8. Money Spent to Acquire
a Customer (CAC)
Profits Generated from the
Lifetime of that Customer (LTV)
>
If...
...you have a broken business model
9. LTV/CAC Example: Widget Sales
In this case, CAC > LTV – this is not a profitable customer
COSTS PROFITABILIT
Y
Salesperson Salary: $10,000 / month
Marketing spend: $2,000 / month
The salesperson pursues and closes
one customer (Customer A) a month
Revenue: $20,000 widget
(one-time purchase)
Cost of goods sold: $10,000
Customer support: $2,000
CAC = ($10,000+$2,000) / 1 = $12,000 LTV = $20,000-$10,000-$2,000 = $8,000
10. LTV: The “Lifetime” Assumption is Critical
“Newer customers must remain subscribed for about
4.5 months to [break even]. However, almost 70% of
customers churn by this time… the break-even point
is moving farther away with every new cohort due
to declining revenue and growing CAC for
newer customers”
“CAC per net new customer was $430K last quarter,
and with an average ACV of $66.9K, they need to hold
onto customers for a long time to be profitable…
Given their blended net revenue retention rate was just
above 105% last quarter, lower than most, they need to
spend even more to grow…”
Daniel McCarthy, Emory University Alex Clayton, Spark Capital
11. LTV/CAC
LTV measures profitability of a customer, not revenue
CAC includes all costs associated with acquiring a customer, not just the
actual ad spend or salaries. This might include:
Marketing materials
Sales tools (e.g, software)
Benefits, travel & expenses, etc.
Other overhead assigned to sales & marketing team (e.g. Rent)
You should assume that your CAC will only increase over time, as you burn
through enthusiastic early adopter customers and enter more competitve
marketing channels
Venture investors usually look to see an LTV/CAC rasio of 3x or higher
Hello everyone.
My name is Saar and I am a venture capitalist at CRV.
I am excited to be here.
So why is a venture capitalist talking about marketing and customer acquisition?
Well - I get to work with a lot of companies that work really hard on growth.
I have been lucky to see many companies go from an idea to hundreds of millions of customers.
And - I would call this luck - but I have seen a ton of failures as well.
I could have probably added another 50 logos to this slide.
But I would like to think I have learned some things from all of these failures.
So before I get into tactics, I wanted to share some high level lessons:
This may seem obvious but:
If you don’t build something that people want - no amount of marketing is going to help you.
Google glass is a great example.
It was not clear what problem Google was solving with Google Glass.
The product was expensive.
And it didn’t seem to do anything well.
So even though they spent millions of dollars on marketing - it totally failed.
If I go back to our failures at CRV, many of the companies never found product/market fit.
But several of them may have had more time to iterate on their product if they hadn’t blown a lot of their money on marketing broken products.
At the same time - and I think this is also obvious - when a company has awesome product/market fit - your customers can be your best marketers.
Here were two examples of strong product-market fit:
When Pokemon Go launched, some of the super fans created an illegal statue in a park. This statue did not come out of the Pokeman marketing budget.
And for Supreme: No one is paying those people to stand in front of the store and get the attention of the cars driving by.
An amazing product can market itself.
So how do you find product/market fit?
One of the things I have observed, is that many of the best teams that we have seen have found innovative ways to test their value proposition early.
We were investors in Ring.
Jamie at Ring initially had an idea for a wifi-connected doorbell because he was working out of his garage and couldn’t hear the doorbell.
At the time - that was an obvious problem to him, but he wasn’t sure if other people had the same need.
He put together a kickstarter-like campaign to test the value proposition.
And only after he started to get pre-orders, did he focus on building the product.
Another interesting example is Robinhood.
They wanted to see if a zero fee stock trading app would be compelling.
They launched a sign-up page for a make-believe product and had over 1 million people sign up.
Unfortunately we see many teams spend several years on product development and millions of dollars on products before they really have any sense of the value proposition.
Lastly - before I get into tactics - I want to cover one more big lesson.
This is about scaling.
As you invest in growth - if you spend more money to acquire a customer than the profits that you will generate from that customer -> you have a broken business model.
This sounds simple but I can’t tell you how many companies get this wrong.
And it is complicated.
Just this week we had a company in our portfolio that had been investing a lot of money into growth.
They hired a new CFO.
And that CFO showed the board an analysis that they were actually losing money on every customer they had acquired.
How did this happen?
Well in this case, the company had not fully accounted for all of the costs that were going into building and servicing their product.
This is an important concept so I want to spend a couple more minutes on it.
So let’s walk through a simple example.
Imagine you run a company that sells widgets.
Customers only buy one widget and you will never sell them anything again.
That is an important fact.
In this example:
You have one salesperson who makes $10,000/month in salary and bonus.
And they close one customer a month.
You also spend $2,000/month on marketing for that one sale.
So your CAC in this case is $12,000.
Now you need to figure out how many profits dollars you will generate from the customer.
So in this example:
If you sell the Widget for $20,000, you generate $20,000 of revenue.
But that is not $20,000 of profits as you all know.
We assumed a cost of goods of $10,000.
And additional customer support for this one sale of $2000.
Since we assume that the customer will never spend money with us again - our formula for the profits generated from the customer is simple: $8,000
In this example, the company is spending more to acquire customers than it makes from them.
More of this activity will kill the company.
So what can you do here:
You can find a cheaper salesperson who is as productive.
You can drive efficiencies in your cost of goods.
You can change your pricing.
You can try to sell add-on products.
This sounds simple but it gets complicated.
Lets say that you don’t get all the revenue from a customer upfront - but instead you have a subscription service:
If you have a subscription business - like Blue Apron or an enterprise software like Domo - you need to have a nuanced view on how long customers are going to stay with you, so that you can figure out how much you can spend to acquire customers.
If you believe that customers will stay with you for several years, you can have a lot of profit dollars to invest in growth.
But if you see that customers are not sticking around, you may not have any money to invest in growth.
You really want to have a view on your customer lifetime before you crank up your marketing.
Some last thoughts before I move into some tactics:
Remember that generating revenue is not the goal. You need profit dollars from your customers to invest in growth.
CAC needs to include some non-obvious expenses. Software for your salespeople, rent, etc.
Generally CAC goes up, not down.
Because LTV/CAC don’t include overhead, management, product development, etc. - most investors look for a ratio of LTV/CAC that is >3
Now I am going to talk about some tactics that we have seen great companies use to acquire customers.
It can really help you get customers if you have a compelling founding story.
As human beings, we make sense of the world through stories.
It is how we remember things.
And it is how we spread things.
When you start a company - it is an act of defiance.
You believe you can do something better than the status quo.
Your story should answer: Why are you working on this problem?
I wanted to share two examples.
The first example is Whitney Wolfe from Bumble.
As many of you know, Whitney left Tinder to start Bumble.
Starting Bumble was definitely an act of defiance.
Her app was created out of her feeling that Tinder was creepy for women - and wanting to give women more control.
But embracing her story led to a lot of PR and word-of-mouth growth.
Here is another example.
My friend Tristan started a company called Walker and Company because he was frustrated with the skin care and hair products that were in the market for Black men.
But before he started the company, Tristan had an amazing run as an executive at some of the hottest tech companies.
So when he left, his story got people’s attention.
He was able to get buzz because:
He was sacrificing his great tech career to start the company
He was highlighting a problem that most folks did not see
The headlines from these two slides are examples of how a good story can help with PR, and I promise you that consumers will share these stories.
Switching subjects:
You can design virality into your product.
Often you need to be bold.
When Crocs launched they didn’t look like any other shoe.
They were the ugliest shoe that I think anyone had ever seen.
But Crocs grew very fast because they took a risk and stood out.
When Lyft had drivers put fuzzy pink mustaches on their cars, it was weird.
Fur on a car was outright crazy.
And it was exactly what worked to get folks to notice Lyft compared to competitors like Sidecar and others.
I love this last example:
As it is non-obvious.
You may think there is no opportunity to change things up - but there often is.
Tough Mudder’s last obstacle is an “electric shock” therapy creates intense photos at the end of the race.
And people tell the “story” of competing in a race where they get “shocked” - and it creates great word of mouth.
Don’t give up on looking for opportunities to differentiate your product.
If you can’t make your product stand-out.
You can definitely make your marketing stand out.
Dollar Shave Clubs is famous for their youtube video.
With a $5k video they got more than 25 million views on Youtube.
But they also got people’s attention by marketing razors in a different way.
They were bold.
They weren’t shy about telling you that their razors were fucking great.
I don’t think any other razor company had used the F-world to describe their razors.
Here is another example of great marketing.
You can get attention by changing the conversation around a product.
Casper put out marketing messages about sex, not sleep.
No one had every marketed a mattress for sex.
Another tactic:
Don’t be afraid to get out there and literally get the product in people’s hands.
Food needs to be tasted. So you need to find ways to get it into people’s mouths.
Exercise equipment needs to be experienced.
Randy Hetrick, the founder of the TRX used to teach classes at the Lyon Street steps in San Francisco.
And a more non-obvious example: Casper found a way to bring mattresses to their customer with their nap pod truck.
I loved the early story of RxBar. For those of you who heard the story, you will remember that the founders started selling to Crossfit gyms when the gyms were just starting to sell products. And that became a great early channel for them.
When you are ready to invest in marketing - many of you will find existing channels expensive.
We see a lot of young companies try new channels.
Often these channels don’t have as much competition, they aren’t expensive to test, and if they work - they can really scale.
I loved the early story of RXBar. For those of you who heard the story, you will remember that:
The founders started selling to Crossfit gyms when the gyms were just starting to sell products.
And that became a great early channel for them.
Don’’t be afraid to put an ad where one doesn’t exist.
Where are those channels today?
We are seeing folks try podcasts, influencers
And they are trying new platforms.
Reddit recently launched its ad platform.
And other weird ones are out there
PR can definitely help your company early on.
But let’s be clear - Uber has nothing to do with Puppies.
But reporters need stories.
And Uber early on was brilliant at coming up with fun stories the press wanted to talk about.
Delivering puppies, ice cream, and flowers were all great PR moments they took advantage of.
Another PR opportunity is to join a conversation that is happening.
We recently saw this with Nike.
But that isn’t new.
Even Uber has offered free rides to customers during shootings and other disasters.
Lastly - you can get more customers if you understand how they buy products.
Techies want the latest gadget.
So Apple goes to great lengths to surprise their customers with new product releases.
They build huge anticipation for their events.
And Steve Jobs was famous for saying “and there’s one more thing” before unveiling a new product.
Here is one last example:
Foodies are willing to “work” for a great experience and go to weird places to find the best food.
They will wait in line for hours to try something.
Here is an example of how a restaurant nailed it:
The resaurant is in the basement of a house in NY suburb.
And it has become one of the most exclusive resaurants in the world - with a 10 year waitlist.
The waitlist in some ways has become the marketing for foodies.
As who has heard of a restaurant with a 10 year waitlist?
It makes foodies want to go even more.