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Should Your Startup Run Ads? (Pre- Or Post- Product/Market Fit)

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Who does well with paid marketing?

By Elizabeth Yin (Co-Founder, LaunchBit)

This is a continuation of a 2-part blog series on whether to run ads for your startup. Before, I talked about running ads pre- product/market fit. This week’s post assumes your startup has achieved product/market fit and is in its growth stage.

Once you reach product/market fit, you should know roughly what your user acquisition funnel looks like and something about the lifetime value (LTV) of your customer. You still may need some major experimenting and reworking, but you should have a rough order of magnitude of your numbers.

Who does well with paid marketing?

Ok, so you have your rough LTV numbers. Here are some quick guidelines from personal experience doing lots of paid marketing. Disclaimer: these are some vast generalizations, so your mileage may vary.

If your LTV is:

  • < $5: paid marketing is going to be near impossible
  • $5-$20: will be tough but paid marketing should be part of your growth strategy
  • $20+: paid marketing will probably be a BIG part of your growth

LTV < $5

Consumer web companies whose business models are ad-based generally don’t do well with paid marketing. It is going to be really hard to buy traffic in volume at LTV < $5. If you’re in this range, affiliate networks such as Referly, Commission Junction, Share a Sale, your own referral program, et al can be a strategy to ensure that you only pay low prices (perhaps $1 or $2) to acquire a new customer. But, some of these networks require you to have significant mass before being able to join.

You should probably start by looking primarily at free channels for growth (partnerships, cross-promotions with companies who have similar audiences, catalyzing word of mouth, viral loops from within your product, etc). Frankly, I would not focus on doing much or any paid marketing if you’re in this category.

LTV: $5-$20

In this range, paid marketing should probably be part of your strategy, but it probably won’t be the bulk of your growth. A number of daily deal sites fall into this category. Like with the prior category, affiliate and referral programs can work well. Groupon and Living Social made it easy for their subscribers to share deals through social networks and earn meaningful credits when their friends bought deals. This significantly propelled their growth.

You also have room to do CPM and CPC deals in this LTV range. For example, if your site converts at 10%, and say you have a $10 LTV, then that means you can spend up to $1 per unique visitor to break even. (If it’s hard to get a sale right away on your site, a lot of companies will try to collect an email address of potential buyers first. Then, they’ll use email marketing to gain trust and sell them later. With lead generation, it should be easier to hit a 10%+ conversion rate.)

The competitiveness of advertising in your vertical will dictate whether you can get a lot of volume at these CPC bids, but you should be able to get at least some traffic to make it worthwhile to use paid marketing for some growth.

LTV: $20+

With high lifetime values, paid marketing will likely be a big part of your growth strategy. In fact, subscription models, especially Saas companies, tend to have very little word of mouth and generally require paid marketing to grow.

Now, I know there are some Saas companies that have grown by maintaining popular blogs and email newsletters. And frankly, a lot of content marketing is paid marketing — most of it isn’t free.

In summary, who does well with paid marketing?

In summary, ads for feedback at pre- product/market fit and ads for high LTV companies at post product/market fit do well with paid marketing.

This post originally posted at LaunchBit’s blog. Photo credit: Mark Richards and Bad Advice Kitty (source unknown).

About the guest blogger: Elizabeth Yin is a Co-Founder at LaunchBit and is currently in the 500 Startups incubator program. She is an internet marketer and backend programmer. Previously, she ran marketing for startups and also worked as a marketing manager at Google. Prior to Google, Elizabeth wrote backend code for startups during the rise and fall of the dot com era. Elizabeth holds a B.S. in Electrical Engineering from Stanford and an MBA from MIT Sloan. Follow her on Twitter at @launchbit.