Calacanis’ Customer Acquisition Cost Math

You may have heard that Jason Calacanis, the CEO of Mahalo, publicly offered $250,000 for two years for one of the top twenty slots of suggested users that Twitter is now offering up as part of its service.  Jason's offer was a publicity stunt.  A game.  He intended to attract media coverage.  He is extremely skilled at getting attention.  The king of linkbait.  It is one of the things that makes him a good entrepreneur.  And once again it worked.

But with an interchange with TechCrunch he said he was serious about the offer.  And I believe he is.

Jason outlined his thought process for the $250k offer in his most recent list mailing (He stopped blogging in 2007.  Blogs are so last, last year, though he really did not stop.)  Jason did some math on his offer and this is what it looked like.

My plan was to post the Top Five most absolutely fascinating questions
from Mahalo Answers to our @questions account every day.
Everyone loves a timely or fascinating question and, in my estimation,
I would get a one percent clickthrough rate on each question. If I was
able to reach three million followers, and kept half of them (1.5m),
that means every tweet would get 15,000 visits. Five a day means
75,000 daily visits, and over two million visits a month–or close to
50m visits of two or three years. Some percentage of those two million
would participate in Mahalo by asking or answering questions, and if
that number is also .5 to 1%, that means I would get about 250,000 new
members for my service.
Each of those 250,000 new members would cost me one dollar, and I'm
certain over their lives we would monetize them for much more than
that.

Jason estimated his customer acquisition cost of doing a deal to buy a Twitter suggested users slot to be a dollar.  Customer acquisition cost is simply the cost of securing a new customer, member, or user.  And while not every startup is well funded like Mahalo and has $250k
to throw around on a whim, there is an important lesson here. 

Customer acquisition cost is a key driver of any Internet business.

Especially so for early stage and growth stage companies.  It deserves deep thought and consideration.  While I might not buy into Jason's math and question some of the assumptions made to reach the customer acquisition cost in this instance, he walked through the logic.  Every entrepreneur running an Internet business needs to be able to do the same.  You can start with a very simple model.  If you have no history make some reasonable well thought out assumptions. Have data points and facts to back your assumptions.  Using services like Facebook, Google, and Twitter as examples and a basis for assumptions is a bad idea.  Yes, Web services need to grow virally and via word of mouth (the two are not one and the same) to be successful.  But at some point it is going to take more then that.   Just assuming 20% quarter over quarter growth rates won't cut it.  Nobody is going to buy into that assumption unless you are actually achieving 20% quarter over quarter growth rates. And then they are going to want to know how you are going to sustain it.

Customer acquisition costs is one of the three most important drivers of a SaaS business model (churn and recurring revenue being the other two), if you are going to build a successful Internet business you need to know customer acquisition marketing cold or find somebody who does.  It is the only way that you can cost effectively grow your business. 

As for Jason's offer?  He raised it to $500,000.