Business model & “LTV” – Life time value
- Develop the business model that is “realistic” by clearly defining revenue sources, keeping the interest of customers and shareholders
- Match pricing consistent with revenue streams/goals
- Define what kind of promotions/discounts are needed and for how long
- Consider how this leads into recurring revenue streams (for SaaS businesses) or repeat/new orders for traditional businesses
- Develop a “model” for customer LTV that is comprehensive (includes cumulative profits and not just simple revenues)
- Show how LTV will evolve both short and long term
LTV defined – what is the “Value” of an acquired customer?
- In early stages probably first year Profit could be computed as expected revenues minus expenses (to develop the business)
- The second and third year it needs to be more realistic with real revenues plugged into the numerator
- The CC (Cost of Capital) is an estimate of what it costs venture firms to invest in a business. The rate ranges from 35 to 75 based on the risk profile of the entrepreneur(s).
- The “t” is the denominator indicates # of years as in year 1, 2,3 etc.
GTM (Go-to-market) & CoCA defined
- Develop a CoCA or some call it CAC (Cost of customer acquisition) model for your product/service. Its different than LTV.
- The GTM should include model of lead generation and closing sales (choice of models like direct, indirect, use of outsourcers, online etc.)
- Map the sales process (sales funnel) to the different people/parties involved from lead generation to closing to collection of money. This might vastly vary based on the type of business you develop.
- State clearly assumptions you make as the leads move through the “sales funnel”. Its important to get “hunters” involved in the early stage of the business
- For the CoCA calculations use – marketing and sales costs, make reasonable assumptions of life of customer, retention rates, and closure rates. Exclude COGS and other fixed costs
- Map how GTM will evolve over time – short, medium and long term
- Explore and define where the use of word of mouth (WOM) falls (if any) in the overall GTM. Very important.
CoCA Calculations:
How do you figure if the business is “viable” via CoCA/LTV?
Courtesy: HubSpot
- SaaS businesses LTV:CoCA ratio needs to be atleast 3:1 and time to CoCA recovery less than 12 months for it to be a viable business.
- For SaaS businesses the CoCA needs to be anywhere between $1 – $3 per customer
- As regards unit economics – customer churn should be between 3.5% to 1.5%
What do you track particularly for SaaS businesses?
- For SaaS businesses – track LTV, CAC, LTV:CAC ratio, CAC recovery etc.
- The are many more parameters to track. More later…..
- Importantly track revenue churn vs. customer churn. Why are they different?
Imagine customers paying per month $10 for “basic” services and $100 for “bundled” services (upsell) & you had 5 of each in the early stages. If you lost 2 customers after couple of months, the customer churn would be 2. Imagine losing both customers in the basic category, then your churn is only $20. But if both are from the bundled category, your churn is $200. Big difference.