Co-authored by Ian Colvin and Lucas Calleja.
1.0 — Mapping out growth, partnerships and tools
Aligning growth strategies and acquisition costs with user behaviour will be more important than ever in the aftermath of the Covid-19 crisis, as firms seek to maximise the length of their runways and maintain strong unit economics. This series will discuss growth channels, particularly paid and unpaid partnerships and the tools used to launch, scale and optimise customer acquisition.
We will analyse how consumer intent differs across channels and the impact that has on unit economics such as monetisation, active users and engagement. Above all, we’ll look at how to create growth processes and incentivise partners to drive optimal user behaviour, which will translate into strong unit economics.
1.1 — Why should unit economics be considered by partnership teams?
We think it is important that growth teams understand what unit economics are and how they’re affected by each stage of the funnel, in order to optimise the impact of their growth roadmaps on them.
Definitions
CAC: customer acquisition cost — any money spent on marketing campaigns, affiliate commissions and outreach to acquire new customers.
CAC = growth spend / new customers
LTV: the average lifetime value generated by each customer, once churn is accounted for.
LTV = average revenue * churn
Churn: percentage of customers who stop using or paying for a product.
CAC to LTV ratio = LTV/CAC
The importance of sustainable partner channels cannot be understated to ensure that return on investment is maximised, which is reflected in the CAC:LTV ratio — ideally this will be 1:3, so for every £1 spent acquiring a customer, £3 will be generated (after churn of monetised customers is accounted for).
It’s important for growth teams to keep this in mind and understand that growth channels differ in acquisition cost, lifetime value and churn. Certain companies might engage in hyper growth, whereby they place less emphasis on the CAC:LTV ratio; in which case other growth metrics higher up in the funnel will be the focus — this is discussed in detail below.
This series will explore how these metrics and intent changes across the following channels:
- Digital marketing
- Paid partnerships
- Unpaid partnerships
- Existing customer base
Examples of paid customer acquisition and retention that align with unit economics:
Aircall pays partners incentives based upon number of monthly revenue licences (subscriptions), incentivising their partners to bring them new business and keep existing customers using them.
- Partner payout: % of monthly revenue share
- Unit economic: subscribers (new and retained)
Qantas paying travel agents commissions for ancillaries such as advanced purchase seat selection drives the agents to upsell to customers.
- Partner payout: cost per acquisition
- Unit economic: units sold
Financial institutions sharing fees (e.g. FX fees or card interchange fees) generated by clients, with affiliates or partners who referred them.
- Partner payout: % of fees from activity
- Unit economic: active customers (card spend or FX exchange)
1.2 — What types of costs are involved?
All partnerships should be sought on a performance basis to protect your business and investors from the risk of excessive acquisition costs.
It will be clear throughout negotiations what each party has to offer and it is likely that you will enter into a commercial agreement to balance the value for both sides.
From a growth perspective, it is crucial to understand what your company’s goal is (e.g. brand awareness, hyper growth, CAC:LTV optimisation), what type of intent the channel is characterised by and then align agreements with that goal in mind:
- CPM — cost per mille (agreed KPI on impressions)
- CPC — cost per click
- CPL — cost per lead
- CPA — cost per acquisition
- Revenue share — usually a fixed % with incremental kickbacks or bonuses based on performance
At each layer of the funnel, incremental improvements can be made which can have huge impacts on the bottom of the funnel. We will explore those incremental gains and how to achieve them through growth tools in article three.
1.3 — What types of paid partners exist and how do you incentivise them?
Kyrill Zlobenko — GM Europe at Seedrs — explains that in general; businesses should not pursue partnerships if the potential partner’s customer base doesn’t closely match their customer profile. Even if the partnership is high profile and generates buzz and extra PR, you may not acquire many of your target customers.
Affiliates
Definition: affiliate programmes are often synonymous with resellers, as they effectively become a network of external salespeople. Affiliates might have websites with lots of traffic, or could be freelancers and SMEs themselves that have audiences for whom your product is relevant.
How to incentivise: Incentivising on a CPC or CPL basis means that affiliates are characterised by high volumes of inbound leads, at times resulting in lower value clients (but also increased brand awareness) as the user experience will be dramatically different than those coming through other sales functions. This is a reflection of affiliates being incentivised towards CPC and CPL regardless of the profile of the traffic.
Example: uSwitch: a price comparison website that users visit when considering changing energy provider or internet provider (and many more products).
Strategic partners
Definition: This type of partnership encompasses a wide-range of activities across sales, marketing and product. These agreements will usually be more difficult to ideate, negotiate and implement as they could involve technical product integrations. For many organisations, the additional resource is worth investing in as it directly correlates to their revenue stream.
How to incentivise: incentivising on a CPA or revenue share basis ensures that the strategic partner is driven to influence the consumer’s behaviour, and prevents excess spend.
Example: Flight Centre connecting to the Qantas Channel as part of a broader transition towards the Qantas Distribution Platform, whereby agents and resellers will have access to more content (additional price points, ancillaries) to sell to their customers.
Influencers
Definition: these are a splinter from traditional affiliate partnerships, facilitated through the growth of social media channels (such as Instagram, YouTube, TikTok) that have resulted in extensive reach capabilities by some users, known as influencers. Influencers are trusted by their followers and influencer marketing has become an indirect sales channel for many companies.
How to incentivise: influencers may charge a certain fee per post (CPV, CPM) and may have added incentives based upon the amount of clicks (CPC) or leads (CPL) that they generate for their clients.
Example: Digital Voices source content creators for YouTube campaigns that drive awareness (CPV) or conversion (CPL) by focusing on relevant demographic data to target specific audiences for their clients.
1.4 — Where can I find affiliates and paid partners?
Affiliates and paid partners can be recruited via outbound efforts (particularly when starting from scratch) or inbound efforts if your brand is strong. Some legwork is required to recruit, educate and agree commercial terms with partners en masse, but we’ll address how to do this in a scalable manner throughout the series.
Building outbound affiliate networks
Broad affiliate marketplaces such as AWIN, CJ and Impact exist that cater for multiple vertices and can help firms grow their affiliate networks by:
- Automating partner recruitment and management
- Partner management portals for logos, content and contracts
- Tracking customer journeys across devices
- Automating link builders and payouts
Additional web crawling software exists such as SEMRush which analyses which websites link to your competitors’ websites, and MediaRails which uses keywords or backlinks to produce prospect lists. Both generate high volumes of prospects, which subsequently require significant resources to qualify, engage and convert them.
While these marketplaces and the tools we discuss later in this series will significantly help you to identify and approach potential affiliates, there is no secret sauce and there are no corners to cut. You need to take your knowledge of the industry, charm and your wallet and go hunting.
Inbound affiliate requests
If you are in the well-earned position of having a recognisable brand or you have already managed to cultivate a well defined community, you have an opportunity to build your affiliate programme via inbound website traffic.
- Example: Shopify has a dedicated inbound portal for affiliate requests, an array of resources that educate partners on how to reach wider audiences and drive traffic to their affiliate links.
You could also reach out to your client base to ask them to refer a client, an affiliate or partner. Many of your customers might already refer clients to you (free of charge) and sometimes are your biggest advocates, so it is worth conducting some tests and equipping them with extra materials or incentivising them.
1.5 — How does intent differ across channels?
Intent is a major leading indicator of conversion, so identifying partners whose customers fall within the medium and high intent buckets is a key step in acquiring customers at scale who will drive revenue. This is also crucial for audience profiling and tailored messaging, when conducting digital marketing (e.g. ads on social media).
Channels and sources which drive these visits have different levels of intent based upon the customer’s journey:
- Low intent: customer sees a digital marketing ad and clicks through to website
- Medium intent: customer is shopping on a price comparison website looking or researching for a new product
- High intent: customer has completed their research and is convinced they want a product, or customer may have been advised by a professional or trusted advisor to use a particular solution, perhaps influenced by a product integration
When analysing channel performance and conversion, you may find that some referrals from partners will be slow to convert and some may never activate but there is still an opportunity to utilise this data to:
- Identify what’s missing from your product to prevent the churn
- Re-align incentives paid to the partner to focus on retention
- Reconsider whether the partnership is commercially viable
Understanding your own customer profile and target customer for whom your product solves problems, is crucial to preventing situations like the one described above from occurring, as you’ll target those with highest intent with the most relevant messaging.
1.6 — What are the key learnings from paid partnerships?
Companies striving to optimise their CAC to LTV ratio should focus on aligning their paid acquisition channel commission models with customer behaviours that drive activation. Firms that are focused on hyper growth or a particular stage of the funnel should clearly define what their funnel looks like and understand the drivers before optimising accordingly.
Kyrill summarised some considerations involved in identifying the right type of partners for your business:
Seeing the right fit goes beyond just customer profiles. Ask yourself:
- Are the core values of my company aligned with the new partner?
- Is the communication style of our two businesses similar?
- How will my customers perceive this new partner?
- Are we creating enough value for the partner’s customer base to generate intent?
Understanding your company’s growth metrics and the drivers behind them will empower growth teams to focus more on quality. Teams could consider the following set of questions when setting up and forecasting the costs of paid partnerships:
- How many website visitors or individual pairs of eyeballs does my business require in order to convert one sale?
- What are the current conversion rates for Click to Sale and Lead to Sale — do they justify a CPC/CPL commission structure?
- Is the goal of this partnership brand awareness/marketing-centric, or is the goal to drive revenue — where does it sit in the funnel?
- Is there a risk that a long-term payment framework will lead to unnecessary spend (e.g. before a client activates) — how does forecast CAC align with LTV?
- Have you forecasted conversion rates through the funnel and considered how this partnership will impact unit economics relative to other channels?
- What tests will you run at each stage of the funnel to optimise each metric?
The next article in the series will examine unpaid partnerships and their role in driving cost effective acquisition. In part three we will further explore different tools that allow teams to automate key functions of growth.
