MBA1998 Guest Teacher – Paul Orlando – How to Understand Lifetime Value (LTV) and Customer Acquisition Cost (CAC)

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Hey oh. Welcome to the Hundred Doll RBA Show. Because your business is not going to get better by itself, that's why we deliver daily 10 minute business lessons for the real world. I'm your host, your coach, your teacher Omar Zenholm. I'm also the co founder of Webinar Ninja, an independent software company. I started with my co founder back in 2014 and today's episode is a guest teacher episode. On our guest teacher episodes we bring on an expert to teach their area of expertise. Today we have Paul Orlando and he's going to be teaching you how to understand lifetime value and customer acquisition costs in your business. These two metrics, these two units of data are critical to the success of your business. If you understand how much a customer is worth to your business for the lifetime of the customer being with you, and you understand your cost to acquire that customer, then as long as your LTV or lifetime value is more than your CAC or customer acquisition costs, you should be in good shape. This is why these numbers are so important. So many people go out of business because they don't know these numbers. So today Paul Orlando, a growth expert, is going to be teaching you how to do this. Understand these numbers, what they're all about, how best to segment your actual group of customers to understand their lifetime value and their CAC depending on who they are and much more. Listen, if you kind of gloss over when it comes to metrics and numbers, I totally get it. But today, Paul's going to simplify things and make sure you understand your most important numbers. So let's get into it. Let's get down to business.

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Today's guest teacher, Paul Orlando, is the author of Growth Units, a book about unit economics. He's built four startup accelerators around the world. Hong Kong, Los Angeles, Rome, and Remote. He helps customers solve problems they couldn't before in new and innovative ways. And today, Paul Orlando is with you to teach you lifetime value and customer acquisition costs in your business. You're going to love this lesson because it's simple and it's golden insight. I'll be back to wrap up today's episode and give my takeaways. But for now, take it away, Paul.

Hello, everybody. This is Paul Orlando. Thanks for joining me today. Today I'm going to be teaching you about unit economics and how to calculate lifetime value and customer acquisition cost. Okay, let's get started. So we're going to go through why it's important to understand these topics, what the parts of lifetime value and customer acquisition cost are, why customers struggle with this, even though this might seem kind of straightforward. And then you know misleading things when you're trying to figure out your customer ltv. And then just for fun, we'll throw in a topic like, you know what, what is negative churn. All right, let's get started. So why is this important to understand? So when it comes to unit economics, which basically describes a specific business's revenues and costs in relation to an individual unit sold, this is important because it helps you model out how your business can grow, helps you understand where you can try to impact your growth, and also really understand where you don't know enough just yet. So the parts of LTV and cac. LTV is the flow of margin that a company receives from selling something, and it's typically not received all at once. And there's a few parts to calculating ltv. So you have your unit price, you have the unit cost, and then you have some metric around repeat purchases. So is this a subscription business where people are just billed automatically every month? Is this instead the kind of thing where they go in person to buy an item in a store or on an E commerce site? It's really up to them to determine when they want to buy it. Again, all variations, you know, in between. But basically those three parts, you know, how much you're charging your price, how much it costs you to provide that thing, and the repeat purchases that you see from a customer on the CAC side, that's the cost to get a paid customer. So the parts of that are the cost of getting somebody in the door. And I, I actually say in the door because you literally could be talking about in the door of a shop, right? That door could also be, you know, your website. But it's the cost of getting somebody in the door divided by the percent of people that convert to become a paid customer once they've gotten in that door. So in other words, it might be, you know, it cost me a dollar to get somebody to click on an, you know, flow through to my website. Once they are there, 10% of them convert to becoming a paid customer. So a dollar divided by 10% is $10 for my customer. Acquisition cost Misleading things about trying to figure out your customer ltv. Well, first of all, even though we will typically hear LTV reported as a single number, like, yeah, our lifetime value is $100, it's $1,000, you know, something like that, the reality is it typically is not just a single number. And I mean that in a number of ways. So first of all, timing is a big part of this. You might have to invest months of time up front with potential customers before they convert to paid. Also because timing is a part of it, it's going to take a while for you to understand what that LTV typically is. So do people stay with you for a year before churning away what is the total of all that contribution margin over that year? The other reason LTV is not a single number is you should eventually, maybe not in the very beginning, but eventually you should be thinking about segmenting. You know, so what's my ltv? Not just on average, but what's my LTV for this specific customer segment? Or what's my LTV from customers that have signed up from this specific channel, you know, for example, ads on Instagram, you know, from my mailing list, from other social media, from, you know, salespeople, from word of mouth, you know, and on and on. So, you know, modeling that all out. You know, Both splitting your LTV and understanding, you know, different LTVs, you know, for different segments or different cohorts of people coming in at different times, really gives you a lot of additional information that, that eventually, as your business is growing, is going to be a great help. Same thing on the customer acquisition cost side. So if you're just using a single number for cac, you're missing a lot of insight. And I think of it a little differently from the LTV side, but so averages are bad here. You know, we want to get a little more specific. The, the reason also on the customer acquisition, you know, side, is that some types of channels say to acquire a customer will scale and some will not. Or some, if you throw more money at them, will become much more expensive, and, you know, some will not. So if you're trying to project how your business could grow, you know, some of those channels are going to become more expensive. It's actually going to change a lot of your framework if you ignore that up front. So once you start to break LTV and CAC down by, you know, by customer segment, by channel, by cohort, you're getting much more value, you know, much more insight. So customer companies actually tend to struggle with this for a couple of reasons. So it might just be that, you know, they're moving too fast to go through the effort or too early stage to think there's value in doing this. Or, you know, they're just defaulting back to using a single static number for LTV or cac. They're not looking at payback periods, for example, like they're struggling because they're not thinking about how long it takes to pay back their customer acquisition cost. You know, you could have what seems like a really favorable lifetime value, let's say, $100. And, you know, customer acquisition cost is, you know, $10. So 10 to 1 ratio typically would say looks pretty good. But if it takes you, you know, 10 years to get that $100, you're probably already out of business, you know, by that time, you know, that extreme example. So understand things like payback periods as well as you're going through this process. Okay, last thing I'll leave you with is the concept of negative churn. So this is a concept that you'll often hear successful SaaS businesses have. So churn is a measure of how many customers we're losing in a period. And so it sounds, like, weird, like, how could I, like, have negative churn? How could I, like, you know, have a customer that actually turns into two people. Right. It's not that. Instead, if I'm in general, if I'm always losing people, you know, a little bit, you know, per period, the ones that remain are more than making up for the ones that have left. So an example might BE I have 100 customers in, you know, period one that goes down to, say, 90 in period two from that same cohort that entered in that first month. In month one, you know, they were each generating, you know, $10 for me. So 100 customers times $10000 dol. But in month two, I only have 90, 90 customers of that cohort. But let's say they're each generating, you know, $20 of value for me, for example. So now I have eighteen hundred dollars of value that I'm generating. So I'm generating more value from fewer customers. That's negative churn. So to recap, you know, understanding your unit economics and lifetime value and customer acquisition cost, it's really important for businesses. You should really dive into these numbers a little bit. If you want a little help in doing that or you want to look at some of these examples with a lot of additional examples and charts included in a really straightforward, useful way, you could check out the the book I wrote on this topic, which is called Growth Units. You just search for Growth Units on Amazon and looking forward to hearing from you if you apply some of these techniques to your business. So good luck everybody. This was Paul Orlando, and if you want to continue to hear about this topic of unit economics, you can check out startups unplugged.com where you can find a little more info or just search for Growth Units, the book on Amazon. Thanks for joining me today. Now back to Omar.

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What a solid lesson by Paul Orlando. If you want to learn more about the metrics you should follow in your business, how to understand them, pick up his book Growth Units. You can find it on Amazon. It's a tremendous value. You know how bullish I am with books and this one is gold. One of the things I learned about lifetime value in my own businesses is that you can always work to increase it. You don't have to have a set lifetime value. Of course you can change and improve your lifetime value by improving your pricing or increasing your pricing. Sell more to your customers, offer higher tier programs or products. There's so much money left on the table when it comes to lifetime value because people sell to customers once and they never re approach them, offer them your new stuff or offer them something a bit more expensive, something a bit more premier or exclusive. See, cost per acquisition will tend to go up. It's hard to control cost per acquisition, especially when you're in the online advertising world. And as it goes up, you need to make sure your LTV goes up so you can cover the costs, cover the difference, cover the increase. I learned this the hard way over the years and I want to make it easy for you to really focus on selling to your existing customers and increase that lifetime value. That could be at the cart, meaning you're giving them other offers to add to what they're buying, like an upsell or a checkout offer. This could be after the cart, meaning that after they buy, you give them other offers in your email newsletter or in your sequences. This could be new things you launch and you include them in the marketing materials in the launch. They could be a combination of all these things. The point here is that don't leave money on the table when it comes to ltv. One of the things I love about using something like Stripe, which is a payment processor, is that you can rank the customers you have by how much they spent and then you can drill in and see what did they buy from me, what are the products they bought, what are the packagings they bought or the tiers they bought and try to get more customers like that. Or offer what that person bought or the higher end customers have bought to all my customers. That wraps up today's lesson. If you love what you hear, hit subscribe or follow on your favorite podcast app right now so you don't miss a beat. Before I go, I want to leave you with this. Your LTV should always be going up. If for any reason it's going down, that's a red flag. You need to take a look at what's going on. Why are people spending less than they normally are? Are my marketing efforts to my customers kind of not doing the job? Maybe I need to modify my auto email sequences. Maybe I need to have a different cadence for my webinars or my promotions. As long as your LTV is going up, is increasing over time. You should be in good shape, but you should be worried. You should drill in and find out if it ever goes down. Thanks so much for listening, and I'll check you in tomorrow's episode. I'll see you then. Take care.

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