Lesson: Revenue Relationships with Steve Blank

Step #3 Obtain: Acquisition and activation is a two-part strategy

So let's take a look at now the web/mobile funnel. Now, what's really interesting is in the web/mobile funnel, the getting customers part of the funnel is actually quite simple, at least on first glance.

We still have earned and paid media driving customers into the funnel. If you remember, we understood who the customer archetype was, we’re running search engine marketing or search engine optimization, but in the web, we just really have to do two things: first one is we got to acquire customers and then we activate them.

Well, what does acquire mean? Acquire on the web is I want to get them to my site or to my mobile app or to my cloud app. How do I do that? As we said, earned and paid media will drive customers somehow to be looking at a place that you’re at, but the next step is much harder. After I acquire them, I want them to do something; I just don't want them to look and go away. I want them to either pay for the product or sign-up for something or become a user. That is, the word “activate’ means, “I want you to engage with my website or my app, and do something I have planned for you to do.”

Now in a simple world, what I would plan for you to do is open your wallet and give me all your money. In a non-perfect world, you might just be a user and I am going to monetize you by getting payers to pay for the fact that I have lots of users, but acquisition, that is acquire, an activation is a two-part strategy. So, in theory, understanding acquisition and activation seems pretty simple. I get it, I understand who my customers are, and then I figure out what earned and paid media I want to use and on the web, I might be paying Google for AdWords. I'm going to acquire them and then activate them. How hard could this be?

Well, it actually gets kind of fun because the real metric, the way we kind of measure things, the language we use on the web is customer acquisition cost. And what we want to do is figure out how much is it really going to cost us to get an activated customer out here on the right-hand of the get funnel.

Let's kind of do an exercise and see what it feels like and how does it work to get an activated customer and how much it would cost.

So, let's assume I am using Google AdWords, and I am paying $0.50 per pay-per-click. Now, let's assume my campaign at $0.50 each gets me 10,000 people to come look at my website. Well, $0.50 times 10,000, that costs me $5,000. But the goal isn't to just have people visit; the goal is to get them to the end of the funnel, and at the end of the funnel, I want them to actually have paid for and/or used the product, so the goal is to activate them.

Now, what's interesting is assume I am offering a trial, and assume that maybe just 5% of the people who I have acquired actually now take the trial. And so, I now have 500 people using my freemium product, but the goal is not to just have them use the freemium product, the goal is to actually have them pay for it. And what's interesting is, assume 10% of those now actually pay. So, I would start with 10,000 people who came to my site and I spent $5,000 for them, 500 people took a trial of the product and 50—only 50—actually paid for the full version of the product.

So while 10,000 people upgrade for $5000 because it only cost me $0.50 per person. If we now do the math, we can now see it costs me $100 to acquire one paying customer. That $100 equals my customer acquisition cost. I used this example for a web/mobile channel, but it's similar for physical channel. You might not be doing pay per click, you might be doing direct math, or you might be doing television or radio math, but the math works the same. How much did it cost to acquire a customer? How much did the campaign cost? How much did it cost to get them to consider your product? How much did it cost them to take a test drive of your car or fly your airline? And what, in the end, was your customer acquisition cost? That's a key number for any founder thinking about a start up.

Just as a note, one of the interesting things about getting customers is I happen to draw the funnel that says awareness, interest, consideration, and purchase, but here's just a heads up. In your funnel, in your physical channel, you might decide the steps are slightly different. So, don't feel locked in to calling them awareness, interest, consideration and purchase, just realize that you need to modify this to what your real cycle is. And you will only kind of learn that as you watch customers get from being aware of your product to purchase. So, use this as a template but don't think that there's anything magic about this. It’s just a proxy.

Now, in a world where basically that's all you do is you create demand on the left side of the funnel and somebody purchases on the right, you could kind of measure how much it cost to do that, and we will talk about customer acquisition cost a little later, but there is a little magic accelerator on the bottom of these funnels, and that's called the viral loop.

A viral loop could be something as simple as somebody bought one of your products in the store and could not wait to tell their friends, "Wow! This was the greatest thing ever, you can't wait to get 'em..." boom. You now have kind of a magnifying effect, a viral effect, about selling your product based on users loving it.

Well, this has happened for a hundreds of years, but now we could sometimes engineer this viral loop by saying, “Is there anything that we can do? Any incentives, any ways to kind of get rebates, is there a way to turn our customers into salespeople to kind of accelerate this purchase to help us get new customers?”

And smart startups think about this loop all the time, so viral loops are something that start ups want to see if it's possible to create. Now, just don't feel bad if in your company it's really not possible to do viral, for example, in dating sites. Not everybody wants to announce to their friends that they’re actually visiting a dating site. So in some cases it might not be possible, but in others you should always keep your eye out. Is it possible to make this funnel more efficient?