Now that you know the acquisition cost of new customers you can compare that to the Customer Lifetime Value (CLV). The CLV is the total amount of money that an average customer will pay you. For example, if you charge $30 per month for your service and the average customer is retained for 10 months, your CLV is $300. If CAC > CLV, you won’t be in business very long. If CAC = CLV then you won’t make any money on these sales, and again, you won’t be in business very long. This strategy might make sense in the short-term to build a customer base, but it’s not sustainable in the long run. The best situation, and a metric to work towards, is for the CLV to be at least double the CAC (CLV >= 2 * CAC). This cushion gives you the ammo you will need to expand your marketing efforts and sustainably build a solid customer base. Obviously, the more cushion the better. These metrics will be hard to know with any certainty before you launch, so make educated guesses and monitor your progress closely. The bottom line is that you don’t have a feasible business if it’s too expensive to reach your customer given your prices and margins.
The Agile Startup is an inspiring compilation of the most important lessons of innovation and entrepreneurship. It’s easier than ever to start a new business, and the potential rewards are enormous. But even with all of the available advantages and resources, the likelihood of any one business succeeding is slim. That’s why you need the simple, clear, actionable lessons found in The Agile Startup.
Author Matt Sand
Passionate about making a difference through innovation and entrepreneurship.