I am not a big fan of paid online ads. At best I see ads as a halfway decent accelerator, at worst a path dependency that depletes resources and in the long term kills prospective companies and startups while shoving money down the greedy “give us all your money” ads-duopoly of Alphabet and Meta.
If a company should do ads or not I look at these parameters:
- R – Referral: New users that are created by the users the company already has. This might be W.O.M. Word of Mouth, better trackable referral links or referral programs. R is always a percentage i.e. A referral rate of 10% (0.1) means every tenth users creates a new users.
- O – Organic: New users that get acquired via organic channels, this might be 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 that get acquired via paid channels, mostly online ads.
A company that does not do Ads, no Referral activity, no Churn, no Organic.
| Users | Referral | Organic | Ads | Churn |
| 100 | 0 | 0 | 0 | 0 |
A company that starts with 100 users, don’t acquire users in any way, does not loose any users, stays flat.
A company where Referral is bigger than Churn, no Organic, no Ads.
| Users | Referral | Organic | Ads | Churn |
| 100 | 0.2 | 0 | 0 | 0.1 |
If the users you have create more users than you loose users over time, massive, exponential growth.
A company where Churn is bigger than Referral, no Organic, no Ads.
| Users | Referral | Organic | Ads | Churn |
| 100 | 0.1 | 0 | 0 | 0.2 |
If you constantly loose more users then you acquire, pretty fast collapse.
A company with Organic activity, no Ads, and Churn is bigger than Referral.
| Users | Referral | Organic | Ads | Churn |
| 100 | 0.1 | 25 | 0 | 0.2 |
Even the Churn is higher than Referral, the combined factor of Referral and Organic leads to growth that reaches a plateau one point, when the R+O gets balanced by higher C.
A company with Organic activity, active Ads, and Churn is bigger than Referral.
| Users | Referral | Organic | Ads | Churn |
| 100 | 0.1 | 25 | 20 | 0.2 |
Look at the different scale from the previous graph. Yes, there is stagnation, but at a much higher level. Ads as an accelerator.
A company where Churn is bigger than Referral, active Ads, but no Organic Channel was ever built.
| Users | Referral | Organic | Ads | Churn |
| 100 | 0.1 | 0 | 20 | 0.2 |
Let’s say you run a company, but you were just to busy to ever build up organic channels.
Similar to the Churn higher as Referral + Organic graph, at one point you reach a plateau
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 / pay more to get the same results. Ads simply become more inefficient.
- 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.
We visualise these truths with a company that did not build up Organic channels, Referral < Churn and stops their aggressive Ads strategy at some point.
| Users | Referral | Organic | Ads | Churn |
| 100 | 0.1 | 0 | 40 / 0 | 0.2 |
Or let’s try another example were the efficiency of the ads decline over time.
| Users | Referral | Organic | Ads | Churn |
| 100 | 0.1 | 0 | 40 going down | 0.2 |
Again, not a graph that you want to see.
But let’s say you were aware that ads work worse over time, so you built up organic channels that bring in constant traffic.
| Users | Referral | Organic | Ads | Churn |
| 100 | 0.1 | 20 | 20 going down | 0.2 |
Not a pretty graph. But one where you get to keep your business while you can work to get your Referral up and your Churn down.
What to take away from this article?
So first of all I do not write this article to convince you that you must do SEO. SEO is a lot of work and might be a good fit for your company or not. But what I want you to take away from this post is:
Ads dependency is not a joke.
If your business is dependent on Ads for new user acquisition, you are in trouble, even before you reach your plateau. Your ad keyaccount managers at Google/Meta are not your friends. They want to get the most money out of you for the longest time possible, but they do not care about your longterm success of your company, they care about their own. Only you care about the long term success of the company. And being ads depended is the worst decision you can make.
If you really want to become a successful company, Referral must be higher than Churn (or same same: Churn must be lower than Referral).
R > C
If this is not the case yet you can use Organic and/or Ads to push you to a certain level. Use these channels as accelerators for your growth. It works until a point.
But be aware, that your ads spending will always rise – or become less efficient over time – which is the same thing. And you do not want to depend on something that becomes less efficient / more expensive over time.
So I stand with my recommendation: If (Referral + Organic) < Churn, don’t do Ads!
Challenge me. fe (at) f19n dot com