I ran across this question online at Quora and figured I might as well try and answer it.
“Why are startup companies willing to spend so much on advertising?”
I see startups raising (and then deploying) funding for 2 core purposes:
- Market testing
- Market growth
The first step of testing is usually much smaller amounts of money invested to just try and take an idea and see if there is a true market fit, if they can dial in their audience and messaging. Guests talk about this a lot in the new upcoming podcast series called “Better Brand Story” (launches Dec ‘22).
For Testing – you really want to figure out that recipe that people really like. Imagine a restaurant coming up with a recipe that not only tastes great – but is able to be scaled up to actual production while also tasting great.
Startups want to know that for every $1 in spend, they generate $1 + X in profit.
Moving on to #2: market growth
Now that startups have tested and proven their delicious profit making recipe with customers that not only BUY their product online but are leaving 5 star reviews, sharing the content and re-ordering while getting friends to buy the product… Now they’re ready for growth.
When it comes to market growth, they fundraise (often) millions to really put fuel on the fire.
Fires only burn so long before needing new wood, before the winds change direction, before the night is coming to an end.
They want to burn big and fast, adding fuel allows them to scale profitability quickly.
If you knew that for every $10,000 in advertising you spend you generated $40,000 in sales… at a healthy profit… How much would you limit your advertising spend to? My guess is you’d ramp up your spending to whatever the ad platforms will take.
That’s why it’s important that you aren’t just thinking of making 1 ad, 1 photo, 1 blog post, 1 video ad.
Why do startups spend on advertising? It’s usually either research and testing or it’s growth.
I know this because I work with companies creating corporate and commercial video production – and often they come to us asking how much “does 1 video cost”. That’s not the right question. Just like asking why companies spend so much money on ads… The question should center around the reason WHY are their ads effective. How are they consistently making net positive sales. Where are they coming up with their ideas and When are they testing these ideas to continuously pump out new campaigns as old ones go stale.
At least that’s what we find at Provid Films.
Planning a video project?