What to do when your GTM fails
Last week we talked about how every startup needs a solid go-to-market (GTM) strategy. We covered:
- Knowing your customer persona
- Having a plan for how to get this customer
Sounds simple enough, right? But there’s one thing we left unanswered at the end of last week’s piece.
Your brilliant plan to repeatedly acquire customers probably won’t hold at scale.
Let’s break down what we mean by this and what you can do about it.
Your unit economics get worse at scale
Let’s say you ran a successful customer acquisition experiment with Instagram ads.
You spent $100 on ads, drove 70 clicks, and generated 5 sales to your video editing software business. The 5 new customers signed up for the $10/mo plan. An average user lasts 4 months before churning. So your $100 ad spend brought in (5 customers x $10 x 4 months =) ~$200 revenue.
Still following me?
That means for every $1 you spend on ads, you get $2 back. That’s great! You pitch this plan to investors and say you need more capital to spend on Instagram ads.
But investors (and experienced founders) know that these marketing numbers likely won’t last at scale.
- Instagram may increase the cost of running ads.
- Instagram can change their algorithm unexpectedly.
- The 5% conversion rate could decrease as you expand to new audiences.
- You’ll need to hire new designers to create new assets. Along with an agency or a marketing hire to manage the process.
You may reach a point where for every $1 you spend on ads, you only get $1.08 back. Or less… after you account for all the other costs involved.
AKA your customer acquisition cost (CAC) gets worse.
If this is happening to you right now, don’t worry. This is normal. Great marketing channels don’t last forever or else I’d still be active in Facebook groups.
But you do need a plan to address these concerns… for your own sake and for your fundraising efforts.
The next part of your GTM strategy
Let’s talk about LTV. This is an acronym for Life Time Revenue, which means: how much revenue will an average customer bring to your business.
Here’s how to calculate it:
LTV = Total Life Time Revenue / Total Customers Acquired
So if 5 customers spend $200 before churning, that means each customer’s LTV is $40.
But your CAC will almost certainly go up over time (marketing channels become more expensive, it takes longer to convert new audiences, other companies are competing for the same customers).
So, what can we do? Well, one option is to try and increase the LTV of your existing customers.
Here are some ways to do this:
- Upsell your customers into a premium plan for $20/mo
- Sell them on a different, complementary product for $5/mo
- Find ways to reduce churn so that customers stay on the $10/mo plan for 8 months instead of 4 months
If an investor is concerned and asks you what you’d do if your CAC increases, you can say something like,
“I’m already acquiring customers profitably. I’ve spent $100 on Instagram ads, drove 70 clicks, and converted 5 sales.
If the cost per lead goes up, or the conversion rate goes down over time, we expect to be able to upsell our customers into a premium plan that does A, B, and C. Or sell new product D that complements A. But for now, we are starting with a product that is laser-focused on A.”
I’ve personally learned a lot from writing this piece. My biggest takeaway? It’s all about the unit economics, baby. Take time to understand how CAC, LTV, and ROI all work together.
Marketing channels won’t be a gold mine forever. Have a plan beyond your initial marketing strategy on how to acquire customers profitably OR increase retention.
And if you’re extra curious, the book Traction: How Any Startup Can Achieve Explosive Customer Growth can be a great resource for you. We’re not affiliated with them, I just love the book.