Frame a Funnel

Most startups die from a lack of customers. Others die because they realize too late that the economics of their customer acquisition process are impossible to survive.

As entrepreneurs, we're all optimists and so we tend to dramatically underestimate the effort that will be required to get customers. We all think our new product or service is so amazing that customers will just be lining up with cash in their hands, but it never works out that way.

My purpose with this chapter is to get you to start building and testing your customer acquisition process now, long before you have an actual product ready to sell. As with everything else on the Launch Path process, it's about continuous learning, optimization, and improvement.

Customer acquisition is always a funnel.

Every venture is different, but customer acquisition can always be visualized as a funnel. You need a whole bunch of leads coming in the top of the funnel, and then you slowly work those leads down through the funnel, and a certain percentage of them end up coming out of the bottom as paying customers.

Let's say you're doing direct sales. You need to knock on 1,000 doors (top of the funnel) in order to get 35 people to invite you in. Of those, 18 ask you to send follow-up information — now they're in your funnel. You follow up with them, giving them more information, and of those, six end up making purchases (they come out the bottom of the funnel). So now we know that every 1,000 doors we knock on will result in 6 sales, and we can figure out ways to optimize that process. For any business, the customer acquisition process can be visualized as a funnel.

The top of the funnel is all the stuff that makes people aware of your company — events, ads, podcasts, articles, etc. Hopefully, they will check out our website and enter their email address, and then we will follow up with them and give them more information. Hopefully, they'll come out the bottom of the funnel as a new paying customer.

The math of a funnel.

Let's look at how the math works. We run some ads, and 100,000 people visit our website, entering the top of our funnel. 20% of those give us their email address and enter the "interested" section. 10% of those respond to our follow-up emails, converting to the "consideration" phase, and then 5% of those convert to "purchase." If you do the math, our ad campaign yielded 100 new customers.

But what if we worked to optimize each conversion by just two percentage points — to 22%, 12%, and 7%? Now our yield is 185 new customers: an 85% increase from the same spend. Optimizing each conversion point in the funnel is the key to success.

Now let's look at the economics. If we spent $1,000 on this campaign and got 100 new customers, then our customer acquisition cost (CAC) was $10.00 each. But with the optimized funnel, our CAC drops to $5.41 — a huge difference. As we discussed in Chapter 5, the success or failure of any startup venture distills down to one equation: CAC < LTV.

Not all customers are equal.

Two years from now, when you sit down and look at the numbers for your profitable startup, you will find that 80% of your profits are coming from 20% of your customers. It is nearly always true. And so, the sooner we can identify the high-value subset of customers for your venture, the better off we'll be.

In Malcolm Gladwell's excellent book The Tipping Point, he talks about how some members of any social structure are more influential than others. Some are more influential because they are respected by the community, well-connected, or considered thought leaders that everyone looks to. Think about who the most influential people are for your product or service and target them. Targeting the right people can dramatically improve the efficiency of your customer acquisition effort.

Think about scaffolding customer segments.

A few years ago, Geoffrey Moore wrote a book called Crossing the Chasm. In it, he discusses the fact that most startups can get an initial set of customers, but very few are able to "cross the chasm" and get thousands (or millions) of customers. His suggested methodology distills down to a straightforward concept: start with a "beachhead" market, nail that one, and then add additional markets one at a time, using each one as a scaffold to the next. Many successful companies have done exactly this.

Owned Media, Earned Media, Paid Media

Your top-of-funnel will largely be people who heard about your startup from somewhere in the media landscape and are interested in finding out more. It's useful to think of the media landscape as having three components:

You will need to generate activity in all three media types, and if you do, the media mentions will all help to drive each other. Remember, metrics matter — you'll want to have a way of measuring where the leads into the top of the funnel are coming from, so that you can optimize, optimize, optimize.

Summary

Every venture will require a slightly different process for acquiring and keeping customers. For some, it will be more about a direct sales team that goes out making sales calls; for some, it's more about Instagram influencers; for others, it's more about Google search ads. But the funnel metaphor always applies, so think about how you will bring leads into the top of the funnel and how you will move those leads down through the funnel and turn them into paying customers.

Most importantly, have processes in place by which you can measure and optimize each step of the funnel process. In the end, your venture comes down to one simple equation: CAC < LTV. Focusing on the continuous improvement of your CAC is likely the single most important factor in making your startup a success.