September 21, 2021

Your Investment Strategy

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.

And in the sixth year you lose $700,000, you add $1,200,000, you add $800,000, you add $500,000, you add $400,000, and you add 3*100,000 = $300,000 from your initial cohort, for $2,500,000 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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