Customer Acquisition Cost & Lifetime Value
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Questions and Answers

What is a significant challenge indicated by low customer retention in mobile apps?

  • Increased total active users
  • High Customer Lifetime Value (LTV)
  • Low Customer Acquisition Cost (CAC)
  • High Customer Acquisition Cost (CAC) (correct)

Which of the following strategies can decrease Customer Acquisition Cost (CAC)?

  • Disregarding social media engagement
  • Focusing solely on advertising campaigns
  • Increasing product prices significantly
  • Encouraging referrals from satisfied customers (correct)

How does Pinduoduo increase Customer Lifetime Value (LTV)?

  • By limiting customer interactions
  • Through group buying and customer engagement (correct)
  • By focusing on a single product line only
  • By offering only high-end products

What is one approach to acquire another company to improve business strategy?

<p>Looking for acquisition opportunities like Facebook acquiring Instagram (B)</p> Signup and view all the answers

What factor is essential for lowering acquisition cost at the customer funnel's lower stage?

<p>Targeting customers who are already engaged (B)</p> Signup and view all the answers

What does a positive Gross Profit indicate for a business?

<p>The company is profitable (A), The company has enough revenue to cover fixed costs (C)</p> Signup and view all the answers

What is the Gross Margin if the revenue is $1.00 and the Cost of Goods Sold is $0.60?

<p>40% (C)</p> Signup and view all the answers

Which expense is generally not included in the Cost of Goods Sold?

<p>Marketing costs (C)</p> Signup and view all the answers

If a company has a Gross Margin of 0.5%, what does this imply?

<p>The company is sustaining losses (A)</p> Signup and view all the answers

What is EBITDA a measure of?

<p>Profit before accounting for interest, tax, depreciation, and amortization (D)</p> Signup and view all the answers

What happens if Gross Margin is negative?

<p>The company is losing money on every sale (D)</p> Signup and view all the answers

How is gross profit calculated?

<p>Revenue minus Cost of Goods Sold (A)</p> Signup and view all the answers

What is an example of Expenditure that a company must manage effectively?

<p>Salaries and wages (A)</p> Signup and view all the answers

What does Customer Acquisition Cost (CAC) encompass?

<p>All costs related to acquiring a new customer (C)</p> Signup and view all the answers

Which of the following statements accurately describes Customer Lifetime Value (LTV)?

<p>LTV predicts net revenue throughout the customer relationship (A)</p> Signup and view all the answers

In what scenario is a business considered sustainable regarding CAC and LTV?

<p>LTV is greater than CAC (C)</p> Signup and view all the answers

What should a business strive to do over time concerning CAC and LTV?

<p>Increase LTV while decreasing CAC (A)</p> Signup and view all the answers

Which component is typically NOT included in the calculation of CAC?

<p>Profits generated from customers (A)</p> Signup and view all the answers

How is the Average Revenue Per User (ARPU) of Meta Platforms calculated?

<p>Total Revenue divided by the number of active users (C)</p> Signup and view all the answers

Which of the following is true about short-term costs compared to long-term profitability?

<p>Short-term cost can exceed profits but LTV should remain greater than CAC (A)</p> Signup and view all the answers

Which expense is included in the component breakdown of CAC?

<p>Salaries of sales and marketing managers (B)</p> Signup and view all the answers

Flashcards

Gross Margin

Profit margin for each sale, calculated as (Revenue - Cost of Goods Sold) / Revenue.

Cost of Goods Sold (COGS)

Costs directly related to producing goods or services sold.

Gross Profit

The difference between revenue and the cost of goods sold.

Expenditure

Includes fixed costs, like rent and salaries, that are not directly tied to sales.

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EBITDA

Earnings before interest, taxes, depreciation, and amortization.

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Revenue

Total income generated from sales of goods or services.

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Healthy Business (Gross Margin)

A positive gross margin indicates a company is making a profit on each sale.

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Unhealthy Business (Gross Margin)

A negative gross margin indicates a company is losing money on each sale.

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Customer Acquisition Cost (CAC)

The total cost to acquire a new customer, including marketing, sales, and related expenses.

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Customer Lifetime Value (LTV)

The total predicted revenue a customer will generate throughout their relationship with a business.

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LTV > CAC

Indicates a sustainable business model, meaning the predicted value of a customer surpasses the cost to acquire them.

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Short-term CAC

The cost of acquiring a customer within a short period (e.g., one month).

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Short-term LTV

The predicted profit from a customer in the short period (e.g., one month).

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Average Revenue Per User (ARPU)

The average revenue generated per user.

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Increase LTV

Growing the predicted revenue associated with a customer.

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Decrease CAC

Lowering the cost of acquiring a new customer.

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Network Effect

A phenomenon where the value of a product or service increases as more people use it. More users mean more value for everyone.

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Customer Retention

The ability to keep customers using a product or service over time. High retention means customers stay.

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Multiple Innovations

Utilizing multiple approaches to improve a product or service, such as network, product system, channels, engagement, or brand.

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Study Notes

Customer Acquisition Cost & Lifetime Value

  • Customer Acquisition Cost (CAC): Cost to acquire a new customer, including paid media, overhead costs, commissions, and salaries of sales and marketing staff. Not including costs of goods sold (COGS).
  • CAC Calculation: CAC = Total Costs / Number of New Customers
  • Customer Lifetime Value (CLV): Predicted net revenue from a customer relationship over the entire time they stay with a company.
  • CLV Calculation: CLV = Purchase Frequency × Average Order Value × Gross Margin × Customer Lifespan
  • Short-term vs. Lifetime: Comparing short-term profit with the long-term value of a customer. Cost may be higher than profit initially, while LTV can be greater than CAC over time.
  • Sustainable Business Model: A balanced business model has Customer Lifetime Value (LTV) greater than Customer Acquisition Cost (CAC). This means the revenue generated by a customer over their lifetime exceeds the cost of acquiring that customer.
  • Strategies for Decreasing CAC:
    • Product system: complementary products.
    • Referral programs: word-of-mouth marketing.
    • Network connections: collaborations.
    • Acquiring other companies: e.g., Facebook buying WhatsApp.
  • Strategies for Increasing CLTV:
    • Customer retention: repeat buying of the same product.
    • Product System: complementary products.
    • Acquiring companies: e.g., Facebook buying Instagram.
  • Audience vs Traffic:
    • Customers in the lower funnel are more likely to convert with lower acquisition costs.
    • Retarget and expand these audiences, including: Fans, Followers, Engaged Visitors, and Website Visitors.
  • Retargeting & Lookalikes:
    • Strategies for retargeting customers to decrease CAC, using existing customers and lookalikes.
  • Project: In analyzing advertising campaigns, consider how to decrease customer acquisition costs and increase customer lifetime value for medium to long-term gains.

Case Study: Meta

  • Meta's Value: Increased annualized revenue per daily user, LTV improving. CAC potentially decreasing due to the network effect.

Case Study: Mobile App

  • Churn: 80% of users churn within 3 days, resulting in low LTV & high CAC.

Case Study: Pinduoduo

  • Innovation: Network connections, product system, channel (WeChat), customer engagement (gamification), and low pricing all contribute to lowering CAC and increasing LTV.

Case Study: Financial 101 (Finance Formulae)

  • Revenue: Gross sales received from customers.
  • Cost of Goods Sold (COGS): Costs incurred during the sale process, e.g., materials for the product
  • Gross Profit: Revenue - Cost of Goods Sold. Must be positive for healthy businesses.
  • Gross Margin: Gross Profit / Revenue * 100%. A measure of profitability.
  • Expenditure: Costs other than the cost of goods sold (COGS). Includes expenses for marketing, manpower, and rent.
  • EBITDA: Earnings before interest, taxes, depreciation, and amortization. Can be negative.
  • Depreciation: Fixed Costs / Period
  • Net Profit: Profit in accounting terms, not equivalent to cash flow.

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Customer Acquisition Cost & Lifetime Value PDF

Description

This quiz explores the concepts of Customer Acquisition Cost (CAC) and Customer Lifetime Value (CLV). It includes definitions, calculations, and a comparison between short-term profits and long-term customer value. Understanding these metrics is essential for maintaining a sustainable business model.

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