Online business means the kind that runs on online infrastructure.

The kind where the cost of goods is very low.

Like digital courses or SaaS software.

Or even commission based online businesses.

Basically where the product comes cheap or at negligible cost

The cost of fulfillment is also cheap due to it all being online.

The perception is that these businesses will be highly profitable.

But that is not always the case.

Because online is mostly profitable only if you own the attention.

Digital businesses can turn into something worse than offline businesses when it comes to unit economics if your cost of acquisition is too high.

For offline business, you already pay for rent which has the premium for attention (i.e the foot traffic) built in the price model already.

Higher the foot traffic and location advantage, the higher the rent. It is a premium for better logistics and attention.

(note from future : I respect offline business even more now lol. I never fully realized rent is a payment for location and attention. I always wondered why aren’t they spending more on ads. In a sense offline business outsource attention gathering to landlords. This also makes me wonder if restaurants pay more for attention via their rent or their ad spend on platforms like food delivery apps and social media and which channel is actually contributing more to their profitability)

But for online business , the cost of attention is not priced in already.

That’s why they seem so attractive.

If not handled well it could turn into a siren song.

SaaS Example:

• A SaaS company offering project management software charges $50/month per user. With near-zero marginal costs, it seems highly profitable.
• However, if it spends $5,00 on ads to acquire a customer who stays for 6 months (LTV = $300), it loses $200 per customer. Profitability requires either lowering CAC (e.g., via referrals) or increasing LTV (e.g., longer subscriptions).

Profitability hinges on controlling customer attention and retaining cutomer.

If you are too reliant on Google and Meta ads, you are cooked.

The thing that I see messing up most businesses and their unit economics is social media ad spend.

Ad spend grows faster than the rate at which your leads and conversions grow.

So there is a point of optima for ads.

Beyond which if you still spend on ads you are just killing your own business.

So either be happy with that optima and don’t spend beyond it.

Or don’t bother playing at all.

If you want more revenue, then keep ad spend capped but also start building your organic reach.

And to build organic reach, you will need to create content.

Sooner or later, you will find yourself turning into a content and advertising company.

It does not matter what your original business was

Be it manufacturing, tech, or something else.

To expand your business online, you have to turn into a content business.

Ad spend is linear.

But conversions via ads are not.

They grow, then they plateau.

So beware

You are in the market of attention.

And markets exist because there is a shortage of a thing.

If that thing was available and abundant, no one would have bothered buying it in a market.

So attention is something that is in short supply.

And if you are trying to buy it beyond a limit, you will have already bought all the good quality attention.

After that, all you are doing is trying to buy bad quality attention and try to convert it into sales.

What that means is your cost graph is growing at a steady rate, but your conversions have flattened.

There comes a divergence between the two, and there is a deficit.

If you are in niche categories, you might find success at the start.

But if you keep spending more on ads you will burn out the market.

This makes me conclude that ad spend doesn’t actually mean much.

Because it feels like it is an employee.

Like you may make him work for 20 hours instead of the usual 8.

Now you have to pay overtime.

And you will not get the same quality of work.

So you have increased your cost, decreased your output, and hurt your unit economics.

That’s why ad spend should be capped.

Because the output it can produce is limited.

It is like an employee who cannot be productive beyond 8 hours.

So to keep making the employee work beyond their hours and still keep paying him…

And if you have any plans that involve having that employee work for more than 8 hours without considering the drop in productivity after 8 hours, then you reevaluate your business plan.

So what could online businesses have done apart from organic content?

Maybe cold approaches.

Because I think cold approach and buying leads is way cheaper.

We can say that money spent on buying leads is way better than money spent on ad spend.

You can literally keep retrying the same lead you have and you can do it for free if you do not have an employee to pay.

But for ads, you just keep spending money.

That makes buying leads an investment.

While ads become a recurring expense.

The viability of the ad spend totally depends on the scale and the budget you have.

If you’re trying to grow your niche business by 10% and you’re already at few million dollars of revenue…

You are just scraping the bottom of a trashcan.

You are going to spend all that money for what?

That’s just trying to throw a coin at Google and see if it returns something.

At small scale, if you have a good existing channel for cold approach and organic content…

Then you can try to explore ads a bit during the time it’s profitable

When the easy catches are just floating on the surface for the algorithm to catch.

But once you have finished everything, don’t try to scrape the ocean floor.

Of course, the ad is an integral part.

But you have to be conscious of the level at which you are.

If you are something like Domino’s…

You know you need the ad speed.

Because your product is generic.

Its consumption is high.

The target audience is big.

So the ad spend over Google and also television is justified.

But if you are someone like a SaaS company, then it doesn’t really make sense to try to source your audience that way.

At the end of the day, you have to see it as raw material.

You cannot import sand and hope to get diamonds out of it.

You have to consider the potency of the raw material.

If you are buying iron ore, how much of it can be converted into iron?

What is the percentage?

So if you are trying to buy attention

The raw material for your marketing

Then you have to understand whether that raw material will convert for your use case, at your scale.

If you want more revenue from ads, then diversify your product portfolio.

Try to capture a different market using a different set of ads.

That can be a strategy.

But to keep digging the same land with the same shovel…

You will hit the bedrock soon.

If you want to keep increasing you ad spend

keep diversifying and expanding your product portfolio and geographies too.

Expansion that way is possible.

Think of it like a precious clay 5 centimeter deep but miles wide.

Don’t dig deep to the bottom of barrel.

Increase the surface area tactically.