One of the biggest mistakes I observe day after day in entrepreneurships that are taking their first steps, is based on investing their extremely limited resources in advertising in order to generate their first clients and, consequently, future “possible” revenues.
A start-up is a reality with its very special context, with characteristics and growth rules totally different from the ones of an already established and consolidated enterprise in the market. For example, when eBay was still an entrepreneurship, they didn’t go out to compete on equal terms against Staples, BestBuy or other competitors in its field. Nor did Google against Microsoft or Yahoo!. Nor did Facebook some years later against MySpace or Google itself.
In the end, investing in marketing is not the solution; otherwise, the winner would always be the one with the highest budget and history clearly proves this wrong, if not, ask Rupert Murdoch from MySpace.
Generating added value
I personally consider that the most important aspect starts with providing value to the user. It doesn’t matter if we have millions of dollars to invest in marketing or no investment at all. No matter if we bring thousands of users into our start-up, if we don’t have a service that generates value, the revenues will always be zero and we won’t develop a viable enterprise in the long term.
For instance, generating value is what eBay proposed since day one: for each new user that got to know the enterprise, 52 new clients were generated in a viral way on recommendation. In the case of Facebook, the figures are not yet known, but they are surely significantly higher. Facebook, Google, Twitter or Craigslist didn’t invest money in advertising during their first years.
This has nothing to do with how much money we have, but with how much added value we generate for our users.
The aim is to understand that as founders we must focus on developing a solution to a concrete and real problem that the client has on a day-to-day basis. It has to be a useful tool, both for buying and selling, for interacting with friends or even for self-education through the internet. This new generation of online education entrepreneurships is offered by Codecademy, Coursera, TreeHouse, among others.
Even if the market we want to step into is saturated and competitive, there’s always some room for those who offer higher value for the user. For instance, Google went into the search engine market pretty late when it was dominated by giants such as AltaVista and even Yahoo! (with already millions in investment.) As entrepreneurs, the only differential in our favor is the value we generate for the client.
Organic channels expert
On the other hand, in a future stage of maturity of our entrepreneurship we will end up investing in marketing in media such as the TV and offline newspapers as currently Microsoft and Apple do, but there’s a previous stage we must work at.
First, we must focus on the organic media. In broad terms, today they are three: search engines, social networks and press releases. Why should we be experts at these mechanisms that don’t depend on the money but on how much effort and time we dedicate to them?
Simply because money is a limited resource and we can’t invest in advertising when there are thousands of priorities before this one (servers, human resources, trainings, trips, etc.) and, furthermore, because prior to investing we must know which ones generate the best results.
For instance, using search engines such as Google, Bing or Yahoo! and through
Know your ROI
What is highly positive too is to know the results that using the social networks generates, that although they are relatively new, there’s a lot of uncertainty about their success or failure as generators of new clients in a profitable way. It can even vary from one field of work or industry to another, therefore, our figures can be different from what other entrepreneurs may share with us.
With our entrepreneurship MelhorTrato we could even organically prove the quality of the results and then a small test of investment verified our theory that a social network such as LinkedIn can be economically viable when compared to others such as Facebook or Twitter that give us negative results. In LinkedIn for each invested dollar we recover a dollar and 23 cents (we earn 0.23); whereas in the other networks for each dollar, we generate 0.87 cents (we lose 0.13.)
Revenues for each client
To conclude, there’s some information we need to be aware of and that grows with experience and work over time. This indicator reflects the profitability that each new client that uses our services will represent for us. If for example, a new client represents an average income of u$s 10 in his whole cycle, then we know that at the marketing investment level we can assume exclusively costs lower to that value in order for them to be profitable.
The lifespan of the client is not for ever but we can have an average estimate based on the history of our database. That’s why we need to work on the first steps of our entrepreneurship WITHOUT any marketing investment, since we won’t know whether we are obtaining any profit or losing money. What are we supposed to compare it with?
Unfortunately, I know several start-ups that failed not because the idea was wrong or because the service given to the client didn’t generate a good added value, but because of the pressure of their investors they spent more money than they could afford on generating a new client.
We can know the value of acquisition of a new client by making small investments on Google AdWords announcements or Facebook CPC (Cost per Click). However, the value that a new client generates for our start-up in their lifespan is something that depends on our work over time. It’s our responsibility to know this factor and to work hard to raise it.
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