This article was written by the original owner of startupguide.com, Ryan Allis, and published on his website in 2012. Read more about why Ryan was happy to hand over his website domain to us here.

In today’s world, marketing is all about the product – not the advertisement. Once upon a time, you could create a mediocre product, and then with enough ad dollars and Madison Avenue script men, you could create artificial demand and generate perceived value for something that didn’t have a lot of intrinsic value.

Today, with word of mouth spreading easily on social media and with the demand for quality products so high, you simply can’t succeed with a poor product.

So if you’re marketing a bad product, stop. Stop everything. Take those funds that you’re spending on advertising and put them instead into product development. Invest in building a great product before you even think about marketing.

Wait until you have a great product to start storytelling. Use your marketing budget and talent to reframe the story that’s being told about your product by yourselves and others. At the end of the day, marketing and advertising is only partially company-directed. The real storytelling happens at the level of the customer.

In this section, we dive into the six steps for scaling customer acquisition, including through word of mouth, tracking of key statistics like cost per lead and conversion rate, and great storytelling.

To acquire users and customers, you first need to have a system in place for tracking results and testing advertising. I recommend spending between 10-15 percent of your monthly advertising budget on testing new advertising channels.

But in order to understand how much to allocate per advertising channel or per marketing channel, you first have to calculate a really important number: customer acquisition cost.

In June 2005, I was having lunch with a friend of mine named Jud Bowman. Jud was the co-founder of Motricity, a company that raised $350 million in venture capital before going public in 2010. Jud was asking me why I hadn’t raised venture capital for iContact. I told him I was considering it. He asked me two critical questions to determine whether we were ready to raise outside capital: What is the lifetime value of an average customer? And how much do you spend to acquire an average customer?

Since iContact operated on a subscription model, Jud told me that I could estimate the lifetime value of an average customer by taking the monthly average revenue per user (ARPU) and multiplying it by the average number of months a customer stayed. At the time, the average monthly revenue per customer was $45 and our monthly average churn rate was about 3 percent, meaning an average customer stayed with us 1/0.03  or about 33 months. So to get an estimate of the lifetime value we simply multiplied $45 and 33 to get about $1,500.

Then to calculate how much we spent to acquire an average customer, Jud told me to simply take what we spent per month on advertising and divide that figure by the number of new customers we acquired in a month. At the time, we were spending about $100,000 per month on advertising to acquire 330 customers per month. So our Customer Acquisition Cost was about $300.

There it was. We knew we spent $300 up front to acquire a revenue stream of $1,500 over about three years. This was very profitable transaction to make over and over, but we could only do it so much before we’d run out of money in our bank account. We knew we could spend a lot more on advertising at the same customer acquisition cost if we had the funds.

Based on this relatively simple math we went out and raised our first $500,000 in investment capital. It took us nine months, longer than we anticipated, but we got it done. We brought on Tim Oakley as our Chief Financial Officer in February 2006 and by April we had a term sheet from IDEA Fund Partners of Durham, NC, to invest $500,000 in iContact.

Of course, mathematically, you should invest more money in the channels that are getting you the best results. For most companies, results mean new paying customers, or new leads that you can turn into paying customers through a sales team.

Once you have a system in place, whether it’s through the web or through a retail store, that can enable you to scientifically track the additional incremental dollars put into a channel and then the additional results that come out of that channel. You can use basic, simple optimization formulas to determine how much to spend on each channel.

This really only works if you have a large enough budget to be able to calculate statistically significant data. If you’re spending, say, $500 on advertising and getting one or two customers from that spend, the sample size is too small. You need to have enough budget – probably somewhere in the neighborhood of 20-30x what it costs to acquire one new customer – to get statistically significant data.

Customer acquisition cost means how much it costs you to get a new customer. To calculate it, you simply take your total amount spent on advertising during a period (let’s say, a month) and divide it by your total number of new customers acquired during that month.

Make sure you set up a system that tracks how many new customers and how many new users you add per month (per day, even) and make sure your accounting system can calculate how much you spend to acquire those customers on that monthly basis.

Not only do you need to know your overall customer acquisition cost, you need to know your customer acquisition cost by marketing channel. It often costs different amounts of money to acquire customers through radio versus TV, for example, or through direct mail versus online advertising. As a scientific marketer who’s combining great storytelling with financial acumen and financial discipline, you need to have a great story and you need to be able to understand which channels to invest more money in.

Of course, mathematically, you should invest more money in the channels that are getting you the best results. For most companies, results mean new paying customers, or new leads that you can turn into paying customers through a sales team.

Once you have a system in place, whether it’s through the web or through a retail store, that can enable you to scientifically track the additional incremental dollars put into a channel and then the additional results that come out of that channel. You can use basic, simple optimization formulas to determine how much to spend on each channel.

This really only works if you have a large enough budget to be able to calculate statistically significant data. If you’re spending, say, $500 on advertising and getting one or two customers from that spend, the sample size is too small. You need to have enough budget – probably somewhere in the neighborhood of 20-30x what it costs to acquire one new customer – to get statistically significant data.

The next really important measure to determine is customer lifetime value. Measuring customer lifetime value and customer acquisition cost together can help you optimize your advertising and marketing spend.

Customer lifetime value means the amount of revenue that you receive over the life of that customer. If a customer is buying a subscription product or generating recurring revenue, you simply take the amount of money that’s paid per month (or other period) and multiply it by the average number of months (or other periods) that customers are around before they cancel their account or stop their subscription.

If you are selling a one-time purchase product, then take a period of time – four or five years, for example – and look back at your data on which customers are purchasing what and calculate how much an average customer spends per visit to your store or per visit to your website, and how frequently they purchase.

In the case of recurring revenue, if a customer is paying $50 a month and stays around for 48 months, then the average lifetime revenue per customer is going to be $2,400. Ideally, you want to keep your customer acquisition cost as low as possible while still maximizing the number of new customers you get. So if your customer lifetime value is $2,400, you might be able to spend up to $800 in advertising to get that customer and still break even or even be profitable.

Here’s a case of a non-recurring or one-time customer. Let’s say the average purchase price is $50 and within a period of three years, that average customer comes back six times. That means they will spend $300 with you, so you might be able to spend up to $100 (again, depending on your gross margin, net profit margin, and cost of goods sold) to acquire that new customer.

Once you have the data on customer acquisition cost by channel and customer lifetime value, you can optimize your marketing and scale your ad budget scientifically. Once you know your conversion rate, your acquisition rate, and your customer lifetime value, you can scale your marketing.

Online marketing channels

Online marketing channels are a dime a dozen. They can include:

Offline marketing

It’s a lot easier to track online marketing results than it is to track offline marketing results. The general way that you will track offline marketing results is by spending enough of a budget in a particular region (a particular demographic area) to determine the results prior to spending any money and the results after spending the money.

Some of the offline channels are obvious and have been around for decades, like television, print, radio, Yellow Pages, direct mail, trade shows, sponsoring events, putting up billboards, and using campus reps for word of mouth. The key is to test all of the channels and track the actual results from each one.

In order to grow your advertising, you need to tell a better story, and scientifically scale your marketing. You can do this through calculating cost per lead and conversion rate by channel to determine customer acquisition cost per channel, determine what you can pay per customer, combine scientific ad measurement with great storytelling and raising capital.

Other tools for increasing customer acquisition can include creating a premium version of your product, adding new retail locations, and hiring more salespeople, to name a few.

Marketing is ultimately about generating an interested lead. It’s turning someone from an unknown quantity into a trackable prospect. Sales is turning that trackable prospect (the lead) into a paying customer. Account management (or customer service, depending on your business) is about turning a customer into a repeat customer – someone who will come back time and time again and be a lifetime evangelizer.

Main photo: Unplash / Evan Krause

*This article was originally published on October 17th, 2018 and updated on December 10th, 2018.