You've launched your product, users are coming in the door, but you're wondering what to spend on marketing to keep it up.
Here's two simple calculations - customer acquisition cost (CAC) and lifetime value (LTV) - that will take you 20 minutes to answer that question.
They're also metrics investors and VC's really care about.
How Much Can I Spend Acquiring Customers When I'm Brand New?
1. HOW MUCH CAN I
SPEND ACQUIRING
CUSTOMERS WHEN
MY PRODUCT IS
BRAND NEW?
HOW TO CALCULATE YOUR
CUSTOMER ACQUISITION
COST + LIFETIME VALUE
2. 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…
7. 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
11. TEXT
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
12. $2.62M
1000 CUSTOMERS
TEXT
HERE’S AN EXAMPLE:
Ad Spend $1.06M
Conferences $50k
PR $60k
Sales Team $1.38M
Discounts $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
17. 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.
18. 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
21. BUT, THAT CAUSES YOU
TO OVERSTATE THE LTV
OF YOUR CUSTOMER.(IT DOESN’T ACCOUNT FOR THE FEES YOU INCUR ACQUIRING THE CUSTOMER)
22. 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.
23. $1.07M
1000 CUSTOMERS
TEXT
HERE’S AN EXAMPLE:
Hosting $10k
Credit Card Fee $141k
App License $5k
Customer 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
25. 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
26. WHAT IF MY PRODUCT IS
BRAND NEW?
You (CEO)
TEXT
27. TEXT
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…
29. 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.
30. WHAT ABOUT DISCOUNTING FOR FUTURE
CASH FLOW?
WHAT IF I DON’T WANT TO DO THIS MYSELF?
You (CEO)
TEXT
31. TEXT
If you have more questions (or notice an error)
EMAIL AARON (AT) STRATEGYBOX.COM
BOOK A CALL WITH ME ON CLARITY.FM