If you’re thinking about performance marketing, hopefully that means you’re ready to accelerate your growth rate. You may have impediments to your growth like your ability to rapidly scale your supply chain or your employees if you supply a service where one of your teams needs to scale linearly with your customer base. For the sake of reducing complexity here, I’m going to assume the limiting factor is cash on hand.
Measurement Considerations
Method of Transaction
Performance marketing is generally measured from an analytics perspective; when does a user complete a purchase. For organizations that are fully online and transacting directly with the customer or are a physical retail business, this may be a fair assumption, but for a business that is on mobile and transacting through the App Store or Google Play Store, you’re receiving your cash 33 days and 15 days after month close, or an average of 48 days and 30 days after a user transacts. This amount of time needs to be added to your payback period in order for you to accurately calculate when you will have the cash on hand to pay for your marketing spend.
Cost of Goods Sold
To measure your payback you’ll need to have a good understanding of your variable costs and if there are meaningful differences between these costs based on the product the customer buys. This should include platform fees, transaction fees, the physical cost of items, shipping costs, and anything else that scales as customers consume more of your product or service.
Differences Between Product Lines
There may be very different payback and retention curves for different users and product lines in your business. Understanding these dynamics is key to sustainably growing your business. If you have one product line with a quick payback but a retention curve that degrades rapidly and another with a longer payback but a healthier long term retention curve, creating the right mix can help to grow the business with minimal additional investment but sustain the long term growth.
Investment Strategy and Payback Period
Rapid Payback
If you have a product that is paying back acquisition spend rapidly, you may be able to get away with working with your existing cash balance and spending up to a safe buffer, since you know you will get that money back in a month or two to reinvest. If you are in this situation, taking on the additional risk of more investment only makes good sense if you are trying to block out a competitor.
Slow Payback
If your product has a slower payback period, taking on additional investment may be necessary. Waiting to recoup your marketing cost to feed back into the system will slow your growth rate, meaning it could take years to reach a meaningful size, and will open the door to competitors with the needed cash to take over the market. In a slow payback situation, it is even more vital that the data infrastructure and the right team is in place to optimize the funnel, because a 10% improvement in performance could mean weeks shaved off the payback, rather than days.
Degradation Risk
When you are spending your first $100k on growth, it is hard or impossible to project how your cost per new customer will change when you’ve spent your first $10m. As a general rule, this cost gets higher over time. This is a function of the size of your addressable market, so the more you can accurately estimate this, the better your forecasts will be. With proper performance marketing execution this risk can be mitigated (or even reversed) but it is important to keep this risk in mind, particularly if you are taking on additional investment to feed a slow payback product. If investment is taken on, assuming the current CAC, in order to invest 1,000 or 10,000 times what has already been spent, your assumptions around CAC are going to be best estimates.
If you target market is very large, you may see none of this degradation until very late in the business’ existence. If your product is very niche and has a slow payback, be very wary, and pad your projections.
Now or Later
Product teams often desire that marketing not be too aggressive because there are new features coming out that will improve customer monetization or retention. The product will always continue to improve and it is difficult to impossible to accurately project the true value of any new feature until it hits the audience.
Base your growth decisions not on hopes for the future, but what your current metrics tell you your growth will be like. If current metrics indicate that growth today is a worthwhile investment, then invest.
Build a Model
Inputs
Whether you have these metrics measured or if they are still guesses, building them into a growth model will help you to understand what growth investment will look like and to tweak values to see how they really impact your business.
Retention Rate – For gaming, media, or subscription businesses, this should be easy to understand. Think of this as the percent of a cohort who returns to purchase a given number of months after a purchase. For DTC companies or other products that have more sporadic purchase behavior, it may make more sense to plot the cumulative spend behavior of an average user.
Cost per payer – How much does it cost to bring a new user in and for them to purchase? It’s best to think of this on a blended basis including users that join organically as well as users driven through paid media.
Average monthly/daily value per active user – When combined with your retention rate, you can use this to map out your LTV curve. If you think this varies over the user lifecycle, you can do this by age, but it is unlikely that you will have good data on that yet.
Gross margin – How much of your revenue you keep after your cost of goods sold.
OPEX – Your operating expenses are the hill you need to climb to reach profitability.
Marketing investment by day/week/month – You can tweak this plan to understand how your change in investment impacts your revenue with your fixed retention rates, cost per payer, and revenue per user. I recommend setting this up so that spend gradually ramps up as a function of the previous period. This will allow your acquisition team to optimize and scale efficiently and will also allow you to work to match your increased investment with your increased revenue over time.
Outputs
Business Summary
| Month | All Users | New Users | CAC | Revenue | Marketing Cost | COGS | OPEX | Profit |
|---|---|---|---|---|---|---|---|---|
| 7/2022 | 54,054 | 20,395 | $20 | $540,542 | $407,905 | $108,108 | $333,333 | -$308,805 |
| 8/2022 | 66,023 | 23,964 | $20 | $660,230 | $479,288 | $132,046 | $333,333 | -$284,438 |
| 9/2022 | 77,220 | 25,433 | $20 | $772,199 | $508,664 | $154,440 | $333,333 | -$224,238 |
| 10/2022 | 94,306 | 33,086 | $20 | $943,061 | $661,717 | $188,612 | $333,333 | -$240,602 |
| 11/2022 | 112,598 | 37,622 | $20 | $1,125,979 | $752,437 | $225,196 | $333,333 | -$184,987 |
| 12/2022 | 135,628 | 45,679 | $20 | $1,356,281 | $913,583 | $271,256 | $333,333 | -$161,892 |
| 1/2023 | 160,543 | 51,942 | $20 | $1,605,432 | $1,038,833 | $321,086 | $333,333 | -$87,821 |
| 2/2023 | 192,116 | 63,066 | $20 | $1,921,158 | $1,261,316 | $384,232 | $333,333 | -$57,723 |
| 3/2023 | 228,736 | 74,102 | $20 | $2,287,364 | $1,482,047 | $457,473 | $333,333 | $14,511 |
| 4/2023 | 268,693 | 84,262 | $20 | $2,686,934 | $1,685,230 | $537,387 | $333,333 | $130,984 |
| 5/2023 | 319,613 | 102,308 | $20 | $3,196,127 | $2,046,150 | $639,225 | $333,333 | $177,417 |
| 6/2023 | 374,958 | 116,334 | $20 | $3,749,583 | $2,326,671 | $749,917 | $333,333 | $339,662 |
Business Summary – A table showing the userbase, new user growth, revenue, costs, and profit over time
Example Model
An example of a model like this can be found in this Google Sheet. Duplicate it and modify it to fit your business.
This model gives the most simple way to model what growth could look like. Determine what really drives your business and build a model that fits for you. And be careful with your assumptions.
Finals Thoughts
Every business will be a different in terms of how quickly it can invest and grow. The current capital, the risk profile for raising additional money to invest in marketing, and the risk tolerance of executives and investors. What is most important is making sure you understand those risks, and how the business will be affected if metrics change over time.