![\"058-LTVCPA\"](\"https:\/\/www.mba-mondays-illustrated.com\/wp-content\/uploads\/2014\/08\/058-LTVCPA.jpg\")
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A couple weeks ago, in a comment to an MBA Mondays post<\/a>, Dan Lewis<\/a> wrote “LTV has to be higher than your CPA or you’re not going to make it.” I asked Dan to elaborate in a MBA Mondays<\/a> guest blog post on this topic and he agreed. Here’s Dan’s post:<\/p>\n \u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2013<\/p>\n LTV stands for \u201clifetime value\u201d of a customer.\u00a0 CPA stands for \u201ccost per acquisition\u201d of a customer\/subscriber.\u00a0\u00a0 \u00a0LTV has to be greater than CPA or you won\u2019t be able to scale \u2013 or, for that matter, survive. To demonstrate, let\u2019s go to the video tape:<\/p>\n Monday through Friday, I publish a free daily email newsletter (which you can, and should, sign up for<\/a>), putting to words the notion that you should \u2013 and can \u2013 learn something new every day.\u00a0 Oddities, like the fact that Abraham Lincoln created the Secret Service the day he was shot, carrots used to be purple, there is only one Jewish person in all of Afghanistan, etc.\u00a0 It has about 4,000 subscribers.\u00a0 It\u2019s basically a blog, sure, but I send it as an email newsletter.\u00a0 Long story; one for another day.<\/p>\n The main costs involved \u2013 the costs of writing and editing the email \u2013 are fixed costs.\u00a0\u00a0 (At this point, it\u2019s also entirely a time cost \u2013 mine to write it, and a volunteer who very generously edits it before I send it out.\u00a0 But even if I hired writers and editors, the cost of producing the content is, at least in this context, a fixed cost.)\u00a0 Write it once, send it to many \u2013 as many as subscribe.\u00a0 It costs the same amount to write the email to one person as it does to one million (God willing!) subscribers.<\/p>\n The marginal costs are, relatively speaking, minor, and consist of the fees paid to the email service provider I use, Mailchimp.\u00a0 At the number of emails I send and the number of subscribers I have, it\u2019s about a twentieth of a cent per email, or $0.05 per 1000.\u00a0\u00a0 Let\u2019s say I can monetize the emails pretty easily at $1 per 1000 (or $1 CPM, as in \u201ccost per mille\u201d from a fictitious advertiser\u2019s perspective), and my margin is 95%.\u00a0\u00a0 Your blog, twitter account, etc.?\u00a0 It\u2019s probably even better, unless you\u2019re somehow paying on a cost-per-post basis.<\/p>\n Let\u2019s say that an average subscriber sticks around for 10 months, and that I publish 20 issues a month.\u00a0 And, while I\u2019m making up pie-in-the-sky numbers, let\u2019s also assume I can get $5.00 CPM from advertisers, on average, over the course of those ten months.\u00a0 The lifetime value of each subscriber?\u00a0\u00a0 $1.\u00a0 Each subscriber receives 200 emails, and at $5 per 1000, that\u2019s a buck.<\/p>\n That LTV \u2013 $1 \u2013 is my upper limit.\u00a0 Spend any more to get a subscriber and I am losing money with every additional subscriber, and that\u2019s bad news.\u00a0 So while word of mouth, Tweets, Facebook posts, guest blog posts (did I mention you should subscribe to the newsletter<\/a>?), etc. are all very good ideas \u2014 that\u2019s how I\u2019ve made it to about 4,000 people signed up thus far \u2014 are also pretty close to the only <\/em>viable ways to grow the subscriber base.<\/p>\n Other ideas?\u00a0 AdWords or Facebook ads would cost about $0.25 per click to advertise on \u201clearn something new every day,\u201d requiring that I convert a quarter of clicks to subscriptions just to break even \u2013 a tall task for email newsletters, akin to getting 25% of visitors to subscribe to your blog\u2019s RSS feed.\u00a0 A lot of list-building (cue ominous scare quotes) \u201cbest practices\u201d \u2013 co-registration, contests\/incentivized signups, etc. \u2013 will hurt the CPM level and likely lead to a much lower LTV.\u00a0\u00a0 And buying lists?\u00a0 No thanks.<\/p>\n This inability to turn money into new subscribers, customers, etc. is a huge limit on the speed and potential for growth.\u00a0 Sure, things can break well and the newsletter can grow by itself, via the methods noted above.\u00a0 But those methods are a mix of elbow grease, dumb luck, a solid product, and a lot more of that dumb luck stuff \u2013 the hallmarks of the \u201csecret sauce\u201d which somehow, some way turns a hobby into a viable business, in a manner and fashion beyond repetition.<\/p>\n LTV > CPA applies, of course, beyond newsletters and beyond media, digital or otherwise.\u00a0 It\u2019s generally easy to apply, as even estimations based on guesses and conjecture are enough to make sure that you\u2019re not making a huge mistake.\u00a0\u00a0 After all, it may be a great idea to spend a ton of capital and spend it to grow your customer base, but not if you\u2019re spending more money to get each additional customer than that customer is worth.<\/p>\n <\/p>\n David Quiec<\/a> added:<\/p>\n This not as easy as you think:<\/p>\n 1) At LTV=CPA upper limit, people usually miss out a lot of other expenses. Esp. in bigger companies where its harder to find all associated costs, both fixed and variable.<\/p>\n 2) Fixed costs\/unit goes down as you acquire more users. So your CPA can go down as you scale.<\/p>\n 3) Cash flow is not addressed. If you have a 3 yr LTV, you don’t really want to spend all of it today. You’ll run out of money.<\/p>\n<\/div>\n<\/blockquote>\n <\/p>\n This article was originally written by Fred Wilson on April 25, 2011 here<\/a>.<\/em><\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":" A couple weeks ago, in a comment to an MBA Mondays post<\/a>, Dan Lewis<\/a> wrote “LTV has to be higher than your CPA or you’re not going to make it.” I asked Dan to elaborate in a MBA Mondays<\/a> guest blog post on this topic and he agreed. Here’s Dan’s post:<\/p>\n \u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2013…<\/p>\n<\/div>\nFrom the comments<\/h3>\n
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