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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.

Patricio Robles

Published 28 February, 2011 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

2405 more posts from this author

Comments (5)

Hitesh Patel

Hitesh Patel, MD at SEO.co.uk

Good post Patricio, I agree there is always some kind of cost involved however you aquire your customers. If you have a great product then it can usually sell itself if the early adopters like it and recommend it.

over 5 years ago

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Véronique Schyns

Define succes? Is it building a brand's awareness or selling more products? I think that in order to be succesful start ups need both: some marketing euros AND free publicity. The combination does the trick. For instance, I'm convinced that it would help my sister's debut novel's awareness if there would be some mass media attention through outdoor posters at crowded streets in Amsterdam or an ad in a targeted newspaper like Dutch Telegraaf. A debut novel needs to get noticed first for the serious mainstream media to write an article about it, a film producer to make a film based on the book and people to buy the book Even if the content of the product is good and my sister's book gets a lot of positive comments, getting noticed through win promotions on the internet, tweets and a facebook fanpage is not enough. It contributes, but our target audience is broader than online and this route alone just takes more time (which is also not free!) to get noticed and you risk to lose the momentum. Hope this makes sense.

over 5 years ago

Matt Clark

Matt Clark, Analytics / CRO Consultant at Userflow

It's crazy to think that you don't need to do any marketing in order to get cusonters.

Unless you work in retail where customers walk past your shop than any activity you do to create awareness is considered marketing - Word of mouth, website, social media, trade fairs etc

How would anyone know about your business if you never took the time to tell anyone about what you're doing.

Not putting a value on time spent on these activities and only taking into account third party costs does not take into account the value of your time.

It doesn't make sense to spend a day telling 100 about your business if you could have worked that day, earned £100 and paid someone else £50 to do the word of mouth for you.

It's a theoretical example, but it illustrates a basic economic law of next best alternative and also the importance of tracking your time which is as finite as money.

I've got a feeling that what Fred really meant was that he is seeing nee businesses coming to him for finance to fund large marketin campaigns before they've proven the value of their product on a smaller scale?

over 5 years ago

Gero Silva Pereira

Gero Silva Pereira, Community manager at NationTraffic

I feel that spending in traditional marketing isn't a waste of money, because first of all you have to always think of INVESTMENT, rather than "spending" or "waste" of money.

As a entrepreneur (and as a businessman as a whole) you have to maximize your efforts and investments. This might sound quite obvious, but it's not if we take reference in the article's title.

My take on this is that in order to run a successful business, it's not about which tool, it's all about "what is that tool used for". Maybe marketing does suit your business model, maybe it's a perfect support for your on-line engagement actions, it all depends on your business and your approach to its development.

If you WASTE money is because you're not doing your homework.

over 5 years ago

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kelli

@ Gero:
You are right, waste of money is the result of failure because your too lazy to do your homework.

about 5 years ago

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