Why ads aren't the end all be all of growth for startups
The majority of startup founders and marketers often start with paid ads - search or social - as their first customer acquisition channels.
This happens mostly due to the lack of marketing expertise and/or the cognitive bias of choosing channels they heard most often about - Facebook and Google.
For most of them, paid advertising seems the easiest way of attracting customers because it implies not thinking too much about copy, content, SEO, and complex stuff. You just write a quick ad, set up your targeting and that’s it. Quick and easy.
It might appear to be the simplest form of marketing, but in reality, it’s much more complicated than that.
What usually happens is they waste a considerable part of their marketing budget because they can’t manage to make their ads profitable.
Then, they don’t have the funds to do anything for customer acquisition and find themselves in this limbo of needing marketing to grow, but now knowing what else to do besides the duo Google/Facebook ads.
From what I'm seeing in the market, running ads tends to be the startup’s approach to customer acquisition, but is it the best and most profitable one? Especially for someone just starting out?
I'll pick a few key questions and myths on this topic that I'll try answering and demystifying below. Here goes.
What makes startups turn to ads when they first start with marketing?
Quick time to feedback, but needs skill and fine-tuning
First off, I think everything starts with the founders’ hope of getting the product in front of as many people, as fast as possible.
And ads (whether it’s search or social) have this quality - it’s a channel with fast results, great for testing different messages and product features, that allows quick customer feedback.
Ads are also pretty great for informing how well your marketing machine works in terms of conversion rates of your landing pages, how well your forms and email captures are working, etc.
I’m not saying running ads isn’t a great channel, but what I’m stressing out here is that it’s not necessarily the most low-risk acquisition channel for those who are just starting dipping their toes into marketing.
It takes some skill to be able to run ads and make them profitable, and it’s also a channel that needs a lot of fine-tuning. It’s not the set-it-up-and-leave type.
False impression of set it and forget it
Another reason startup founders are inclined to start with ads is that, especially at the beginning, when they’re wearing 100 different hats in the business, they lack the expertise to use other channels that might seem more complex.
Plus, ads by nature are more measurable and precise, and the process looks pretty straightforward. This gives them the false impression that it doesn’t need too much tweaking. That it will just work perfectly on the first try.
This is so not true.
False impression of traction
One more thing I wanted to say here is that this channel also gives you the false impression of traction, especially when you’re pre-product/market fit.
For a startup, one of the most obvious indicators of reaching product/market fit is, in most cases, a slow but steady and organic growth and product adoption without the help of paid marketing.
This way you know that the product is growing naturally and doesn’t rely on an artificial aid like ads.
What you need to ask yourself is this - If I turned off all my ads today, would my product keep growing organically?
As I said, growth might be very slow, but it should still be naturally growing without the help of paid ads.
Do ads work regardless of business model and industry? Are there different strategies for B2B vs B2C in terms of ads approach?
Here’s my line of thinking here.
Ads work better for low-friction products
First off, ads usually work when the friction to adopt or purchase the product is very low.
Low friction could be a low price, quick time to value, and ease of use without too many friction touchpoints like filling out forms, or signing up for something, customizing the interface, etc.
Think about it - you click on an ad for an interesting product and find out it costs $500. The high price immediately introduces a barrier, a level of friction. The higher the price, the greater the friction.
Also, when coming from an ad, users have less patience to uncover your product’s benefits and find value - especially when coming from social ads like Facebook, where that audience is not in the purchasing mindset. They’re not ready to buy your product and they’re not actively searching for products, which makes them a cold audience.
This is why advertising eCommerce products with low friction works way better than advertising software or enterprise SaaS, as people are more inclined to make impulse buys when it comes to clothing, cosmetics, gadgets, household products, etc., especially if you find great deals with discounted prices.
Your ads' success is determined by your business model
In terms of the company’s business model and how that influences whether ads work for you or not, I’ll say this: your ads' success is also determined by your business model (how you charge - freemium, free trial, monthly subscription, free monetized with ads, one year upfront, etc.) and by the Average Revenue Per User.
The average revenue per user is the amount of money a company can expect to generate from an individual customer.
Depending on how low or high your ARPU is, this in turn will determine which types of channels you can pursue.
If you have a low ARPU, you need to pick organic channels with low customer acquisition costs, like SEO.
Subscription businesses typically live on the mid-ARPU spectrum, with more predictability in terms of monthly revenue. This makes them eligible for higher CAC channels like paid marketing because they have higher ARPU.
B2C outperforms B2B when it comes to ads
B2C companies have a big advantage over B2B because they have bigger addressable audiences. There are more individual consumers than there are businesses.
This is a critical aspect as most ad channels, except for LinkedIn, can't target employees.
Most ad networks are designed to target B2C demographics as precisely as possible, especially Facebook and Instagram.
So this leaves B2B companies with very limited options in terms of good firmographic audiences to target, which makes B2B advertising expensive and not that accurate.
eCommerce and ads
Now, in terms of the company type (eCommerce, mobile apps, enterprise SaaS, SMB SaaS), there are types that definitely lend themselves better to ads than others.
When it comes to eCommerce, there are many reasons why ads produce better results.
First of all, people are inclined to buy physical goods because these types of products are common necessities people have, so there’s a greater need for them.
At some point, everyone needs to buy clothing, household products, toiletries, and so on. So, when you’re selling physical products, if they’re attractively priced and you also offer deals and discounts now and then, there’s a great possibility that people will buy them.
Secondly, eCommerce ads get better CTR because they can use video ads.
An eCommerce product can be showcased in a desirable and eye-catching way using video compared to a software product. Consider how hard it is to produce an interesting and engaging video for a B2B software product compared to an electric bike, for example.
eCommerce products lend themselves better to deals and discounts which are so tempting for most people. Great deals to physical goods resonate with people because they’re usually aware of how those goods are priced, so when a great deal appears on the market, they’re immediately triggered to buy.
Mobile apps and ads
When it comes to mobile apps, they can also use ads more effectively than enterprise or SMB SaaS, because there’s less friction to paying, installing, and using them.
They’re super easy to install in just a few clicks and they usually don’t introduce friction until after you’ve experienced their value by using the app for a while.
Another advantage is that once the app’s installed, it’s usually there to stay until you remember to uninstall it, which happens very rarely.
Low-priced SaaS and ads
Low-cost SaaS is the most prone to fail running profitable ads because the math usually doesn’t work in their favor.
If your average SaaS app costs $40/month and retains a customer for 6 months, they make $240 per customer.
Now if it costs you the same amount of money to acquire a customer from Facebook ads due to the CPC and the average conversion rate, this probably won’t be a viable channel for you.
Factor in other operating costs and that’s clearly not sustainable in the long run.
In a nutshell, ads rarely work for low-priced SaaS apps, unless they can adapt their pricing to amount to a higher lifetime value, which would then make ads profitable.
What are the realities of making paid acquisition work? What’s the right way to think about running ads? What are the most important aspects a startup founder or marketer needs to know before running ads?
To be able to make your paid acquisition efforts work, pay attention to these aspects:
- Math has to work
In short, your AOV or ARPU needs to surpass the amount you spend on ads to acquire a customer in order to make it a profitable channel for your business.
If you break even, meaning your cost of acquiring a customer through ads is equal to the amount of money you make from each customer, then I think it’s worth running ads for a limited period of time just to learn more about your audience’s behavior and what makes them tick in terms of messages and product features.
Each ad network has an associated cost per click, which in turn determines its affordability. For example, LinkedIn and Twitter ads are very expensive, so make sure the ad network fits your budget.
2. Your business needs to lend itself to the different channels and ad formats
If you’re in B2B software, it will be harder to stand out with video ads or any ads showcasing your product.
B2B products and services usually don’t perform that well on Facebook or Instagram because these channels have a specific audience with a specific set of expectations and behaviors.
On Instagram, people expect to see inspirational imagery and products which are more lifestyle-based. On Facebook, they expect to see funny and interesting videos, so if your product doesn’t fit that particular content style which people expect to see there, your ads will suffer a low CTR.
3. Your audience needs to be present on the ad channel to work
Is enough of your audience present on that ad channel to make it work? If yes, then it’s an option to consider. If not, what are the channels where they spend time that you can advertise on?
4. Take into consideration your audience's behavior regarding your type of product
For example, are your prospects buying your type of product by searching on Google using keywords? Because if there's no search demand for your niche, then AdWords is not an option for you.
Does your product or service require research and consideration before purchasing it? Or is it an impulse buy? Usually, when it comes to lower-cost products, people don’t do in-depth research because there isn’t a high risk to them. They can see your product on Facebook and buy it on impulse without prior research because it lends itself to this kind of behavior.
For more expensive products or services, people usually spend weeks and months researching before making the purchase, so the way you design your ad funnel needs to match their behavior.
There’s much more to making ads work for your business than just wiping up some copy and pressing publish. Ads aren’t the end all be all of growth for all startups.