Paid search is the quintessential tool for acquiring new customers. So shouldn’t it be the ideal tool for high-growth start-up companies? Yes it can be, but it often isn’t. So let’s start there.
Great new ideas sometimes aren’t ready to spread via paid advertising, especially not when they’re competing in expensive keyword auctions. As an advisor to any start-up, your second job is great tactics. Your first job is strategy: knowing when to advise entrepreneurs that there are other things they should be doing first, before spending money on paid media (either with available funds, or with sweat and favors), like put more into product development, recruit key cofounders or technical staff, traditional or new (online) PR, inbound or content marketing, etc.
Start-ups that have raised around $1 million in seed capital, of course, can probably afford to budget for paid advertising on top of the other priorities, assuming they have some cash flow. (In ecommerce, consumer finance, or very well defined B2B spaces, pay-per-click [PPC] might vault right to the top of the list even in bootstrapped startups, in cases when a bit of compelling content or glad-handing influencers pales in comparison with the immediate customer acquisition potential of PPC.)
Broadly categorized, the main uses of PPC we’ve seen fall into:
- The “go crazy” market-sizing exercise, or its close cousin, the “land grab”;
- act like a traditional business, run PPC like a conservative, moderate-growth profit center;
- initial, low-cost testing.
Let’s look at number three first. Probably the biggest tragedy in the land of start-ups falls over at the slow end of the “fail fast” vs. “fail slowly” spectrum. Companies that cling solely to inbound marketing, charm, etc. — oftentimes simply benefiting from temporary success in the ever-shifting world of Google organic search — may never reach critical mass, and may never really seriously test their business model against “normal” acquisition costs (free simply isn’t a credible price for gaining a new customer in the real world). Too much hope is a problem for entrepreneurs, just as much as too little hope or too little perseverance might be. We worked with an innovative but tiny start-up in the telecommunications space, and the entrepreneur decided smartly to budget a certain amount for PPC so he could understand consumer behavior. Nice product, and for a consumer, a nice-to-have but not a must-have. (Consider that Skype might have been this start-up’s biggest competitor at the time.)
Despite ego-boosting positive feedback from some early customers, the results of testing paid ads were pretty dismal. The entrepreneur was forced to take a more serious look at the upside limits to the business, and seriously question whether the idea was worth raising capital or mortgaging his house for. After all, he had a day job as a lawyer. The difficulty of converting new customers via PPC helped him to understand that a few pockets of consumer interest didn’t necessarily translate into a scalable business. At least the experiment was cheap.
The second option, acting like a traditional business, has been a clear success for the start-ups we’ve worked with. Whether it’s making a small profit on each ecommerce sale, gaining new high-end large-buyer B2B customer wins, or undercutting the “big guys” in SaaS, hardware, or software, many start-ups have found that PPC leads to them feeling like a real business sooner than later. Positive cash flow combined with a steadily increasing pipeline of real customer response data is start-up nirvana; well, actually, it’s simply business nirvana. Why make the distinction between a start-up and any other business? Although their needs and outlook may in fact vary greatly from larger, more established businesses, this approach to PPC has helped many start-ups succeed. Steady growth, by the way, doesn’t preclude “hockey-stick growth stories.” Indeed, when five or six years of data and growing dominance are all laid out before strong strategists and deep-pocketed investors, a “go big” shift is easier to undertake. And instead of discussing “burn rates,” the entrepreneur is taking home a growing paycheck.
When it comes to number one and “go big”: please don’t go there right away. Strategy number one — the massive market-sizing exercise — rarely makes sense. We’ve had start-ups come to us with thin business models who have a minimum spend in mind (because their prominent celebrity investors were feeling their oats? we had no idea): “spend $75,000 per month on a bunch of celebrity names!” or what have you. The funny thing about massively failed “market-sizing exercises” is that the investors will often leave the party suddenly. The start-up — instead of working on the product or idea, gaining validation, and winding up a long-term success — is prematurely aborted. The company “pivots,” the CEO might lose control, the investors get 80 percent of the company in a “down round,” and so on. Sure, “fail fast” might be a glib mantra that appeals to the partners and investors who potentially have large pools of capital to deploy, but it does the entrepreneur — the one who pins her hopes and dreams on making this thing succeed as a real business — little good. “Fail fast” is best reserved for the small, affordable tests outlined in strategy number three. And if you’re the business owner, there is no better discipline at first than spending your own money in an attempt to either carve out a return or gain valuable market insight.
That doesn’t mean start-ups shouldn’t want to move quickly. PPC is nimble, and can help a new company make its mark before potential competitors even know what hit them. Many have reached significant funding milestones as a result of PPC’s ability to generate a solid customer base without waiting around for “inbound marketing alone” to make a hero out of them. PPC also “makes you smart,” as my colleague Mona Elesseily points out. Because the clicks cost money, you’re more apt to test landing pages, UI features, business model details, etc.
Raises of, say, $1 or $2 million, are supposed to leave some money in the budget to accelerate growth — often at break-even levels and no better –so the investors can decide whether to place their next, bigger bet on the company. Once funds raised are in the $5 million and up range, typically there will be plenty of marketing dollars earmarked in the budget for a full-scale paid marketing effort. Especially in tech, we’ve worked with quite a few start-ups that have progressed through the ranks quickly with rapid customer acquisition strategies via PPC.