This post was originally published on the Nordic APIs blog as “How to Achieve Accelerated Growth with APIs”. Growth is a word on every entrepreneur’s mind, especially when it’s associated with the value of a startup, or with how much profit it can generate. Most startups struggle, and apply many different techniques, to reach a point where they can show some growth.
This article shows you how growth can be measured, and what variables you can use to control it. It also shows you a different way of achieving higher than usual growth. You can do this by combining traditional customer acquisition channels with an API, and making third-party developers the focus of your business marketing.
When discussing the various aspects of business, we usually associate growth with the generation of significant earnings that increase at a faster rate than the overall economy. Paul Graham, a long time investor and founder of YCombinator puts it better by saying that for a startup “the only essential thing is growth; everything else we associate with startups follows from growth.”
So, how do you put your business in “growth mode?” The first step toward achieving growth is to fully understand how your product or service will be used, and served to your potential customers. Only after that can you understand how to generate earnings and make them grow at an increasing rate. A good starting point is knowing the cost of acquiring a new customer. From there, decide how much value each new customer brings. With this knowledge, you will know how to drive the growth of your business.
Measuring Your Customer Acquisition Cost
Let’s start by analyzing how you attract new customers. There are several techniques you can use to acquire them. These acquisition channels , as they are often called, provide a variety of costs and results to consider. Here are some channels that are interesting to evaluate:
- Organic search or SEO: one of the channels used most by the industry because it is perceived as a low-cost strategy. This is deceptive: SEO may look easy to master, but in reality usually involves creating a large amount of new content that will rank well in searches, and attract new leads to your web site. SEO-related work can go from $100 per hour for contract work, to $5,000 per month for full service from an agency.
- CPC or Cost Per Click advertising: often used with SEO (or when CPC alone doesn’t provide the desired results). Depending on the product you are advertising, you can spend thousands of dollars per month on this channel.
- API: your API can become an inbound channel with the creation of third-party apps. These apps are integrated with your API and expose some or all of its features. This attracts more users to your app, which will eventually convert into new customers. If you already use your API yourself, the associated cost will be quite low compared to SEO or CPC. Plus, you can also monetize your API making this channel profitable by itself. A good example is Uber’s API which features important partners such as Starbucks and TripAdvisor. By using Uber’s API through these partners, more business is flowing in Uber’s direction, resulting in accelerated growth.
Once you understand how much in total you’re spending on customer acquisition, you only need to “do the math” to see clearly how much each new customer is costing you. This number will vary from month to month, but you should have a defined target, and stay within that cost-per-customer limit, to avoid losing money.
Let’s say you’re spending $1,000 a month on a combination of acquisition channels and you’re able to attract ten new customers. In this case, your Customer Acquisition Cost, or CAC, will be $100. If your customer lifetime value is lower than $100, you’re losing money on each new customer. If it’s higher you’re generating earnings.
Measuring Your Customers Lifetime Value
A way to measure Customer Lifetime Value, or CLTV, is to calculate how much, on average, each customer is spending per month, and then multiply the value by their expected lifetime in months. The obtained value will vary each month and, after some time, you should have a clear picture of where you’re going.
CLTV depends on the total number of customers you retain, and the total amount they spend. Therefore, the less the churn the higher the value you’ll receive from each customer. Assuming you do not change your pricing model, the best way to increase CLTV is to control and increase your customers’ retention rate.
Once you understand what your CLTV is, it becomes easier to see whether you are generating earnings — or diving into losses. If your bottom line is negative, you should pay attention to your CAC and reduce it, or otherwise change your business in significant ways. If your bottom line is already positive, you’re in good shape to achieve growth.
How to Drive More Growth with a Lower CAC
One easy way to drive more growth is to increase total spending on acquisition channels. This drives up the CAC. Funded companies usually use this approach to drive more growth by spending more on advertising. Is it possible to do the same while actually lowering the CAC?
Once you understand the dynamics of your acquisition channels, you can start to invest less on the paid ones and measure the resulting CLTV. In the beginning you might see a decrease in total number of new customers. However, if you move your attention to the API inbound channel and use the divested money there, you should begin to see positive results that last for the long term.
APIs are becoming the number one inbound acquisition channel because they offer a lower barrier to decision-making. Traditionally, decision-making takes a long time, and involves many different stakeholders, but with APIs it only takes a group of developers to convince an entire organization.
By investing in an API that can be easily integrated with third-party apps and avoiding common marketing pitfalls, you will create a sustainable customer acquisition channel that you can maintain at a reasonable cost. Not only will more customers be using your app, but you’ll also be able to retain those customers for a longer period.
By using your API as the preferred customer acquisition channel, you’ll be able to create a sustainable growth with a high retention rate. This would be more than enough for most businesses but here we’re trying to reach accelerated growth, something on the range of ten times the growth you would usually obtain.
You can follow the same acquisition tactics explained above to attract third-party developers who will integrate your API with their apps. You can effectively improve the API acquisition channel results by targeting developers on the other channels. First, start by measuring how much it costs you to attract a developer to use your API. You should try to minimize this cost by using less expensive channels, and by avoiding excessive, premature marketing campaigns. With developers, it’s always better to show commitment over time than to launch a big campaign and then forget about it. Next, you should understand how much business developers are creating for you. On average, you should be able to tell how much revenue each developer is generating. If this number is lower than the amount you spend to attract those developers, you should obviously rethink your acquisition strategy.
The less expensive way to start is by revamping your documentation and developer portal. Then you need to follow a platform strategy that allows you to provide developers with all the tools they need to integrate with your API. The SEO channel should be used at all costs to maximize the number of new developers signing up to use your API. Other channels, like CPC, can and should also be used in combination with broader developer-oriented marketing activities.
After some time, you’ll start seeing more and more developers building third-party apps which will attract more and more customers to your own app. This, combined with the high retention rate obtained from integrated third-party apps, will drive your CLTV up and put you in hyper growth mode!
An interesting example is EasyPost, a company providing a shipping API that lets developers integrate with USPS, UPS, DHL and FedEx. EasyPost went live in 2013 and, according to Sawyer Bateman, it’s been enjoying a 100% month-over-month growth. The trick? They focus 100% on their API, and on making developers happy.
If growth is the only thing that matters for a startup, finding and increasing it should be the most important business activity. You’ve discovered ways to measure and influence several factors that can affect growth. In addition, you should now be able to evaluate different acquisition channels and associated CAC, and be aware of all the means available for controlling or even improving your CLTV and achieving maximum growth.
Growing faster means being able to control all these factors and attract more customers at lower costs, or obtaining more revenue per customer. I’ve shown you a way to obtain the same growth factor without incurring more costs. Simply use your API as the main inbound channel and use all the other channels to acquire developers – not customers.
Treat third-party developers as your main source of customer generation. Using this strategy, you can achieve hyper growth by obtaining a customer base with a higher retention rate.