
Startup Killer: the Cost of Customer Acquisition - wheels
http://www.forentrepreneurs.com/startup-killer/
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slapshot
Customer acquisition cost (CAC) versus long-term value (LTV) is one of the
concepts at the core of any SAAS (software as a service) or subscription
business. Companies like Salesforce.com have made it their mantra to
constantly drive CAC down and LTV up.

The factor that this site doesn't mention is the speed of acceleration. If you
can extract $200 of value from every $100 spent in acquiring customers, it
sounds like you're in good shape. But if it takes you 5 years to make that
$200, then you won't be able to reinvest your revenue in getting new
customers. On the other hand, if it only takes two months to $200 back from
$100 in customer acquisition cost, you can very quickly spin up a massive
business from a small initial investment. The difference between 5 years and 2
months is massive in terms of valuation and ability to self-fund.

He also fails to mention scalability of your marketing, but that could be a
whole different post.

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anamax
This argues for using something like the customer's Net Present Value instead
of LTV. For a startup, the "interest rate" used to compute NPV is rather high
because $200 in five years isn't worth very much to a startup today.

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slapshot
True, but even if you got $200 in NPV in five years (maybe $300 of nominal
dollars), you still wouldn't be able to spin up fast enough and would take a
massive infusion of capital to scale.

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anamax
> $200 in NPV in five years (maybe $300 of nominal dollars),

I doubt that $300 in five years is worth $200 to a startup today - that's a
very low interest rate.

> you still wouldn't be able to spin up fast enough and would take a massive
> infusion of capital to scale.

I was unclear about the reason for using NPV.

There are three numbers. One is the LTV of the customer. The second is the
amount of money per customer that you need now. The third is the interest that
someone will charge you in return for the LTV of that customer. The LTV and
the interest rate tell you how much money that customer is actually worth now
to you; it's the realizable NPV. If it's greater than the CAC, great. If it's
less, you're hosed.

For most startups, the interest rate is pretty high, so a $200 LTV five years
out isn't going to get you very much money. For example, I doubt that many
start ups can get $200 today for $300 in five years.

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jmount
Warning: this site has some really aggressive 3rd party tracking cookies. It
pops-up dialogues on Safari if you have 3rd party cookies disabled.

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middayc
what do you mean by "really agressive"? I saw google analytics by quick skim..

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jmount
By "really aggressive" I mean something in their Javascript pops-up and nags
at you for rejecting their cookie.

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spencerfry
It's a funny metric. If things are going well, you tend to forget to think
about it. If things aren't going well, you never really have a chance to. I
agree with the author that it's something to seriously consider, but it's
always difficult to calculate until you've got a lot of data.

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johnrob
The idea that a lot of companies fail after achieving product market fit
contradicts a lot of advice out there... I wish the author would have
referenced some real world examples because I'm struggling to accept his
claim.

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TheSOB88
Those are some seriously funky scales. I could have sworn things go on _top_
of scales.

