HOW MUCH CAN I SPEND ACQUIRING CUSTOMERS WHEN MY PRODUCT IS BRAND NEW?

HOW TO CALCULATE YOUR CUSTOMER ACQUISITION COST + LIFETIME VALUE

WHAT’S THE PROBLEM?

▸ You’ve got a great idea.

▸ You’ve raised a little money, demos are going well and you’ve signed hundreds of users up.

▸ It’s starting to work!

BUT…

YOU’VE GOT THIS VAGUE FEELING…

HOW MUCH CAN I SPEND TO ACQUIRE FUTURE USERS?

You (CEO)

YOU’RE NOT ALONE.

BUT THE TRUTH IS OUT THERE.

ENTER CUSTOMER ACQUISITION COST (CAC FOR SHORT)

WHY WILL CAC HELP?

It will help you:

▸ Know if you put in $ you’ll get $$$ out

▸ What’s working in your marketing and what’s not

▸ Know when you can afford to make hires

▸ Shorten your sales cycle by identifying bottlenecks

▸ See if you’re under or over investing in your marketing

OKAY, OKAY… THE EQUATION

TOTAL COSTS ASSOCIATED WITH GAINING A NEW

CUSTOMER

TOTAL # OF NEW CUSTOMERS

TEXT

IN THE PAST 12 MONTHS:

WHAT COSTS DO I INCLUDE?

You (CEO)

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COSTS TO INCLUDE IN YOUR CAC CALCULATION:

▸ All of your advertising spend (Adwords, Facebook Ads, Display Ads, and Print)

▸ Events and Conference Fees

▸ PR Retainer

▸ Sales Team Salary (base + commission)

▸ Any discounts, free trials or hosting costs

$2.62M1000 CUSTOMERS

TEXT

HERE’S AN EXAMPLE:

Ad Spend $1.06MConferences $50k

PR $60kSales Team $1.38MDiscounts $70.8k (1%)

Total - $2.62M

= $2,620 CAC

THIS ASSUMES

A PRODUCT COSTING $59 PER SEAT AVERAGE OF 10 USERS

ANNUAL REVENUE OF $7080 PER CUSTOMER WITH 1000 CUSTOMERS

AND THAT’S IT!

WELL, NOT QUITE.

KNOWING ONE MORE NUMBER WILL ALLOW YOU TO RAMP UP SALES AND HELP YOU SOAR

LIFETIME VALUE (LTV FOR SHORT)

TEXT

WHAT IS LTV?

▸ It’s the total amount of revenue you’ll receive from a customer over the life of them using your products

▸ Having a healthy and long LTV means you can more easily predict where the business will be in the future

▸ More sales and higher profit margins means a higher valuation, an easier time attracting the team you want and a sounder sleep.

MONTHLY REVENUE

PER CUSTOMER

IF YOU’RE JUST STARTING OUT ASSUME CUSTOMERS WILL STAY WITH YOU FOR 3 YEARS:

ANNUAL GROSS

PROFIT %

# OF MONTHS THEY’RE A CUSTOMER

X X

X X$590 3685% )(

)( - CAC

- $2,620

LTV = $15,434

WHOA THERE.

WHAT’S GROSS PROFIT %?

You (CEO)

TEXT

EXCELLENT QUESTION.

WE TEND TO THINK WHAT THE CUSTOMER PAYS AS BEING REVENUE WE CAN USE.

BUT, THAT CAUSES YOU TO OVERSTATE THE LTV OF YOUR CUSTOMER. (IT DOESN’T ACCOUNT FOR THE FEES YOU INCUR ACQUIRING THE CUSTOMER)

TEXT

HOW DO I FIGURE OUT GROSS PROFIT %?

▸ Think about the costs associated with production of your product:

▸ Hosting and Monitoring

▸ Credit card fees and any transaction fees to partners

▸ Licenses and royalties of products embedded in the application

▸ Customer Success Teams

▸ Labor for your Dev Team doesn’t need to be included if it doesn’t really increase when you sell more of the product.

$1.07M1000 CUSTOMERS

TEXT

HERE’S AN EXAMPLE:

Hosting $10kCredit Card Fee $141k

App License $5kCustomer Success $920k

Total - $1.07M

= $1070 COST OF GOODS (COGS) PER CUSTOMER

THIS ASSUMES

A PRODUCT COSTING $59 PER SEAT AVERAGE OF 10 USERS

ANNUAL REVENUE OF $7080 PER CUSTOMER WITH 1000 CUSTOMERS

REVENUE:

TEXT

NOW, COMBINE THE TWO:

GROSS PROFIT % = 85%

/$7.08M 1000 = $7080

COGS: $1.07M 1000 = $1070/$7080 - $1070 = $6010 GROSS MARGIN

$6010 / $7080 = .8488

.8488 X 100 = 85%

TEXT

NOW YOU KNOW YOUR GROSS PROFIT, YOU CAN DETERMINE YOUR LTV:

MONTHLY PER

CUSTOMER REVENUE

ANNUAL GROSS

PROFIT %

# OF MONTHS THEY’RE A CUSTOMER

X X

X X$590 3685% )(

)( - CAC

- $2,620

LTV = $15,434

WHAT IF MY PRODUCT IS BRAND NEW?

You (CEO)

TEXT

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YOU’LL NEED AT LEAST ONE MONTH OF SALES.

▸ This will be your ‘Month 1 Cohort’

▸ Look at your churn (# of customers who left) in this Cohort

▸ Then input it into this formula:

# Months used in your LTV calculation = 1/(Average Monthly % Customer Churn)

* More on that later…

NOW, IT’S ON.

TEXT

WHAT YOU CAN NOW DO:

▸ See how much $ will give you $$$ in what time frame. Investors especially like that kind of stuff.

▸ If your LTV negative some big changes for your product, pricing or how you acquire customers are needed. Now.

WHAT ABOUT DISCOUNTING FOR FUTURE CASH FLOW?

WHAT IF I DON’T WANT TO DO THIS MYSELF?

You (CEO)

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If you have more questions (or notice an error)

EMAIL AARON (AT) STRATEGYBOX.COM

BOOK A CALL WITH ME ON CLARITY.FM

THANK YOU FOR YOUR TIME.