Damn G, your CAC is higher than your CLV / by Dimitra Taslim

Marc Andreessen’s old blog had some really good read, one of which was the “Pmarca Guide to Startups, part 4: The Only Thing That Matters” (this dude from The Motley Fool has actually saved his best blog posts).

[Update: Marc Andreessen has now made his archives available as an Ebook. Click on this link to get it!]

In this post, Marc proposes that product/market fit is the only thing that matters. He believes that a great market pulls product out of the startup; conversely, in a terrible market, the best product in the world made by a really great team is doomed to fail. Having observed a number of startups from their conception stage to their product launch (big caveat: I’m by no means an expert in the ecosystem), I think that a viable business model – one that’s able to acquire customers at a sustainable cost – is just as important.

So how do you calculate CAC and CLV? Check out David Skok’s example spreadsheet on CAC and my previous blog post on CLV (I’ve included a spreadsheet in that post too).

Skok’s model shows that at a cost-per-click of 50 cents and the relevant conversion rates, each customer costs $100 to acquire. For many B2C businesses, it’s extremely difficult to get consumers to spend more than $100 on the product/service! More interestingly, Skok shows how quickly your CAC rises if you require some form of human interaction to convert customers… it shoots up to $1,750 per customer!

Another interesting point is virality, which is measured using the viral coefficient. It is often calculated as the average number of invitations sent by current users times the conversion rate of invitations to new users. NPS-driven viral growth is something all B2C businesses strive for – it’s very rare. The businesses that achieve it instil a sense of belief in their customers that they are part of something truly unique. Their customers buy into the values and become evangelists and community leaders in their own right. TransferWise is an excellent example of this – check out Nilan Peiris’ slides on TransferWise’s NPS-driven growth.

What else drives the balance between CAC and CLV? I’ve summarised the key factors below:

It’s critical for entrepreneurs to ask themselves whether they can monetise customers for substantially more than it costs to acquire them, before investing in unnecessary marketing channels and other acquisition costs. As a rule of thumb, Dave Kellogg (previously SVP at Salesforce) suggests on his blog that the CLV/CAC ratio should be 3x or higher!