Revisiting Lifetime Value and Customer Acquisition

To run a profitable and scalable business, you want LTV > CAC. Currently, w e have rising CACs and less scalable, measurable acquisition-and it's all happening in a recessionary market environment.

The last decade showed that questionable business models can subsist for a long time (and even flourish) when capital is abundant. Thirteen years after its founding, Uber is still figuring out how to be profitable: the company’s gross margins actually declined seven percentage points over the past three years, and the net profit margin is -3%.

Google, Facebook, and Amazon are monopolizing digital ad spend, and even newsfeeds and search results are finite. Limited supply + growing demand = rising prices

Companies with poor unit economics found themselves propelled by aggressive venture dollars (which themselves were propelled by a low-interest-rate environment). Those companies then turned those dollars into aggressive customer acquisition. Until recently, the market rewarded growth at all costs.

Common mistakes when using CAC and/or LTV: using revenue as a proxy for LTV, overestimating LTV when you don't have clear data, failing to take into account the time value of money, not segmenting users by paid vs. organic when doing the math.