What does it feel like to increase your net worth by nearly 650% then lose it all?
You’re back where you started and life could be worse, but I would kick myself if I lost all that money.
Let’s imagine you bought General Electric stock in January 1995 at $8 a share. That stock goes up to $60 a share in 2000 and you’re ecstatic. “It’ll keep going up though.” So you buy more stock.
By 2003, the stock is down to $25 and in 2009, it’s down to $11 a share. What a deal! You believe in GE and realize it’s an opportunity to buy an underrated stock at a discount.
You’re right. In 2016, it’s back up to $30. But this time it doesn’t keep going up. In 2019, that stock is down to $9 a share.
If GE was the only stock you invested in, your portfolio would’ve been extremely risking and you would’ve seen your money multiply then shrink.
Let’s think about risk in the context of customer acquisition.
Zynga is an online game company that was built on top of Facebook. They’re known for games like Farmville, Words with Friends, and Poker on Facebook. They were a high growth company that went public in 2011.
In 2013, they lost half of their user base, laid off 520 employees–18% of their workforce–and closed three offices. In 2014, they laid off 314 more employees–15% of their workforce.
There are many reasons why Zynga had trouble but one thing was clear, they were all in on Facebook for user acquisition. Zynga was built on top of Facebook and grew through viral loops via Facebook’s news feed and notification platform.
Let’s say you have 500 friends on Facebook and 100 of them play FarmVille. And those friends all invited you to play FarmVille. You would get notifications from 100 different people inviting you to play this game..
Remember this was back in 2010 when Facebook was still new and getting a notification was a big deal. People would see invites from friends to play a game and would end up trying it out. That was Zynga’s primary growth channel.
Then Zynga got some bad news.
After the changes take effect, people who do not play games will no longer see news feed application stories from friends who do play games — same goes for any other third-party app. Because news feed stories were a main way that people found games in the first place, we expect app virality to decrease as a result of this change.Source: Adweek
Facebook stopped letting third party applications show news feed posts to people who weren’t playing their games and Zynga immediately lost their biggest growth channel.
How do we avoid Zynga’s fate?
Most businesses’ customer acquisition strategies follow a power law where one or two channels account for 80% of their business.
You need to ask yourself, “How much would my business be affected if I lost my biggest customer acquisition channel?”
Let’s equip you with a framework of thinking about customer acquisition so you find new growth channels and mitigate the damage of losing your biggest growth channel.
Why is customer acquisition so difficult?
What do Google search, Google AdWords, Facebook Ads, Instagram Ads, social media platforms, technology, consumer behavior, and marketers, all have in common?
Change. They’ve all changed a lot over the last 10 years.
- Search algorithms are more sophisticated.
- Paid ad platforms have become saturated and more expensive, especially in the ecommerce space.
- Social media platforms keep changing and many are no longer around.
- Technology has continued to iterate quickly with the rise of machine learning and AI.
- Consumers have higher expectations of how businesses operate and what the quality of their products.
- Marketing tactics have decreased in effectiveness marketers have had to adapt.
Every channel goes through a cycle of change and effectiveness.
There’s a stage of discovery where the channel is new and marketers are trying to figure out how it works and how to get the most out of it.
Eventually, marketers begin to catch on and experiment on the channel.
When the tactic is optimized, more marketers continue to pile into the channel.
This is when the channel starts to be adopted by the masses and becomes less effective with consumers.
Eventually, the channel becomes less efficient, the tactics fatigue, and the value you get from it isn’t as high.
Email is a good example of this. Email was extremely effective back in the 2000s (when done well, email can still be effective). It was still new and it was a nice surprise when you received an email. You wanted to open it.
Now, over 200 billion emails are sent everyday. Inboxes are getting flooded and this has led to a decrease in open and click rates. While email isn’t dead it has become significantly less effective.
Google algorithm updates are another example. I won’t go into detail about the Google Panda Update but here’s what happened to a lot of websites’ organic traffic.
In March 2018, when Google made a significant change to their search algorithm, Giphy, the popular GIF website, lost 95% of its organic visibility in 5 months. That translates to a loss of 27 million users a month.
Overall organic traffic to the website was cut in half and pages that used to show up in the search results were no longer indexed.
Their downfall was the result of being too dependent on one channel to acquire users.
In January 2018, Facebook changed their news feed to show more content from friends and family and less content from publishers. This was great for users, but the decrease in ad inventory was horrible for advertisers.
What works now won’t work as well in a couple years, months, even weeks.
That’s why you need to ask yourself: How much would my business be affected if I lost my biggest customer acquisition channel?
This chart of the holy grail of investing from Ray Dalio, Founder of Bridgewater Associates, can be taken from investment philosophy to explain the idea of hedging risk and diversifying a customer acquisition portfolio.
It’s best practice to diversify your portfolio and hedge risk investing in different return streams that are uncorrelated.
The graph above shows that if you go from one or two good uncorrelated return streams to 15 or more, you can reduce your risk by about 80%.
It’s easier to invest in 15 different stocks than it is to find 15 different customer acquisition channels, but even going from two uncorrelated channels to three could make a big difference in hedging risk.
Before we discuss how to you find new customer acquisition channels, let’s discuss how to think about new channels.
The three horizons of customer acquisition channels
The three horizons model of innovation was popularized by McKinsey as a framework to help companies manage current performance while maximizing future opportunities for growth.
The model can be used when thinking about customer acquisition channels.
Horizon 1 channels are the core customer acquisition channels that your business runs on. For most businesses, this is often one of three things: organic traffic, paid ads, or sales. The focus of Horizon 1 plays is to continue improving the performance of your existing channel(s) to maximize value
The problem with focusing on only one highly performing channel is you run the risk of potentially losing that growth channel if the search or ad algorithm changes or a recession hits and you have to let go of your sales team.
That’s where Horizon 2 plays come in. Horizon 2 plays are emerging customer acquisition channels you might have heard about or seen other businesses pursue that you want to experiment with.
These are channels that are not yet proven to work for your business, but may have been validated by other companies and have some potential to generate returns in a year or two. You may want to put 20% of your resources into testing these channels.
Horizon 3 plays are the very new channels that no one has really figured out yet. Because there are no playbooks yet, you could gain first-mover advantage and these channels could prove to be very profitable down the road. It may be worth dedicating 10% of your time to testing these channels. You’ll just have to accept that it might take more than a few years to pay off. That means it’s important to start testing these channels now.
An example of a Horizon 3 channel was Pinterest’s ad platform when it was first released. No one knew what type of performance to expect from it and few marketers viewed it as a channel to grow their business. A handful of businesses saw the potential of Pinterest and shifted some of their paid budget aeay from Facebook and Google and began testing Pinterest ads.
Years later, there are businesses being built on Pinterest.
If you think that’s too long, Steve Blank argues that Horizon 3 initiatives could be validated even more quickly. This may be true depending on your product(s) and the channel(s) you want to test.
Don’t wait to work on horizon two and horizon three channels. Since they will take time to pay off, it’s best to start experimenting with them now. That way, if they do begin to pick up traction, they can make up for potential decreases in effectiveness of your horizon one channels.
When you look at a chart of passage of time and the return on investment…
A framework to diversify your customer acquisition portfolio
Each of the five steps below are straightforward and each can be viewed as individual audits to help you find channels that may be opportunities to acquire customers.
- Audit your existing customer acquisition channels
- Research your competitors’ strategies
- Research unrelated businesses’ strategies
- Prioritize your opportunities
1. Audit your existing customer acquisition channels.
Review each of your channels and grade them as well as you can on their performance. How you grade them will depend on your goal, i.e. you might be focused on generating more leads, getting more free users, getting more paying customers, getting larger contracts, and so on. The important thing is to grade each channel according to the same criteria.
You might be surprised to find that a particular channel isn’t performing as well as you had thought or that a channel is performing better than expected.
If you’re running paid ads, how well are your ads converting views into leads or purchases?
If you’re blogging, how does your blog traffic converts into users or leads? You might find that you’re getting a lot of organic traffic, but find that traffic doesn’t convert well.
If you have an email nurturing sequence, how effective are those emails at converting leads into customers?
2. Research your competitors’ strategies.
Do the same audit for your competitors. While you’ll be limited in how much information you can gather about their strategy, you can still learn a lot about their strategies from reviewing their website, blog, campaigns, and ads.
The goal isn’t to copy them since what works for them might not work for you, but you can get new ideas and inspiration.
Use Spyfu to dig into their paid ad strategy and see the keywords they’re targeting. How are they positioning their product in their ads?
Use SimilarWeb to understand where their traffic comes from. You might be surprised to find that they have a lot of traffic coming from channels you avoided.
Use Ahrefs to see where they get backlinks and what keywords they rank for. What keywords do they rank for that you don’t? What websites do they get backlinks from that you should also try to get links from?
What channel you’re auditing, continue to ask yourself: what are my competitors doing that I’m not? Why are they doing it? Why am I not doing it?
Keep a running document of all your notes.
3. Research customer acquisition strategies of unrelated businesses.
Think about the businesses you’re inspired by and the products you love and learn about their strategies.
Find folks who work at those companies on LinkedIn and get on the phone with someone on their marketing or product team. It’s an opportunity to learn from them and share notes about what’s working and what’s note, things to try, and so on.
This is an opportunity to have fun, explore, and learn. If you’re a B2C company, don’t rule out potentially learning from B2B companies and vice versa. There are plenty of opportunities to find strategies that translate between different industries and business models.
Working at HubSpot, a B2B CRM company, I’ve spoken to marketers and product managers at B2C companies and learned that while they served a different market, they faced similar challenges and gave me a different lens to view those challenges. These conversations will get you to think more outside of the constraints you normally work in, i.e. be more creative.
4. Aggregate and prioritize your opportunities.
Now that you’ve audited your acquisition channels, researched your competitors’ strategies, and learned from your favorite brands, you probably have a list of ideas you want to try.
Make a list of all these channels and rank them in order of potential opportunities. Then you prioritize which channels you want to go after. The framework I’ve learned and continue to use and refine is Brian Balfour’s customer acquisition matrix.
To avoid getting too complex, I stick to six basic criteria and rank them as low, medium, or high. You can get to these judgments through research which may include pulling some data, talking to people, or doing a Google search.
i. What is the cost to acquire users through the channel?
Obviously it’s ideal to keep costs low. When thinking about paid ads, it costs money to run campaigns so even if paid channels are efficient, it will still cost money to continue investing in this channel. The cost might be low to test out and high if you decide to scale.
If you’re thinking about content marketing, the upfront costs might be expensive to hire writers, but with a good SEO-driven content strategy in place, you’ll begin to rank for keywords that will continue to drive organic traffic over time. The cost here may be medium or low.
You can see that unless you have a lot of data on these channels, this isn’t a very scientific way to judge them. There is a level of intuition here.
ii. How targeted can you be with different audiences?
Facebook ads are highly targeted so you can be very specific about who sees your ads.
The extent of targeting via organic search is dependent on the keywords you decide to focus on, but you can’t decide who actually sees your content.
iii. How much control do you have in turning the channel on or off?
Facebook and Google ads are easy to turn on and off.
Partnerships, on the other hand, would be more difficult. You might be halfway through the term of the partnership but realize it isn’t actually generating the results you expected. It will take more effort to end the partnership because it might mean hurting the relationship.
iv. How quickly can you start running experiments?
Again with paid ads, you can start immediately. For partnerships, it takes a long time to get a partner, to agree on the type of partnership, and if you want to create content together, and so on.
v. How long does it take to get data?
You can get data on paid ads within a couple of days or even hours. On the other hand, it may take a couple of weeks or months to determine whether or not your content marketing efforts are paying off.
vi. If the experiment is successful how well does the channel scale?
This depends on the size of the channel. Facebook and Google ads have large audiences to reach. Content marketing is capped on the search volume of target keywords but can scale if you have a good strategy to expand your keyword portfolio. Depending on the type of partnerships you do and big the pool of partners, it might be difficult to scale.
I created this customer acquisitionn channel prioritization spreadsheet to help with the process. Again, it’s not scientific, but provides a good exercise to help you think critically about each channel.
Executing Your Strategy
It doesn’t matter if you’ve chosen the next great channel if you can’t execute well. This is when mistakes are made. Below are three tips for execution.
Validate before committing.
The goal of this exercise is to determine which channels have the potential to help you grow your business and figure out which ones to test. Before you decide to have a whole team work on a channel or invest a lot of time or money, use 10-20% of your resources to test it out.
For example, if you want to test live chat, start out with a free live chat tool on your website for a month and see if people engage with it. If there’s engagement, you can decide to invest a little bit more and purchase an introductory product and create a chatbot to automate some conversations. If you see that people who engage turn into leads or customers, you might decide it’s worth it to continue investing in live chat.
View new channels as experiments and validate them before committing to investing your precious time and resources.
Focus on what you set out to do.
Remember that huge list of ideas you had? Avoid revisiting that list. You might get impatient about the channels you’re experimenting with and be tempted to try experimenting with all the channels at once.
If you aren’t putting your energy into truly validating a channel and it doesn’t work, it’s easy to say, “Well, we weren’t putting in all our effort in testing so we should keep testing.” That leads to more half-assed efforts.
Focus on your handful of experimental channels to start and really focus on them for at least a couple of months. If there’s no traction, revisit that list of ideas and move on to the next channel to test out.
When you find one that works, double down.
Center everything around learning.
Your experiments are going to fail in many cases. No matter how interesting that channel might be or how excited you were, you just couldn’t make it work. That’s okay. What’s important is that you share those failures and the resulting learnings with your team and move forward. That’s how you avoid success theatre. Ask why it didn’t work. Ask what could have been done differently. Then do better.
Focus on learning even when something succeeds. Ask why it succeeded. Ask what you should continue doing. Ask what you could’ve done better. Because there’s always room for improvement.
No matter how often you read blog posts that make these processes seem polished and perfect, the reality is, it’s messy and difficult and we’re always aiming to improve.
As you learn, you’ll find your wins. Sometimes they’re small. Sometimes they’re big. Sometimes they’re few and far between. And when you win, you double down, and you keep learning.