Brutal truth: most entrepreneurs don’t have a background in marketing or sales.

The result? They tend to learn how to market their products or services on the job. 

And that’s OK… if you’re at a stage of success where you can hire a marketer or an entire marketing team of copywriters, advertisers, SEO specialists, social media managers, etc. But even then that’s not ideal.

What is ideal is having even a basic understanding of marketing to successfully grow your business. 

What does marketing look like?

Marketing is a strategic tool that amplifies a business’s products and/or services to generate revenue. 

That’s a boring way of saying: marketing helps you make more money.

If you’re running a successful marketing machine, that means that you spend $1 and make $1.01 dollars back (or more). The idea here is profitability.

There are a gazillion ways people spend that $1 on marketing: events, swag, demos, surveys, slide decks, webinars, website copy, social media, newsletters, digital and print advertising, SEO … and that’s just the tip of the iceberg. 

But let’s put all those aside and get back to basics.

Three key concepts are essential to marketing:

1. Lifetime Value (LTV): As a customer spends money and then comes back to spend money at a company, their lifetime value goes up over time.
2. Cost to Acquire Customer (CAC): This refers to how much money it costs to attract and retain a customer.
3. Payback Period: This is the amount of time it takes for your initial investment - including the cost of operations - to be earned back.

Let’s dive deeper into that last one: payback period. 

What's a payback period?

If you think of marketing as a revenue-generating machine, then it’s crucial to also think about how you get to that point of making money. 

In other words, how long does it take to go from Point A (investment) to Point B (return)?

Let’s say you spend $10 to acquire a customer via a Google ad. Payback period is the amount of time it takes to make that $10 back from the customer.

If you have an operations-heavy team, this number will go up.

Let’s say that, in addition to the $10 ad spend, your employee also spends 1 hour onboarding that customer. If your employee’s rate is $25/hour, then you’d combine the two costs: $10 + $25 = $35 investment.

Now you want to calculate how long it takes to earn $35 back from that customer.  

Benefits of a fast payback period

It may take a startup several rounds of fundraising to get their marketing machine working properly. And early-stage investors get diluted every time a startup raises another round.

That’s why early-stage investors prefer fast payback periods… like three months or less.

Companies that achieve a faster payback period are at a huge advantage.

Think of subscription-based software that charges annual subscription fees upfront. Why this method? To get 12 months of revenue all at once so they can pour that back into their marketing machine to attract more customers.

Why do investors care about this?

When investors look at this data in early-stage startups, they want to know what your payback period is so they can know how much more money you’ll need from other investors.

This will be a consideration for their investment. 

What's a good payback period for startups?

Several months might be OK for a Series A company, but a pre-seed company should build a marketing machine that pays itself back immediately on the first purchase.  

Eventually, the payback period will be extended over time, and it won’t be instantaneous anymore.

Coming soon …

Stay tuned for an in-depth look at the cost to acquire a customer (CAC) and lifetime value (LTV).