There are only two ways to scale a business to hit that $100 million threshold:
1. Your business has a high Life Time Value (LTV) per user, giving you the freedom to spend a significant amount of money in customer acquisition. High LTV can usually be found in transactional or subscription businesses. The biggest driver for high LTV is repeat purchase behavior in an e-commerce business, and a low churn rate in a SaaS company.
2. Your business has a high viral co-efficient (or perhaps even a network effect) that lets you amass users cheaply without worrying too much about the monetization per user or spending money on paid acquisition. User acquisition is generally close to free, and monetization per user is often low (advertising-based or freemium businesses).
Unfortunately, many consumer internet startups find themselves stuck in the middle of these two strategies: they have low monetization per user and limited viral effects.
(1) In the early days of Seeking Alpha, one of our investors felt we should be spending far more on PR and marketing. But with an ad-based revenue model and thus low lifetime value per user, that never made sense to me. Boris’ post puts its finger on why this is the case.
(2) Re. “Your business has a high viral co-efficient (or perhaps even a network effect) that lets you amass users cheaply”. Many businesses relied on social networks for viral growth, but forgot that they weren’t in control of the viral mechanism. As the social networks increased their own monetization, the traffic they sent to publishers plummeted.
(3) Both models require high frequency of use, because even in a viral model it’s hard to amass users who use your product infrequently. See Google’s Toothbrush Test.
(4) Re. “The biggest driver for high LTV is repeat purchase behavior in an e-commerce business, and a low churn rate in a SaaS company”: see the posts on Churn and Retention in Startup Best Practices.