To Pay Or Not To Pay To Acquire Users?

I recently heard a VC say that startups “should spend the least amount of money possible on marketing.”  This is a healthier attitude than the opposite prescription of undisciplined land grab, but a better approach is pure ROI marketing.  Marketing opportunities that offer a fast payback with additional profit margin are a key component for reaching your startup’s full market potential.

Work from Free to Paid Drivers

Ultimately my goal with any startup is to acquire the highest number of qualified users possible – at a positive return on investment.  But it often takes several months after “launching” to transition to aggressive scaling. 

I like to start with free customer acquisition channels since they obviously offer the best opportunity to generate a positive ROI. Free drivers may include viral marketing, self-implemented SEO and listing with any directories that are appropriate for your product.  Leveraging this early user flow we optimize the first user experience for the right target users and introduce a business model that generates sufficient revenue to fund future paid user acquisition.  When we start developing paid channels, we work our way through the lowest hanging fruit first, beginning with demand harvesting channels, later adding demand creation channels. 

Kill the Opportunity for the Competition

If your growth is accelerating, you will attract competition.  And this competition will likely be savvy enough to replicate the customer acquisition and monetization approaches that you worked hard to invent.  So it is important to make it as difficult as possible for them to get traction.  I know some of you are saying “but your recent post told us to ignore the competition.”  My point was not to ignore the competition forever, simply to ignore them while you are figuring out a repeatable, positive ROI way to acquire customers. Competition (especially those that are spending irrationally) will distract you from this critical task.

But once you have optimized the first user experience and introduced a business model that generates sufficient revenue to fund user acquisition, it’s time to focus your marketing efforts to aggressively build new customer acquisition channels and scaling existing channels – both free and paid.

9 thoughts on “To Pay Or Not To Pay To Acquire Users?

  1. Hi Sean,

    I just wanted some clarification on this article. Are you looking at web 2.0 and other sites that don’t charge customers? I run a web 2.0 site and I would have a hard time imagining how you can measure the ROI of paying users. Web 2.0 sites only gain power and market value if there is a critical mass of passionate users. Most likely the users you pay will not be passionate users and may no longer use the site when no longer paid. But what they might establish is a sense of community and create initial content. This could encourage passionate users down the road to get involved. Measuring the ROI of these paid users will be very difficult because the benefits of paying users will not be seen for a long time.

  2. Hey Sean,

    I wrote an article last week about using almost-viral growth to lower your cost of acquisition without hitting the viral gas pedal, here:

    That strategy seems to dovetail nicely with what you’ve written here about building out your paid channels before accelerating your growth to the point where the competition takes notice.

    Do you have any thoughts about that?


  3. Your VC is a macho sales type. They kill companies. If you just want to be in and out, ok. But, if you want to live long, this advice is death.

  4. Hey David – fortunately this wasn’t a VC behind one of the startups I work with. I spend a lot of time vetting VCs before I agree to work with a startup. Still – this VC is much more compatible with my approach than a VC pushing for land grab at any price. Marketing arbitrage is generally a pretty easy case to make: “if I can buy $2 at the price of $1, should I spend the money?”

  5. Hy Jesse,

    Just read your article. Awesome stuff! First time I’ve heard the concept of why “almost viral” can be better than viral (viral coefficient 1 or greater). Makes a lot of sense that you’d want to control demographics etc. For example, if you have a storage cost associated with your viral product and a 1% upgrade rate to a premium version, part of your acquisition cost is paying the storage cost for the 99% of people that don’t upgrade. It’s hard to make this math work. But if you have a 4% upgrade rate in certain geographies, you can focus your marketing dollars seeding these markets… The case is generally even stronger for an ad supported business where CPMs are much lower in 3rd world countries. I can’t wait to dig into some of your other posts. For anyone else that wants to read the article, it’s here:


  6. Sean,

    Yeah, I think people people see “going viral” as an unequivocal good. Everyone who responded to the article latched onto my talk about operational costs, which was the weaker objection, so I’m glad you spotted the stuff about demographics.

    A viral process is darwinian — it selects the users who are best at propagating the virus, not the users who are best at monetizing.

    There’s at a non-zero chance you wind up with a huge site filled with users who won’t pay you one red cent.

  7. I love how you have demonstrated the healthy balance between ignoring and acknowledging competition. Like you, I feel that at the beginning, ignoring the competition is necessary for growth to happen. Plus, in some cases, the difference that separates your company from the competition is likely to show itself organically once people start interacting with your product.

    Yet, if you become too complacent and assume your advantage will last, then that’s when competitors will most likely swoop in and fix all your mistakes. Along with ROI, I’d say the biggest factor in a lot of startups’ success is product improvement and development. Listening to people who are interacting with your product (especially the first users, since they are the Innovators who will spread the word about your service).

    And, Jesse, I completely agree. Going “viral” is overrated in the sense that it does not equal out to profit always. And, plus, a lot of things that go viral didn’t even mean to go viral. I witnessed that firsthand and was unprepared.

  8. Thanks Jamie – If I’m establishing a new market, I definitely don’t care about the competition. But if I’m disrupting an established “premium only” player in an existing market with a freemium offering, then I want to start at their current point on the learning curve and improve from there. I actually once had the VP Marketing of a competitor contact me and complain that our landing pages looked too similar. I (being a bit of a smartass) explained that the similarity was only temporary, I would change the design as soon as I figured out something that performed better.

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