“We’re raising capital to acquire new users and accelerate growth. Our aim is to use this capital to acquire (X) number of users so that we can raise our series (Y) in 18–24 months time.

Our aim is to optimise our content and digital advertising strategies such that our CAC: LTV ratio is greater than 5. We are confident we can do this but need the capital to build out this capability and deliver at scale. We are confident that our marketing team will be up to the task.”

— Future (hopeful) “soon to be” Unicorn Founder.

Invest in digital advertising in order to test and optimise for a favourable Customer Acquisition Cost (“CAC”) to Lift Time Value (“LTV”) ratio. It’s one of the SaaS industry’s most common growth strategies for early-stage startups.

It's a popular growth strategy for its simplicity and ease of execution. The theory being that if you can build a reliable advertising system that generates a CAC: LTV ratio greater than 1 then you can somewhat guaranty profitability as you scale. And, in theory, this all makes sense.

If LTV is greater than CAC, and you can guarantee that over time and scale, then, in theory, you will grow profitably.

But, what’s wrong with this thinking?

Well, to start with, we really need to look at the global digital advertising market. First, Google and Facebook have a combined market share of 56% of the $396B global digital advertising market. Add in Amazon and Microsoft, and that’s 64% of the global digital advertising market covered. That’s quite a bit of dominance for a very small number of players.

Second, there has been a digital duopoly within the global digital advertising market space for years. The growth of Facebook and Google in this market has been exponential since the early 2000s and there is no sign of this slowing down.

Then, we only need to look at the combined advertising revenues of Facebook and Google to understand how powerful these two companies really are in this space. $204.5 billion dollars earned in 2019 alone and that’s pre-pandemic.

So, what’s the key point we can take away from this information?

Primarily, the key takeaway is that the global digital advertising market is a duopoly market and it’s a duopoly that is only getting stronger YoY.

Google and Facebook have built what is an effective paywall that controls the customer access for almost all online markets.

It’s as if any company wanting to advertise online has to pay a “customer access tax” to either Google or Facebook or both to access new customers; a tax that keeps increasing YoY at an exponential rate. There simply is no other option for companies but to pay this ‘tax’ if they want to advertise digitally.

This means that at its core, a growth strategy that relies on paid advertising alone to ‘win’ is always going to be a flawed strategy. It leads to an inherently fragile business model; one that is very capital intensive and one that embeds an unavoidable natural increase in advertising costs over time.

Margins are hard enough to achieve in a duopoly market without unwittingly signing up to an exponential YoY digital advertising cost increase. It also relies on the assumption of a consistent flow of external capital to cover inevitable margin gaps without the certainty of profitability at scale.

So, what’s the answer?

Simple. Offset the companies reliance on paid advertising to generate business by building out and executing core organic growth strategies. The theory being that the less reliant a company is on digital paid advertisements to generate business, the more robust and (ironically) more investable that company will be.

There are four main growth strategies that can help a company to achieve a more diverse, robust, and proportionally organic revenue base.

Strategy 1: Increase Expansion Revenue.

Strategy 2: Increase Natural Rate of Growth (“NRG”)

Strategy 3: Reduce Churn

Strategy 4: Increase Net Dollar Retention (“NDR”)

(There are articles linked above that outline each strategy in more detail, FYI)

The value that each strategy brings to a company is in the net effect of CAC: LTV. The successful execution of any of these organic growth strategies will result in objectives and initiatives the directly improve LTV, reduction CAC, or both, which in turn improve the companies CAC: LTV ratio.

The second-order benefits of such organic strategies are also numerous. Companies that successfully execute organic growth strategies tend to have better margins, ownership of the customer, more efficient use of capital (lower burn rates), less dilution for the founder, and more time.

Time to plan for growth and find the right investment, on better terms, should it be required.

And this is why factoring organic growth early is important for the success of many growing businesses. It makes for a more well rounded, resilient, and better business. And, whilst this often isn’t the quickest way to grow, a company with a good proportion of its revenue generated through organic channels is one that will be better off in the long run.

Now that you have the groundwork laid out, it’s time to embed an organic growth strategy within your organisation.

If you haven’t done so already, start with the strategy that best aligns to your current operational capability and resources and start planning how to achieve the set objective. With consistency, patience, and time, you will quickly see the organic revenue rolling in!

Good hunting.