## September 21, 2021

A key component of Customer Development Strategy is knowing how much to invest in marketing to make sure you have a healthy business in the future.

Let me show you an example.

Let's say that you lose \$15 profit acquiring a customer. Then, the customer delivers the following amount of annual profit in each subsequent year.

• Year 0 = \$8 (this is in the remainder of the acquisition year).
• Year 1 = \$12.
• Year 2 = \$8.
• Year 3 = \$5.
• Year 4 = \$4.
• Year 5 = \$3.
Each year you acquire 100,000 customers.

In the first year, you lose \$15 per customer and then generate \$8 downstream profit. In total, you are down \$700,000 in the first year.

In the second year, you lose \$700,000 from the new customers, but you get \$12*100,000 = \$1,200,000 profit from customers acquired the year prior. You earn \$500,000 profit.

In the third year, you lose \$700,000 from new customers, you get \$1,200,000 from last years newbies, and you get \$8*100,000 = \$800,000 from customers from 2 years ago. Total = \$1,300,000 profit.

In the fourth year you lose \$700,000, you add \$1,200,000, you add \$800,000, and you add 5*100,000 = \$500,000 from your initial cohort, for a total of \$1,800,000 profit.

In the fifth year you lose \$700,000, you add \$1,200,000, you add \$800,000, you add \$500,000, and you add 4*100,000 = \$400,000 from your initial cohort, for \$2,200,000 profit.

If you know what you gain downstream, you know how much you can spend to acquire a customer today. Losing \$15 per customer today is wonderful, because downstream you make a fortune.

Leverage the concepts here to identify what the "right" payback window is. Don't just assume it is a 12-month window, ok?

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