Case in point, in order to run a profitable business you want the cost of acquiring your customer to be far lower than the total revenue a customer will generate for you.
CAC < total revenue = 🥳
The reality is the revenue may take a while to accumulate, say in a subscription or reoccurring business like Netflix or Uber and holds true even in FMCG/CPG and other categories.
So to help determine your marketing spend at the outset, you bring in a concept known as Customer Lifetime Value or LTV. 📈
This is the calculation of the estimated total revenue a customer will generate for a brand over the lifetime they transact with it. It’s this calculation that determines marketing costs/budgets for that customer segment. 👯
Now here is where things fall apart 💔 as ‘estimates’ are based on a combination of past performance and assumptions like a stable market/competitor conditions, similar consumer behaviour, no purchase deterioration and how 🐂 you/your VC wants to be. 🥊
So at best this approach needs heavily caveated and at worst just goes into the world of pure fantasy. 🧚♂️
Its these very assumptions, projections or conjecture (!) that is at the root of why we have ended up with bloating losses of so called ‘unicorn’ companies (don’t get me started on how that status is determined!). 🦄
Formula as follows:
Unrealistic business case/assumptions = unrealistic valuations = excessive marketing spend = underperforming LTVs = huge losses 📉 = no sign of profitability 👀 = funding freeze = huge lay-offs 🤯
If we can learn anything over the past few years, it’s that we need to be way more discerning with this calculation and more focussed on the here and now. 🧘♂️
After all, ‘the past is not always an accurate predictor of the future.