How Effective is Having an Audience Actually? (...It's Not What You Think)

Key Concepts

• Product-led growth vs. buying users
• Organic reach limitations
• Customer Acquisition Cost (CAC)
• Average Revenue Per User (ARPU)
• Lifetime Value (LTV)
• Return on Investment (ROI)
• Paid advertising as a user acquisition channel

Limitations of Organic Reach and the Need to "Buy Users"

The video begins by addressing the common aspiration of Bootstrap founders to achieve product-led growth through word-of-mouth and viral loops. While monetizing an audience and leveraging social media presence can be effective initially, it has a limited capacity. Simon Harberg shares his experiences with launching Link Drip, 8base, and Founder Stack, generating $75,000, $5,000 MRR, and $175,000 respectively through social media announcements and YouTube videos. Despite having a substantial social media following (around 500,000 followers), he acknowledges that organic reach has a "cap." He cites Peter Levelvels' $50,000 MRR as an example of even highly successful indie hackers reaching a limit to organic growth.

The video argues that to surpass this limit, businesses need to adopt a more traditional approach and "buy users." This involves paying to promote the app to potential users through various means.

What Does "Buying Users" Mean?

"Buying users" encompasses any activity with a cost specifically designed to acquire new users. Examples include:

• Paying influencers for product promotion
• Affiliate programs with revenue sharing
• Running paid advertisements
• Employing salespeople to sell the solution

While this is essentially marketing, it becomes more complex and expensive when relying less on organic reach and the trust associated with a personal brand.

Determining Affordable Customer Acquisition Cost (CAC)

The core of the video focuses on determining how much a business can afford to spend to acquire a single user, known as the Customer Acquisition Cost (CAC). The video presents two methods for calculating the target CAC:

1. Using Average Revenue Per User (ARPU):

• Definition: ARPU is the average monthly revenue generated by each user. Platforms like Stripe, Lemon Squeezy, Bare Metrics, and Chart Mogul provide this data.
• Method: Determine the desired payback period (Simon suggests 3 months). Multiply the ARPU by the payback period to calculate the target CAC.
• Example: If ARPU is $20 per month and the desired payback period is 3 months, the target CAC is $60.

2. Using Lifetime Value (LTV):

• Definition: LTV is the total revenue a user generates on average before churning. Platforms like Stripe, Lemon Squeezy, and Chart Mogul provide this data.
• Method: Aim for a 3:1 ROI. Divide the average LTV by 3 to calculate the target CAC.
• Example: If the average LTV is $200, the target CAC is approximately $66.

Finding Marketing Channels and Measuring CAC

Once the target CAC is determined, the next step is to find marketing channels that allow user acquisition at or below that cost. This requires experimentation and tactical thinking.

Strategies for Finding Cost-Effective Channels:

• Leverage Existing Resources: Identify any existing resources or platforms that enable cheaper promotion. For example, access to video equipment or expertise in content creation.
• Master a Channel: Focus on becoming proficient in one marketing channel to improve its effectiveness and reduce CAC over time.
• Measure and Approximate: Track the actual cost per user for each channel. While precise measurement can be challenging, it's crucial to approximate this number. For example, using unique referral links in blog posts to track user sign-ups and calculate the cost per user acquired through that post.

Paid Advertising as a User Acquisition Tool

The video highlights paid advertising (e.g., Facebook and Google Ads) as a relatively straightforward method for buying users. These platforms allow advertisers to specify their target CAC, and the platforms attempt to find users at that price. Simon Harberg uses paid ads to promote Founder Stack, his all-in-one lifetime deal, with success on Facebook and Instagram. He recommends paid ads as a less complex way to acquire users by testing different ad creatives.

Conclusion

The video concludes by emphasizing that most SaaS businesses eventually need to "buy users" after exhausting their organic reach. While less romantic than the ideal of product-led growth, it's a necessary step for scaling a business. The video also mentions the importance of making the product more sellable, suggesting viewers watch another video on UI kits to improve the product's perceived value. The main takeaways are the importance of understanding CAC, ARPU, and LTV, and using these metrics to guide user acquisition strategies.