The Metric That’s More Important Than Customer Acquisition Costs

0:00All right. So we're going to talk about the metric that's potentially more important than customer acquisition costs. because the macroeconomic environment that we're in is a little different now. What do you think that might be, Neil? If you have customer acquisition costs, you have CAC, what do you think the counter might be? I don't know, but the most important metric that we look at is LTV over anything else. Okay. And we look at LTV and the profitability of the LTV because that dictates what we do in all of our marketing. And shockingly, a lot of businesses don't really know their real LTV.

0:32They kind of have idea, they say they're tracking, it, but in a lot of cases it's inaccurate and it's off. Agreed. So what I would say at a high level is what LTV matters, but this kind of goes hand in hand with LTV and you probably know where I'm going with this. And so I'm going to share this post over here, Elena and Verna, I want to give her credit for this because this is kind of the basis for this podcast. So this post is entitled or not entitled, it's titled cost of acquisition CAC trap. And this is from her newsletter, Elena's Growth Scoop. And her argument here is that just focusing on CAC is the wrong move.

1:07And the move is to focus on payback period instead. So there's a highlight over here that I put in. So let me just give you this example over here. Those of you that can't see the screen. So let's say you have two channels. Channel A generates a high volume of customers with a CAC. So customer acquisition, cost of customer acquisition of$5. Okay. So that's channel A, CAC of$5. Channel B brings in fewer customers, but has a CAC of$1 ,000. And so what she says here is that cheap acquisition is cheap for a reason. Consider that Channel B, despite its high CAC, attracts customers who convert to paid in less than a month, recoup their acquisition costs, and contribute significant additional expansion revenue.

1:46On the other hand, Channel A is bringing in low intent users who increase the cost of service, convert at low rates, and don't generate enough revenue to break even within a year. In this scenario, focusing only on reducing CAC could shut down your most profitable channel in favor of attracting accounts with low intent and poor conversion rates. What do you think about that? There's one caveat here, and I'm not trying to put words in her mouth, but what I think she's trying to say here with low cost acquisition typically brings bad traffic and higher CAC tends to bring better quality traffic. At scale, largely we see that being true when you're just testing out marketing campaigns which i don't believe she's talking about here a lot of channels have high cac and they have terrible traffic as well but those you would end up weeding out but at scale totally agree with this in which you got to look at the payback period and that's why early on i mentioned the real metric we optimize for is ltv and we also find that a customer just doesn't have a specific ltv and this is your average for all customers.

2:50We actually look at LTV per channel as well, because some channels bring a much higher LTV than other channels, and you're able to spend way more money to get those customers. And yes, unless you're a really big enterprise, and when I say big enterprise, I'm talking about people who have multi-billion dollar market caps, not startup multi-billion dollar market caps, but real publicly traded multi-billion dollar market caps based off of EBITDA. With a lot of those companies, it doesn't matter as too much with the payback period. Because if you have a billion, 2 billion,$10 billion literally in your bank account, kind of like a Microsoft or Apple or Google or Amazon, you can do whatever you want, right?

3:31Even if your payout period is three years, it doesn't matter if you know a customer is going to be with you for 10 years or 20 years. But when you're smaller, the payback period really does matter because that affects cash flow drastically. Hence, that's why Microsoft advertises on this podcast and we love Microsoft for that. So anyway, let's continue on here. So this is actually how they're thinking about it because Microsoft Clarity, it's a SaaS product or it's not even SaaS. It's just for free, right? And so what they do is they understand that once they bring you into the Microsoft ecosystem, they're going to have a lot more stuff to sell.

4:01And so the potential LTV is really high. And so this over here is known as the paid marketing loop. And so this has been in startup world for a while, but let me just highlight this over here. So... And if you're on YouTube, you can end up seeing it. If not, go check us out on YouTube. You'll be able to see the images that we're talking about. Correct. The payback period metric measures how fast and long it takes to recuperate your acquisition costs so you can reinvest returns into the paid acquisition loop. So you can see over here with this, you see a new user sign up. That's step one. Okay.

4:33Step two is X percentage of users pay. Let's say 10 % convert to a paid product. And then three, once you have people paying, then you could go buy more ads, assuming that you have the cash coming back in. And then you can act on the... So you buy more ads and then people act on the ad and they sign up and then you just go for new user signups and this continues the loop. So any revenue made post-payback period is profit that can be reinvested into other growth loops or product development strategies. So ideally, you have a strong payback period. Yeah, not just a strong payback period, but for anyone listening, the big takeaway that you need is you should know the lifetime value of your customer, the lifetime value based on different channels.

5:11And then you need to look at when you're doing your marketing, all right, how long is it going to take you to generate your income back? And if you're strapped on cashflow, there's companies like CapChase, Pipe, that all provide revenue financing to float you. Or if you're large enough, you can just go to the bank and you can get pretty cheap interest rates. But without knowing that, you're not going to be able to scale as quickly. And I remember, I don't know who I was talking with him, it may have been a guy named Zach Westfall who runs Timothy Sykes business. And, you know, he was talking to the Agora guys and he's like, Neil, you know what the difference between a seven figure, eight figure and nine figure company was?

5:50And I was like, no, he's like a seven figure company. Typically when they're doing their marketing, they spend money and they want it profitable right then and there. So if they spent a dollar, they want to make$2 and have a dollar of it profit or 50 cents profit, whatever, because there may be other costs. An eight-figure company, and a lot of times, they'll spend a dollar and they want to just break even. So, they don't make any profit, but they know they can make more money down the road because of the LTV and customers continually coming back and buying from them. A nine-figure company, they'll spend money, they're willing to lose it upfront because they know the LTV of their customer and they'll make it in the long run.

6:27And a lot of times, if you just want to scale your marketing, you have to be willing to lose money longer than other people. It's sad, but it's true. And if you can optimize your LTV, the user experience, your product, your service, the flows, whatever it may be to keep people coming back, that's where you really create a really large business. Like I don't even know what the LTV of a customer is on Amazon, but it must be ridiculous. I don't know how many times I've bought on Amazon, but it's way too many to count. It has to be hundreds and hundreds of times throughout my whole family, immediate family, my kids, my wife and us, my kids are young, but between my wife and I, we must have purchased from Amazon more than a thousand times transaction wise.

7:05Yep. And the final thing I'll say here is, well, a, to Neil's point, you got to know your numbers, but you can optimize your payback period. So this is actually highlighted here as well by reducing your cash or cost of customer acquisition, increasing paid conversion rate, increasing ARPU. So that's average revenue per user and reducing the paid conversion time. So these are different levers that you can pull. highly recommend you read this post and elena thanks for putting this together please don't forget to rate if you subscribe to this pod give us five stars and we will see you later