Customer Acquisition Cost & Lifetime Value PDF

Customer Acquisition Cost & Lifetime Value IS3150 AY 23/24 Sem 1 Professor (Adj) Lai Kok Fung Finance 101 Revenue $1.00 Gross sales received from customers Gross Margin (or Gross Profit Margin), is a Cost of Goods $0.60 Cost incurred when making sa...

Customer Acquisition Cost & Lifetime Value IS3150 AY 23/24 Sem 1 Professor (Adj) Lai Kok Fung Finance 101 Revenue $1.00 Gross sales received from customers Gross Margin (or Gross Profit Margin), is a Cost of Goods $0.60 Cost incurred when making sales measure of company’s profitability. GM Sold (COGS) e.g., what Grab pays to drivers indicates the amount of revenue remaining after the company pays for the Gross Profit $0.40 This must be positive for healthy businesses Cost of Goods Sold (COGS) or Cost of Sales Gross Margin 40% Profit margin for each sale (COS) If GM is negative, company is losing Expenditure Fixed cost, regardless of sales money for every single sale even Manpower $0.25 without accounting for fixed cost/expenditure à not sustainable in Rent, … $0.05 the long term Marketing $0.05 Marketing cost is normally accounted under Expenditure, If GM is positive, company can increase not COGS, unless it is directly related to sales, like sales to cover for Expenditure, i.e., commission paid to affiliate for each sale. become profitable eventually. EBITDA $0.05 Earning before interests, tax, depreciation and If GM is too small, eg. 0.5%, gross sales amortization. Can be negative. (Revenue) must be sufficiently big to Depreciation … Fixed asset cost, amortized across certain period cover for Expenditure. … Net Profit ….. Profit in accounting term. Not equivalent to “cashflow” 2 Customer Acquisition Cost Cost incurred to acquire a new customer, may include Paid media spend, i.e., advertising and marketing spend Overhead costs related to sales and marketing Commissions and bonuses related to sales Salaries of marketers and sales managers CAC is the fully loaded costs associated with sales and marketing to attract a potential customer and to convince them to purchase, divided across all new customers. It includes components (e.g., wages for sales/marketing staff) not included in COGS 3 Customer Lifetime Value Prediction of a net revenue attributed to the entire future relationship with a customer. Examples: Mobile games – revenue obtained over the lifetime of playing the game, i.e., download fees, subscriptions, in- app purchase, advertisement, affiliate commissions, etc.. Grab – rides, food orders and other revenues obtained over customer lifetime Car Trader – buying the car, maintenance, service fees, next car purchase, insurance commissions … 4 Short-term vs Short-term (e.g., 1 month) Customer Lifetime Lifetime Cost = Paid marketing plus CAC = Total cost spent to acquisition related cost acquire one customer during this period LTV = Profit over customer Profit = Profit obtained lifetime, which may include from 1 or more transactions multiple purchases with during this period related products Likely Possible Cost > Profit LTV > CAC 5 Sustainable Business Customer Lifetime Value > Customer Acquisition Cost 6 Over time, a business should strive to Increase Customer Lifetime Value Decrease Customer Acquisition Cost 7  Average revenue per user (ARPU) of Meta Platforms from 2011 to 2023 Case 1: Meta Customer Value Increases Annualized Revenue per Daily User = Total Revenue / Number of Active Users LTV increasing CAC? May decrease due to network effect Twin growth engine: ⬆ Total Active Users ⬆ Revenue / Users 8 Case 2: Mobile App Low Customer Retention Market data varies from Only 20% of users return to an app 31-60 days after first use, to 80% of users churn in 3 days Low LTV, high CAC à Challenging business model 9 Case 3: Pinduoduo Multiple Innovations 1. Network: connections with others to create value (Group Buying). CAC ↓ 2. Product System: groceries and farm products. LTV ↑ 3. Channel: WeChat. CAC ↓ 4. Customer Engagement: gamification, e.g., Duo Duo Orchard Farm. LTV ↑ 5. Brand: low price. CAC ↓ 10 Decrease Customer Acquisition Cost 1. Product System: complementary products and services targeting the same audience 2. Referral & word of mouth from happy customers, friends and families. 3. Network: connections with others to create value a) Demand Side (customers), e.g., Pinduoduo group- buying innovation b) Supply Side: collaborate with other businesses to create product system 4. Acquire another company, e.g., Facebook acquired Whatsapp, Amazon acquired Zappos (fashion), Spotify acquired Anchor (podcast). 11 Increase Customer Lifetime Value 1. Customer Retention: repeat buying of same product 2. Product System: offer complementary products and services 3. Acquire another company, e.g., Facebook acquired Instagram. Keep customers for as long as possible. Encourage more spending and increase share of pocket. 12 Audience vs Traffic Customers at lower funnel are more likely to convert, resulting in lower acquisition cost. Retarget and expand these audiences: Fans & Followers Engaged Visitors, e.g., social media reactions, video watch length, etc.. Website Visitors Build Audience Retargeted and lookalike audience can lower CAC for future campaigns 13 Retarget & Lookalikes If your business already has seed audience Leverage it rather than relying on starter audience lower customer acquisition cost Keep audience engaged, build credibility, encourage conversions, and expand to lookalikes 14 Project As you analyze the results of your advertising campaigns (i.e., single transaction analysis), consider how your client can Decrease Customer Acquisition Cost Increase Customer Lifetime Value in the medium to long run. 15 Assignment 5 (due Nov 4) 16