7 things Digital Startups Need to Know - Acquisition

How Much is the Customer Acquisition Cost (Especially for Companies with a Direct Monetisation Model)?

Scale is a critical success factor in a digital business. Delayed monetisation means a company must bear the cost of every new customer addition for a prolonged period of time. The cost of servicing each new client, or the marginal cost of each customer, plays a critical part. If the marginal cost for each new customer is high, the exponentially growing customer base means operating costs will also increase exponentially. A low marginal cost, on the other hand, would also be an incentive to add as many customers as possible before entering the monetising phase, as it increases the effects of operating leverage when money starts to flow in. In the case of a company with a direct monetisation model, it is easier to estimate an acceptable customer acquisition cost (CAC). Firstly, one needs to look at the lifetime expected earnings of that customer, or customer lifetime value (LTV). The LTV is the present value of the projected profits from a customer to the firm over an entire relationship period. In its simplified form, the LTV is calculated by (Annual Recurring Revenue x Gross Margin) ÷ (Churn Rate + Discount Rate). As a general rule the LTV should be multiple times of the CAC, at least 3 times. The higher the multiple, the better it is for the business. However, if the LTV is similar to the CAC, then it suggests that the firm may not be profitable in the future.

Report produced by: Asian Insights Office, DBS Group Research