Yesterday we spoke about the life time value of a customer. The LTV helps identify 2 things
- What is the amount of money you can spend to acquire a customer
- What activities do you need to do to ensure that the customer can do business with you as long as physically possible and keep referring customers like themselves to you.
Now that you know the above 2 things because you calculated the LTV, our next item is how much can you spend to acquire a customer and therefore what channels/mechanisms can you use to spend that money
Suppose the lifetime value you define is $60000 and the font end first sale gross margin is $10000/-, on a revenue of $100000/- then theoretically you can spend $10000/- up front to acquire the customer. However you have to be sure that your product or service is so good that the customer will keep coming back for more and also gives you referrals. Otherwise this same strategy which can catapult your business to the top can also bring it to a grinding halt in a matter of time.
As a product management person, you have come out with your first version of the product, you have identified the most economically viable, smallest niche from which you can start and then you have identified the possibility of spending $10000/- to get a customer.
Within the most economically viable market niche, your next step is to understand how many customers can you handle at a time. If you are in a service business, like a coach or a consulting professional or a video editor then your physical constraint is the amount of time you have in a day. if you have a product then your production capacity is your constraint. if you are selling eggs then the number of hens/ducks that you have is the constraint. On the other hand if your selling an ebook then there is virtually no constraint.
So going ahead with the earlier example of $100000/- order value, lets assume you can sell only 12 of these in a year or $1.2 million. The upfront gross margin that you make is $100000/-.
So when you make your plans for your marketing and selling activities you can look at this possible pool of money which is theoretically available for you to use to acquire the first set of customers in the first year.
Which will lead us to issues –
- Now you look at finding the options of how you could spend the $100000/- to acquire these customers
- How to scale by identifying the constraints.
We will pick up on each of these in the future posts
Till next time then.