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How do you calculate customer acquisition costs for platform businesses?

I'm working on a pitch deck and I'm trying to explain the unit economics and am kind of stuck on explaining customer acquisition costs for a crowdfunding platform. How does Kickstarter calculate CAC? Does it even make sense for a platform business?

I get how it works for pipe-oriented models, but it feels so unnatural here. Most of my costs are in software and much of that in features that serve a marketing function. But there's not a huge amount of plain old variable marketing expense such as advertising. It's more about enabling marketplace participants to promote projects, some media outreach, email marketing, bizdev (cross-promotion), etc.

Any thoughts?

10 Replies

Rob Gropper
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Rob Gropper Entrepreneur
Director at PetHero, SPC - Member at Eastside Incubator - Principal at Tuxedo Technologies Group
Michael, can you give some details on what your ideal prospect looks like? consumer, SMB, enterprise? you have to reach these "marketplace participants"... who are they? Do you need to build both sides of the market or just 1?
Michael Brill
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Michael Brill Entrepreneur
Technology startup exec focused on AI-driven products
@Rob... think "Kickstarter for wine." On one side, project creators are wineries/independent winemakers/restaurants and on the other are wine enthusiasts. We operate the marketplace platform and an underlying operational service for production and fulfillment.

So think of a small winery on one side and a consumer on the other. We will have project acquisition costs in the form of winery bizdev early on, but after a couple years that will be nominal. On the consumer side, these are core wine buyers (3m people who spend > $2500/year on wine in US).


Mana Ionescu
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Mana Ionescu Entrepreneur
President, Lightspan Digital: Digital Marketing Problem-Solver and Speaker
Well, generally companies (successful companies) spend 30-40% of their expected revenues year 1 in business (this can be partly in people's time and partly in advertising costs). Mature successful companies spend anywhere between 15-25% of their expected revenue in marketing. So regardless of type of platform or marketing, those are some ranges to reference. We do social media marketing, and trust me, it's not as "cheap" as people like to think. It's a whole lot of work to get the word out about products etc. Whether you outsource or get someone inhouse to do the work, you'll have to invest quite a bit in marketing at first.
Trevor Collins
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Trevor Collins Entrepreneur
Crowdfunding Entrepreneur & Co-Founder of 100 Danish
Hi Michael,

Perhaps the best way to think about and focus on marketing costs for your two-sided marketplace is on the supply side. i.e. the wine makers you have to recruit to your platform.

This would be especially appropriate in the first year. If you think about it, once passionate and innovative winemakers are geared up and ready to offer their product - a compelling story with incredible wine rewards attached - the buyers will line up. The reason? Because those makers will generate their own marketing and press to bring in backers. In the Kickstarter model, the project creators are the engine that keep growing the platform. And their press will bring press to your wine platform.

As far as the COCA for bringing in wine makers, there are a number of different channels you can try to quantify. If I were in your shoes, the only online channel I would consider would be targeted Facebook ads. You can build super targeted audiences of people who are wine makers, restauranteurs, owners of vineyards, etc to put ads in front of. Just make sure you have a beautiful optimized landing page for them to land that prompts them to leave their info. Then you follow up and sell the concept.

COCAs through FB ads can wildly vary, but it's quite possible you could get each qualified lead for ~$100 once you've optimized your ad creative and the audiences you target. I just finished working with a company that does just this who I'm happy to connect you with if you want a better point of reference. It's tough to shoot numbers from the hip, but these guys do this for multiple startups and venture-backed companies across a bunch of industries. They could probably give you a good sense after a 15 min conversation.

Outside of online channels, maybe you've also thought of repeatable face-to-face ideas that revolve around national & international wine festivals. (maybe for your first 10 wineries you personally tour a wine-rich region and meet the makers)

Finally, on top of all these factors specific to your wine platform, you can factor in the more standardized costs associated with email marketing and biz dev. This is especially appropriate when the platform is growing after yr 1 and you have a sizable backer list.

Hope that's helpful. You're welcome to message me for clarity or to expand on anything. Cheers! p.s. I love the name Cruzu
Michael Brill
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Michael Brill Entrepreneur
Technology startup exec focused on AI-driven products
Thanks Trevor. So far I have really just focused on the winery side... luckily that is turning out to be pretty easy as I spent most of the past decade in wine and am in Napa halftime now. And I appreciate your optimism about consumer demand. I also think it'll be there with the basic stuff we have built into the platform + some external marketing efforts. But almost reflexively, investors want to have a LTV/CAC conversation based on end user acquisition. I don't find it very intuitive here other than simply diving my user count by marketing costs which are mostly non-variable, so I'm not sure what that tells anyone.

Glad you like the name. It works quite well for a wine crowdfunding site and it cost me $0.99!!
Arthur Veytsman
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Arthur Veytsman Entrepreneur • Advisor
Founder at Immerss, 6x Entrepreneur & Angel Investor. Building relationships with Angel Investors worldwide.
Michael, I am in same boat. Marketplace for Talent. My experience so far leads me to believe that when investors hears Marketplace they automatically think Problem. And rightfully so. It is hard to market to sellers and buyers at the same time. Chicken or the Egg? Seller is there buyer is not. Who do you market to first?
In our cases however we are marketing to sellers only and giving them all the technology to build their own audience. I strongly believe that is the key point you have to communicate. However, your deck still needs to include the estimated cost (marketing, sales, salaries) of acquiring a winemaker and the revenue you are planning to get from each winemaker.

Hope this helps.
Michael Brill
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Michael Brill Entrepreneur
Technology startup exec focused on AI-driven products
Arthur, we are definitely putting most of the emphasis on project acquisition and those economics are quite easy to describe. Buyer "acquisition" is much trickier as it's a function of seller costs (not ours), marketing functions of our platform (our development cost, but really indistinguishable from non-marketing features), and other marketing efforts that are relatively modest. Obviously if I try to communicate all that, it'll end in tears... so, as you suggested, I'm just focusing on seller economics.

Rob Gropper
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Rob Gropper Entrepreneur
Director at PetHero, SPC - Member at Eastside Incubator - Principal at Tuxedo Technologies Group
Michael, my current project (from a customer acquisition standpoint) has a similar model - our ultimate end user is a consumer, but OUR customers are enterprise customers and they in turn reach the end consumer. We provide, among other things, the platform and tools to help our enterprise customers' engage and convert their prospects into paid users, but it is ultimately up to our enterprise customers how they reach their prospects and convert them into paid users. One of the things our customers really like about our model is that we help them reach their customers more efficiently than they are doing it now. Our cost model is based on good old-fashioned hand-to-hand enterprise selling: How much time and effort is involved for us to get an enterprise prospect from prospect status to on-board and active status. Like you, our enterprise customers then plan and execute a 'project' using our platform which is how they generate revenue. Obviously you need to be concerned about your customers' 'sell through' (your customers' ability to generate revenue from their end users via your platform) costs, but obviously you don't need to bear those costs yourself. You could conduct a few pilot projects with your customers to get a better feel for their CAC so that you could address the subject with your angels/VC, but i get that your primary focus is on your costs to acquire your customers, not necessarily end users (you need your angels/VC to get that). So we built our cost and revenue model from the bottom up - 1 sales person can close x sales in month 1, 2, 3, etc. When we get to Y sales people we need to add Z infrastructure costs such as a manager, etc. This is of course is broken down into more detail such as recruiting and hiring costs, training costs, ramp-up time, salaries, commissions, etc. That model morphs over time as we grow and break down the prospecting and selling and on-boarding functions into their components. But simply put once a sales person (we build teams of inside and outside sales) is on board and trained and up to speed they ramp up into a monthly quota. Our cost model is very heavily weighted on sales and engineering early on. The primary difference i can see is that it sounds like you need to reach SMB customers and ours are more enterprise in scope so our LTV is enough to justify this high-touch selling model. SMB is obviously a tough nut to crack, but early on for purposes of proving your model i'd treat them as if they were enterprise customers - meet them face to face and and base your early cost model on this high-touch (and high-cost) selling model. This should be a worst-case cost model and you can then work on ways to make that process more efficient - remote selling tools, driving more inbound sales from marketing and advertising expenditures, trade shows/events, etc. The ultimate goal being to morph into a cost-efficient model for SMB where your customers and end-users are driving sales via word of mouth and your sales team morphs into a business development team. i would not put efforts into biz dev early - it's just not efficient in the earl stages. You can likely convert some of your sales people to biz dev later on. You may still have a 'sales' team that focuses strictly on large prospects (enterprise). We don't add biz dev to our model until well into our second year after launch and this is for very targeted use cases.
Michael Brill
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Michael Brill Entrepreneur
Technology startup exec focused on AI-driven products
Thanks Rob.

That all makes sense. In my case, "selling" to a "SMB" is simply getting wineries signed up. I know who these are, how to contact them and the value proposition all quite well. It's initially a human sales/bizdev process but as the concept gets more mainstream and the onboarding tools mature, this ultimately becomes a nominal cost (imagine Kickstarter's cost of attracting new projects the first year vs. now). I can model this easily.

The winery (project creator) will certainly drive some of user acquisition. We'll also have a basic marketing mix in place, but that just amounts to something like $5/user (vs. LTV of $350 from user contributions). The difference is that I have significant platform costs (another $16+/user). The platform has a feature set designed to simplify and scale project creator marketing efforts, to encourage existing backers to promote the project, to proactively identify high-probability projects for existing backers, etc. All of that stuff could be accomplished with traditional marketing dollars, but we're choosing to productize that instead (our DNA is much more product than marketing).

Personally I am fine with this model. But I think many investors will look at this through an ecommerce lens where their focus is on number of users and end user spend. And then what is the margin on that end user spend and the costs to attract the end users. This all gets reduced to CAC/LTV numbers. I can calculate those but they look so goofy because CAC is so low (and I sure don't want to start having to allocate development costs between marketing-ish things and not).







Rob Gropper
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Rob Gropper Entrepreneur
Director at PetHero, SPC - Member at Eastside Incubator - Principal at Tuxedo Technologies Group
Yep, all makes sense. I assume your "platform costs" are costs one would normally dump into your "G&A" bucket or "product dev" cost bucket? If you investors can't wrap their heads around a 2-tier sales model then they are probably not the right investors :-) . Revenue and cost models are just plane different for consumer models and enterprise models and SMB models. Yes, your CAC costs should look ridiculously low after your model begins to shake itself out. How would an investor presentation for Kickstarter look? You could do some SEM and some FB ads. Hell, you could do a super bowl ad, but why? The results these types of marketing efforts are much less predictable for an early stage company than are the cost for direct selling. You could spend a ton on SEM and FB ads and never get traction like you could by calling your wine-maker business contacts and having lunch with them. Like you said, you know your prospects, you know how to reach them, you know the sales cycle time, etc. Break that down into it's component costs and roll that into your CAC if you think your investors need to see a 'more rational' CAC. When you get to a second or third investor meeting then you can talk through CAC in more detail. Once you are 1-2+ years in then you can start building your business development team instead of a sales team - where you or your sals people start out calling directly on wineries and generating direct revenues (sort of) your biz dev person may call on wine distributors (just an example) who can leverage their winery connections and drive more sales indirectly. And when your model calls for really accelerating growth (like taking a C or D round in prep for an IPO or post IPO) and someone decides you need to be doing TV commercials and trade shows and event sponsorships because that's what marketing VPs like to do (i can see all the Alaska Airlines flights to/from the bay area with some wine promo from one of your customers and a Cruzu promo) then you can sped tons of "marketing" dollars to satisfy people who say your CAC costs need to be higher... go figure. But in the early stages, and that stage may last longer than you think, your selling costs (and again, i would not spend much if anything on biz dev in the fist 1-2 years+) should go into your CAC bucket - those are cost directly related to generating revenue (in your case they are 'customer acquisition' but not end-user acquisition). And whether that's you doing the selling early on and your salary and expenses or you hire a sales person those are real costs.
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