Paid User Acquisition for Early Stage Startups – Part 1: The Five Rules of Paid User Acquisition

This is the first post in a 6 post series I am writing about how early stage startups should approach paid user acquisition. This first post will outline some of the basic rules of customer acquisition. These rules are based on my first-hand experience running millions of dollars in paid ad spend over the last few years while consulting. They are also informed by the millions of dollars a month in spend we track and analyze on behalf of our customers at my current company, Interstate Analytics.

In later posts we’ll dig into landing page best practices, as well as the top 4 channels startups should be considering early on in their lifetime: Retargeting, Facebook, AdWords, and paid content marketing (Taboola/Outbrain). Let’s get started.

The Five Rules of Paid User Acquisition
  1. Make Something People Want
    Paid User Acquisition is not a replacement for a good product. It can sustainably boost growth for your good product but it can’t save a bad product.
  2. Listen to Statistics, Not Your Gut.
    Optimizing paid user acquisition simply a matter of running lots of controlled tests, only unlike other A/B tests these cost real money to run. You should be familiar with how to run basic statistical tests on your data, and how to avoid multiple significance testing errors. Here are some good resources to read and use:
    Avoiding Multiple Significance Testing Errors
    Sample Size Calculator
    Chi-Squared Test Calculator
  3. Run a Small Number of Big Tests
    This rule derives from Rule #2. As a small startup, you have a limited marketing budget. This means that if you want to know anything with certainty, you can’t run hundreds of tests. For any given test, the smaller the baseline conversion rate and the smaller the difference you are trying to measure, the more samples you need to test. e.g. If your baseline conversion rate is 2%, in order to measure a 1% improvement with 95% confidence you need 2615 samples, but to measure a 4% improvement you only need 478 samples. (check the sample-size calculator above). Experiment with concepts that are very different. Minor changes in copy or creative lead to minor changes in conversion rate. Look for major changes.
  4. Learn Baselines
    In order to know which major changes are feasible, you first need to understand what ‘good’ means. There are established metrics of what ‘good’ means for everything you’d want to measure, whether its a click-through rate for Facebook newsfeed ads, a cost-per-click (CPC) for Outbrain ads, a conversion to email signup on your landing page, or a conversion to purchase from a Retargeting ad. Knowing these baselines will help you make sensible decisions about how you are doing and where you should be focusing your efforts. For example, if 3% of users clicking to your landing page from an ad convert to entering their email, you can probably improve that 10-12x. If you’re already at 30%, you can only improve 3.3x theoretically and likely only 0.6-0.7x realistically. I’ll try to include baselines in upcoming channel-specific posts wherever I can, but they aren’t secrets. If you Google or ask around you can usually get a good idea of how you should be doing.
  5. Focus On the Right Metrics
    Many companies focus on the wrong metrics for paid user acquisition. Cost Per Click (CPC), Cost Per 1000 Impressions (CPM), Cost Per Conversion (CPA), etc. The only number that matters is Return on Investment (ROI) measured over time. Return on Investment is calculated by dividing the amount of net revenue a campaign drove by the amount spent on the campaign. As a result, it can change over time as more people purchase. Tracking this is important, especially if you are a subscription business or any other business where you don’t expect to break even on a user’s first purchase. If you’re doing a great job you’ll hit 100% ROI in the first week, if you’re doing a good job you’ll hit it in the first month, if you’re doing an ok job you’ll hit it within 3-6 months. Metrics like CPA, CPC, etc can be leading indicators for ROI in some cases, but if you are relying on those metrics you have to recognize them for what they are, proxies to the real metric you’re trying to measure.

In the next post we’ll cover landing page optimization for paid user acquisition. Sign up here to get notified when the next post goes live:

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