My good friend Saar Gur who is a general partner at Charles River Ventures just posted a brilliant presentation on customer acquisition. He explains that most startups fail because they don’t acquire customers profitably.
This goes to the heart of how Jose and I invest. As I mentioned in Why we play Moneyball rather than Powerball, we care deeply about unit economics. We want you to show us that even at a small scale your long term value (LTV) per customer is greater than your customer acquisition cost (CAC). In fact, we don’t think a business has great unit economics unless the projected net contribution margin per customer in the first year is 2x the customer acquisition cost.
Saar not only presents how to calculate the CAC and LTV, but presents the various channels and their pros and cons. In our experience, the success of channels varies dramatically from business to business. Google SEM seems to always work for us in businesses with high LTV, but in some cases like fashion where pictures are very powerful, display ads and Facebook can be much more cost effective. We have also been pleasantly surprised by the effectiveness of TV.
Read the presentation.