If (Referral + Organic) < Churn, don't do Ads
At best ads are a halfway decent accelerator, at worst a path dependency that depletes resources. If you want to become a successful company, Referral must be higher than Churn.
Key takeaways
- Referral above Churn: exponential growth, without any ads.
- Churn above Referral: collapse, or a plateau as long as Organic or Ads feed in new users.
- Ads work worse over time, and if you stop doing ads you stop getting users from ads.
- Organic channels that bring constant traffic keep the business alive while you get Referral up and Churn down.
Whether a company should do ads or not, I look at four parameters:
- R - Referral - new users created by the users the company already has: word of mouth, referral links, referral programs. Always a percentage: a referral rate of 10% (0.1) means every tenth user creates a new user.
- O - Organic - new users via organic channels: SEO, brand traffic, newsletters, organic social media reach, other owned channels.
- C - Churn - how many users a company loses in a certain timeframe.
- A - Ads - users acquired via paid channels, mostly online ads.
Without ads, Referral against Churn decides
No Referral, no Organic, no Ads, no Churn: flat
| Users | Referral | Organic | Ads | Churn |
|---|---|---|---|---|
| 100 | 0 | 0 | 0 | 0 |
Referral bigger than Churn: exponential growth
| Users | Referral | Organic | Ads | Churn |
|---|---|---|---|---|
| 100 | 0.2 | 0 | 0 | 0.1 |
Churn bigger than Referral: pretty fast collapse
| Users | Referral | Organic | Ads | Churn |
|---|---|---|---|---|
| 100 | 0.1 | 0 | 0 | 0.2 |
Churn bigger than Referral, with Organic: growth to a plateau
| Users | Referral | Organic | Ads | Churn |
|---|---|---|---|---|
| 100 | 0.1 | 25 | 0 | 0.2 |
Referral and Organic combined lead to growth, until R+O gets balanced by the higher C.
Ads lift the plateau, they do not remove it
Organic plus Ads: stagnation at a much higher level
| Users | Referral | Organic | Ads | Churn |
|---|---|---|---|---|
| 100 | 0.1 | 25 | 20 | 0.2 |
Look at the different scale from the previous graph. Ads as an accelerator.
Ads, but no Organic channel was ever built: a plateau again
| Users | Referral | Organic | Ads | Churn |
|---|---|---|---|---|
| 100 | 0.1 | 0 | 20 | 0.2 |
So based on this you can do either ads or organic. Does not matter. But …
The dirty truth about online ads
- Over time online ads work worse, so you have to do more ads or pay more to get the same results.
- The more ads you do, the more resources are not invested into longer lasting channels.
- If you stop doing ads, you stop getting users from ads.
No Organic, Referral < Churn, and the aggressive ads stop
| Users | Referral | Organic | Ads | Churn |
|---|---|---|---|---|
| 100 | 0.1 | 0 | 40 / 0 | 0.2 |
The efficiency of the ads declines over time
| Users | Referral | Organic | Ads | Churn |
|---|---|---|---|---|
| 100 | 0.1 | 0 | 40 going down | 0.2 |
Declining ads, but Organic brings constant traffic
| Users | Referral | Organic | Ads | Churn |
|---|---|---|---|---|
| 100 | 0.1 | 20 | 20 going down | 0.2 |
Not a pretty graph. But you get to keep your business while you work to get your Referral up and your Churn down.
Ads dependency is not a joke
I do not write this to convince you that you must do SEO: SEO is a lot of work and might fit your company or not.
If your business depends on ads for new users, you are in trouble, even before you reach your plateau.
Your ad key account managers at Google/Meta are not your friends: they want the most money out of you for the longest time possible. Only you care about the long term success of your company. Being ads dependent is the worst decision you can make.
R > C: Referral must be higher than Churn
Until then, Organic and/or Ads can push you to a certain level, as accelerators. It works until a point.
Your ads spending will always rise - or become less efficient over time - which is the same thing. You do not want to depend on that. So I stand with my recommendation: If (Referral + Organic) < Churn, don’t do Ads.
Challenge me. fe (at) f19n dot com