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Startup Killer: the Cost of Customer Acquisition

54 points by wheels 17y ago

deleted 17y ago
[deleted]
spencerfry 17y ago
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.
jmount 17y ago
Warning: this site has some really aggressive 3rd party tracking cookies. It pops-up dialogues on Safari if you have 3rd party cookies disabled.
- Jim_Neath 17y ago
  I've noticed this on previous visits. I tend to close the site before reading anything due to it.
- middayc 17y ago
  what do you mean by "really agressive"? I saw google analytics by quick skim..
  - dmix 17y ago
    This one was caused by Zoho being embedded in the post, not the blog linked.
  - jmount 17y ago
    By "really aggressive" I mean something in their Javascript pops-up and nags at you for rejecting their cookie.
slapshot 17y ago
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.
- anamax 17y ago
  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.
  - slapshot 17y ago
    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.
    - anamax 17y ago
      > $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.
TheSOB88 17y ago
Those are some seriously funky scales. I could have sworn things go on top of scales.
johnrob 17y ago
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.
deleted 17y ago
[deleted]

54 points by wheels 17y ago

deleted 17y ago

[deleted]

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.

jmount 17y ago

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

Jim_Neath 17y ago
I've noticed this on previous visits. I tend to close the site before reading anything due to it.
middayc 17y ago
what do you mean by "really agressive"? I saw google analytics by quick skim..
- dmix 17y ago
  This one was caused by Zoho being embedded in the post, not the blog linked.
- jmount 17y ago
  By "really aggressive" I mean something in their Javascript pops-up and nags at you for rejecting their cookie.

slapshot 17y ago

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.

anamax 17y ago
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.
- slapshot 17y ago
  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.
  - anamax 17y ago
    > $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.

TheSOB88 17y ago

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

johnrob 17y ago

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.

deleted 17y ago

[deleted]