is, and how much you need at the margin. Scale quickly. And win.