It all boils down to one simple thing:
If the cost to acquire your customers is higher than the value you can extract from them, then you will fail.
The simplest way to estimate LTV (lifetime value of a customer) is to plug your numbers into the following equation:
(Average Value of a Sale) * (Number of Repeat Transactions) * (Average Retention Time)
An example would be someone who pays for your SaaS, $40 every month and 3 years is the average amount of time they stay. The value of that customer would be:
$40 X 12 months X 3 years = $1440 in total revenue (or $480 per year).
LTV is great for projecting things longer term, but this post is focusing more about short term, explosive growth. Looking at AOV compared to our CPA will reveal a margin.
The AOV (average order value) here would be the $40 initial purchase, since they only bought one month at a time (no yearly package).
CPA (cost per customer acquisition) is entire cost of sales and marketing efforts over a given period, which includes salaries and other team related expenses, then divided it by the number of customers that have been acquired in that period.
The higher your AOV compared to your CPA, the quicker you can grow.
As long as the cost is less than your profit you make on your first sale, then your startup can keep growing. Just run campaigns that ensure you acquire customers at the cost you can afford.
You might be willing to spend more on acquiring them, even if the payoff from them won't come from the first or second purchases.
This is only available to startups with funding, or other resources to absorb the investment of a higher-cost marketing campaign.
Thats why, if you're a startup looking to find your next plateau of growth, you have to either:
A) Drive up your AOV
B) Lower your CPA
If you can increase AOV, that means you are in the position to use existing channels to acquire your customers at your current CPA.
Having a AOV of $100 or more allows you to use any kind of paid media with any a better return on your money.
Knowing the basics of growth in these terms allows you to stay ahead of the platforms. As long as those platforms deliver the results you require, you use them. If they don't, then don't use them.
It's up to the platforms now to provide us with the tools.If you found this helpful, or find this topic interesting, I suggest you subscribe with your email below.
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