Primordial ooze

The foundation of a great consumer brand or service is organic, word-of-mouth growth. Most startups cannot afford to pay big dollars for a marginal user. Ensnared in a frustrating tautology, the successful ones are forced to rely on the inherent virality of product excellence itself as a vector to acquire users.

However, after achieving product/market fit and raising your first significant round of venture capital, you may want to consider spending some of that capital on paid channels to supplement to organic growth. Few consumer companies have the ability to maintain annual growth at scale in excess of 100% without paid marketing support. With this realization in mind, many founders pose a critical question to their board members and advisors:

How do I allocate marketing dollars across the various channels where I can advertise my product or service?

My general recommendation is that the allocation should follow a power law distribution:

A few critical assumptions inform my recommendation.

The first is that most successful consumer startups have a single channel with extreme product/channel fit, where the economics of user acquisition are disproportionality skewed in their favor. For an example, see my last post on this concept for Zola. The second is that startups have limited capital, so when presented with a channel that outperforms, the tendency is to stuff as many of those valuable marketing dollars in that channel as possible. The third is that all marketing channels eventually saturate, so it makes sense to have some necessarily small allocation to newer channels that are not yet working, but could perform well in the future. This small allocation to newer, unproven channels is the “primordial ooze” from which newer, high performing channels are born.

The “ooze” assumption requires the most explanation. I liken decisions on marketing mix to those of a portfolio manager deciding on asset allocations. The Capital Asset Pricing Model (CAPM) demonstrated mathematically that increased diversification across a set of partially uncorrelated securities results in better risk-adjusted returns for the entire portfolio. Therefore, even if an individual security presents significant risk, as long as it possesses little correlation with the remaining portfolio, an investor is better off owning some small amount of it.

A CAPM for marketing mix would likely allocate 80–90% of your marketing dollars to your highest performing channel(s) and the remainder to a mixture of channels that are not yet profitable, i.e. the “ooze.” The average return of this portfolio will necessarily be lower than an “eggs in one basket” approach, but I’d argue via metaphor with CAPM that the risk-adjusted return is higher.

What exactly is the risk that you’re mitigating through diversification? It’s the risk that your top performing channel saturates sooner than expected. When this happens, the results can be devastating. Your unit economics can quickly deteriorate, forcing a tough choice between growth and preservation of capital. The only resolution is to find a newer channel that performs well, but such a discovery does not happen overnight. Alternatively, maintaining a constantly bubbling ooze of new channels creates the possibility that new growth opportunities will evolve.

My recommendation is to create a bucket of “ooze” marketing spend on the order of 10–20% of your total budget and use it to constantly test new channels. Every couple quarters, one of these channels should evolve to the head of the distribution and scale with significant marketing dollars behind it. The rate of evolution is also an important metric. It shows how effective your marketing organization is in successfully discovering how to make new channels profitable — a critical skill for a growing consumer business.

Do you have a concept of “ooze” in your company’s marketing budget? What is your percentage allocation? Reply to me on Twitter (@ataussig) and let me know.