Customer Acquisition 101 for Entrepreneurs and Startup Founders

I was watching an entrepreneur pitch a new IoT device to a group of partners at a VC firm I occasionally consult for. He spent a long time lovingly describing every aspect of the product and all its features. The product portion of the pitch went a bit too long for my taste, but the device sounded interesting, so I was curious to learn more about the business he was building around it.

Finally, after about 15 minutes, he seemed to have finished explaining every last detail of product functionality and was ready to get to the important stuff. He flipped to his “customers” slide. It contained a chart with a line moving “up-and-to-the-right.” At the top of the chart was the number 976. After showing the slide, he proudly proclaimed: “In our first six months, we already have nearly 1,000 customers!”

And that was all he said about customer acquisition. On the next slide, he began describing his team, and that’s when I stopped listening. In the 15 seconds he’d spent talking about his customers, he told me exponentially more about his startup than he did during the 15 minutes describing his product. He told me he wasn’t an entrepreneur worth investing in.

Good startups are more than products

If people visualized startups the same way astronomers draw maps of the solar system, most people would stick the product at the center and have everything else orbiting it: sales; marketing customer support; HR; fundraising; and so on. This makes sense from a consumer perspective because, as customers, we interact with companies by buying their products. As a result, products seem like the natural focal point of every company.

But great startups aren’t product-centric. Instead, great startups revolve around the customer acquisition process because, without customers, you don’t have a business.

For startup founders, this means the most important thing to understand about your company — and the most important thing to explain to potential investors — isn’t your product.

Let me write that again for emphasis: Your product isn’t the thing you should be pitching to investors.

Your product is mostly irrelevant. It’s a mechanism through which you acquire customers. Unfortunately, the vast majority of young founders I meet only want to talk about their products. They rarely ever mention their customer acquisition processes. If they do, they hardly have the vocabulary to discuss customer acquisition in a sophisticated way. They’re more likely to do exactly what the founder I described at the beginning of this article did — share how many customers they have.

But a startup’s number of customers doesn’t reveal anything by itself. That’s why I was so frustrated when the founder I was listening to told us his company had 1,000 customers. To an untrained listener, it might have seemed impressive, but potential investors are never untrained listeners. They want — and need — more context.

For example, having 1,000 customers doesn’t sound nearly as good if your pipeline started with 100 million prospects and cost $100 million to build it. Conversely, only having 10 customers isn’t necessarily bad. What if the pipeline started with 10 prospects and building the pipeline only cost $10?

As you can see, without sharing additional details about the entire customer acquisition process and pipeline, a founder presenting a startup's number of customers is, at best, ignorant about the complexities of getting customers, or, at worst, being intentionally deceptive. Neither option is good.

How to talk about customer acquisition

Since so many of the founders I’ve met struggle to explain their customer acquisition processes, I thought it would be helpful to describe a customer acquisition process in more detail. What follows is a description of the customer acquisition process I’ve personally used in the past for building B2B SaaS companies.

Before sharing it, I want to make two points:

First, I’m describing a B2B SaaS customer acquisition process because it’s what I know best. If that’s not the kind of company you’re building, don’t worry. The specific stages aren’t as important as the overall concept, so keep reading. You’ll still learn plenty.

Second, by describing all the stages of a customer acquisition process, I’m not suggesting you should explicitly detail each and every stage of your customer acquisition process when pitching your startup. Instead, I want to introduce you to a higher resolution of complexity within a customer acquisition process so you can apply it to your own strategy. Doing this will encourage you to put customer acquisition at the core of your business. As that happens, you’ll naturally begin to present your startup in a way that’s less product-centered and more customer-centered.

With those caveats out of the way, let’s dive in! I’m going to start with a diagram of my sales funnel:

The above diagram shows each stage of the customer acquisition process for a B2B SaaS company. As people move through the funnel, the number of potential customers at every stage decreases, but the odds of them becoming a customer increases until you’ve finally got your cohort of paying customers. Woohoo! However, as you can already tell, the process of getting customers isn’t simple or quick.

Stage 1: Awareness

The stage at the top of the funnel is “awareness.” Simply put, people have to know about your product in order to buy it. While the relationship between awareness of a product and the ability to purchase it should seem obvious, it’s a relationship founders often forget. They get so obsessed with perfecting their products that they neglect this critical aspect of building a successful company. Don’t make the same mistake.

Awareness comes from all sorts of places: content marketing; SEO; PR; word of mouth; and, of course, paid advertising. Of all the strategies for generating awareness, paid advertising is the most scalable. In a practical sense, it’s infinite. But it’s also the most problematic. Still, you’re not likely to run out of people you can target via paid advertising, meaning paying for awareness can help make the top of your funnel extremely wide as you capture the attention of lots of people.

But, as you can see from the diagram, capturing people’s attention is just the beginning of the process. What you do next is equally as important because, if you can’t get people to buy, then all you’ve done is spend resources creating awareness without generating any revenue in return.

Stage 2: Activation

Lots of funnel visualizations skip this step and it always confuses me. Instead, the funnels jump straight from awareness to nurturing (I’ll talk about what that means next) without pointing out the fact that you can’t sell someone a product unless you can communicate with them. That’s what you’re solving in the “activation” stage.

Activating prospective customers means getting some form of contact information. Maybe it’s an email address. Maybe it’s a phone number. Or maybe you get people to follow you on social media. Regardless of what contact information you capture, your goal in the activation stage is to secure a way of communicating with prospective customers. This will allow you to proactively contact sales targets rather than always depending on them to initialize communication with you.

As a reminder, activation looks different for different types of businesses. In the B2B SaaS space, activation is a critical part of the process because purchasing decisions usually take a long time and require lots of touch points. For a cheap consumer product, the activation phase might be incidental as people are filling out their credit card information.

Stage 3: Nurturing

Once you have a way of contacting someone, you can continue sharing more information about your product and its value proposition. This process is known as nurturing. It can take lots of different forms including things like white papers, blog posts, videos, infographics, and webinars.

Again, nurturing looks different for different types of companies. In the B2B SaaS space, where decisions usually take longer and require more than one person at a company, nurturing is often an educational process where you slowly drip information that teaches potential consumers about your product and why it’s worth considering.

In a B2C space, the nurturing process is usually less educational and more aspirational. For example, nurturing content might include videos and photos of celebrities using your product.

In either case, the purpose of nurturing prospective customers is to get them interested enough in your product that they take a proactive step toward attempting to purchase it. For a B2B SaaS product, that usually means requesting a demo or, for less expensive products, starting a trial.

Stage 4: Qualification

Just because someone thinks they’re interested in your product, it doesn’t mean that person is qualified to buy it. Maybe the person wouldn’t actually be able to get value from it. Maybe the person has too big or too small a company. Maybe the person lives in a country where laws prohibit your product.

Whatever the case, qualification is a critical part of the funnel because it’s the first time your funnel focuses on efficiency over volume. By that I mean it’s the first time where you want to actively push prospects out of the funnel who aren’t likely to become customers.

While pushing away potential customers might seem counterintuitive, remember that bad prospects who get too far into your funnel will cost you time and money. For example, you don’t want your sales team talking with bad prospects who can’t or won’t ever buy your product. You also don’t want bad prospects burning through your resources during free trials. And, believe it or not, you definitely don’t want bad prospects buying your product.

That last warning might seem particularly strange. If someone wants to pay you, isn’t that a good thing? The answer is an enormous NO!!!!!

While all money can seem like good money — especially for a young, cash-starved startup — bad customers usually cost more than whatever they’re paying. For example, they’ll often try to convince startups to develop unnecessary features just because they want them. This puts startups in a difficult position. They can either waste resources developing unnecessary features, or they can ignore the requests. Doing the former risks hurting their product. Doing the latter risks upsetting the customer, which, in turn, can cause that customer to speak negatively about your company to other, better-qualified prospects.

Stage 5: Demo

Once you’ve found qualified prospects, it’s time to demonstrate exactly what your product can do. This is where the traditional “sales process” picks up in a customer acquisition funnel.

Just remember that demoing a product isn’t the same as showing off all your coolest features. Instead, demos need to show prospective customers how your product will provide value explicitly to them. If that concept is too difficult to grasp, think about it this way: people who are bad at giving demos tend to spend the entire time demonstrating features. People who are good at giving demos spend the entire time trying to understand the prospective customer’s problems and explaining how the product can help solve them.

Also, since organizations often have multiple stakeholders, be prepared for prospective customers to require more than one demo. For each demo, the same concept applies. Don’t just show features. Figure out what the person you’re talking to needs, and then show how your product can address it.

Stage 6: Trial/Proposal

For higher cost items with longer sales cycles, prospective customers rarely go straight from seeing a product to buying it. They might want to test it through some sort of trial. They might need specialized development and integration work. Or they might require custom contracts drafted in partnership with their lawyers and yours.

Whatever the case, just because you can see the finish line, lots can go wrong in the trial/proposal stage. The most common and most frustrating issue is that people simply change their minds. They thought they wanted something; however, upon further reflection, it no longer seems as appealing.

To counter this problem, remember that the nurturing process shouldn’t stop once prospects get to the trial and/or proposal phase. This is the time to ramp up nurturing because prospective customers are close to becoming paying customers.

Stage 7: Customer

Congratulations! You’ve got yourself a paying customer. And all it took was days… weeks… months… maybe years after they first became aware of your company. Are you starting to see why customer acquisition — not product development — is the thing around which a company should revolve?

Once a product is built, it’s usually a relatively stable asset. But customer acquisition is a constantly moving target. Your strategies for generating awareness will constantly change as you mine different pockets of potential customers. And the different pockets of potential customers will require different qualification and demo processes. Some interested customers might want trials. Some might want to have 38 meetings before signing a contract that’s been reviewed by a staff lawyer as well as by an external law firm. And so on. Each customer will provide its own unique challenges, and you’ll have to deal with every one of them.

Keep that in mind when pitching your company to potential investors. Whatever customer acquisition process you use, I guarantee flashing a big number on the screen that touts your total number of customers won’t tell your audience anything important. And while you don’t need to explain every aspect of your customer acquisition process, showing you’re properly sophisticated in your approach to customer acquisition should take you longer than 15 seconds and one slide. In reality, it should be the bulk of your presentation.

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Aaron Dinin teaches entrepreneurship at Duke University. A version of this article originally appeared on Medium, where he frequently posts about startups, sales, and marketing. For more from Aaron, you can also follow him on Twitter or subscribe to his awesome podcast, Web Masters.