If you have a new business and plan to spend money on customer acquisition, are you making a huge mistake?
Venture capitalist Fred Wilson thinks you just might be. In a blog post that sparked an interesting discussion, and some heated debate, Wilson last week wrote that "I believe that marketing is what you do when your product or service sucks or when you make so much profit on every marginal customer that it would be crazy to not spend a bit of that profit acquiring more of them (coke, zynga, bud, viagra)."
As an investor in consumer internet startups, including names like Twitter and Foursquare, Wilson suggests that consumer internet startups can acquire new users (who Wilson loosely refers to as "customers") without spending a dime by piggybacking on Twitter and Facebook, attending events, and tapping into niche markets. His rule:
Early in a startup you need to acquire your customers for free. Later on, you can spend on customer acquisition.
The reality is that customer acquisition is never truly free.
Spreading the word on Twitter? Developing Facebook integration into your product? Building an API for developers? Attending events? At the very least, all of these take time.
And not only does time have economic value, it is typically one of the most limited commodities for those trying to build new businesses. After all, when you have a small team with no revenue coming in, time is everything. Invest your time in the wrong areas can mean failure, even if your concept is good.
Even if there is truth to Wilson's underlying argument (a big marketing budget won't guarantee success), businesses (both new and old) shouldn't naively believe that customer acquisition is a cost-free undertaking.
Sometimes the investment in customer acquisition is denominated purely in dollars, and sometimes it's denominated in time and the use of human resources.
Just because a handful of the internet's most wildly successful startups took off with what most of us might consider a minimal customer acquisition investment doesn't mean that this is a good one to emulate. After all, most new companies won't experience Zynga-like growth, and planning for it is probably a really foolish idea.
Not all customers are equal
But there's another important consideration that doesn't get mentioned in Wilson's post: the fact that not all customers are created equal. Where you invest is just as important as how and how much you invest. After all, not every new customer sticks around, and some types of customers are far more valuable than others.
For a consumer internet startup, for instance, the 'early adopters' who sign up to check you out before moving on to the next 'next big thing' are probably far less valuable than the users who sign up because they're truly interested in what you offer.
Yet Wilson and others place a heavy emphasis on reaching out to these early adopters. That may pay off for some new businesses, but for most, there are only so many early adopters to go around.
In some markets, early adopters don't even matter. For instance, let's say you're starting a new niche dating site. Is setting up a Twitter presence and integrating with Facebook a good strategy? Perhaps. But there's a very good chance setting up an AdWords account and building an affiliate program would be far more productive.
From this perspective, it's clear: even within the consumer internet, there are many ways to acquire new customers. Different companies will find that different customer acquisition approaches work the best.
But all will find that there's nothing free about customer acquisition when you're doing it right.