A7E22000005DC-928_634x798.jpg' alt='Most Productive Serial Killer' title='Most Productive Serial Killer' />In general serial killers come from homes what were troubled which meant their childhood years included neglect or abuse. However, most mass murderers are known to. Startup Killer the Cost of Customer Acquisition. In the many thousands of articles advising entrepreneurs on what they have to focus on to build successful startups, much has been written about three key factors team, product and market, with particular focus on the importance of productmarket fit. Failure to get productmarket fit right is very likely the number 1 cause of startup failure. However in all these articles, I have not seen any discussion about what I believe is the second biggest cause of startup failure the cost of acquiring customers turns out to be higher than expected, and exceeds the ability to monetize those customers. In case you are not familiar with the importance of ProductMarket fit, Marc Andreessen has a great blog post on this topic  The Pmarca Guide to Startups, part 4 The only thing that matters. In this blog, Marc argues that out of the three core elements of a startup, team, product, and market, the only thing that matters is productmarket fit. I agree with Marcs view that productmarket fit is extremely important. However after closely watching several hundred startups that have failed, I observed that a very large number of these had solved the productmarket fit problem, but still failed because they had not found a way to acquire customers at a low enough cost. Business Model. I would like to propose that in addition to team, product, and market, there is actually a fourth, equally important, core element of startups, which is the need for a viable business model. Most Productive Serial Killer' title='Most Productive Serial Killer' />Cruelty, violence, badness. This episode of Radiolab, we wrestle with the dark side of human nature, and ask whether its something we can ever really understand. Business model viability, in the majority of startups, will come down to balancing two variables Cost to Acquire Customers CACThe ability to monetize those customers, or LTV which stands for Lifetime Value of a CustomerSuccessful web businesses have long understood these metrics as they have such an easy way to measure them. However there is a lot of value in looking at these same metrics for all other businesses. How To Import Photos To Imovie From Ipad. To compute the cost to acquire a customer, CAC, you would take your entire cost of sales and marketing over a given period, including salaries and other headcount related expenses, and divide it by the number of customers that you acquired in that period. In pure web businesses where the headcount doesnt need to grow as customer acquisition scales, it is also very useful to look customer acquisition costs without the headcount costs. To compute the Lifetime Value of a Customer, LTV, you would look at the Gross Margin that you would expect to make from that customer over the lifetime of your relationship. Gross Margin should take into consideration any support, installation, and servicing costs. It doesnt take a genius to understand that business model failure comes when CAC the cost to acquire customers exceeds LTV the ability to monetize those customers. Sandcastles Program Newman'>Sandcastles Program Newman. Jeffrey-Dahmer-Monstrous-Serial-Killers.jpg' alt='Most Productive Serial Killer' title='Most Productive Serial Killer' />A well balanced business model requires that CAC is significantly less than LTV Since the above two diagrams are so obvious, you may wonder why I have included them. The goal is give the reader a sense of the balancing act required to create a profitable business. Hopefully the value will become more obvious with the third version of the diagram that shows the different factors that affect the balance. Another reason for stressing the point using diagrams is that many entrepreneurs have realized that since the web provides some amazing new ways to acquire customers at low cost, several new businesses have become possible. The only thing that you have to consider is can you monetize your customers at a higher level than the cost to acquire them. The Entrepreneurs Achilles Heel Optimism. To be an entrepreneur requires great optimism, and a very strong belief in how much customers will love your product. Unfortunately this same attribute can also lead entrepreneurs to believe that customers will beat a path to their door to purchase the product. This frequently causes them to grossly underestimate the cost it will take to acquire customers. A common scenario is an entrepreneur that has dreamt up a cool new service that they can offer via the web. As a VC, I have sat through many presentations like this, and in most cases the service is actually interesting and compelling. However in the majority of these presentations there is little or no focus on how much it will cost to acquire customers. As I ask questions to understand the thinking, what usually comes out is something vague along the lines of web marketing, andor viral growth with no numbers attached. A quick look around all the B2. C startups shows that, although viral growth is often hoped for, in reality it is extremely rare. When it does happen, the associated businesses are usually extremely attractive, provided they have a way to monetize their customers. For more on the topic of Viral Growth, refer to my blog post on that topic here. Far more common is a need to acquire customers through a series of steps like SEO, SEM, PR, Social Marketing, direct sales, channel sales, etc. What shocks and surprises many first time entrepreneurs is just how high the numbers are for CAC using these kinds of techniques. Some examples of CAC calculations. For example, if you are using Google Ad Words to drive traffic to your site, take a look at the following interactive spreadsheet. This example shows a cost per click of 5. Those trials are then shown converting to paid customers at the rate of 1. What the sheet shows is that each customer is costing you 1. For many consumer facing web sites, it can be hard to get the consumer to pay more than 1. And this cost does not factor in the marketing staff, web site costs, etc. To access the spreadsheet, please click here. One of the more interesting things that this model shows is how rapidly cost of customer acquisition climbs if your leads require human touch to convert them compare cell B2. B2. 2. This human touch can be as light as email follow ups, or as much as inside sales people doing multiple sales calls and demos. I have seen this cost vary from around 4. Another shocking computation is to look at the cost of a direct field sales force To access the spreadsheet, please click here. This shows that it is not unusual for the cost of acquiring a customer to be as high as 1. This number is heavily dependent on the productivity of your sales teams. In the model above, this was set to 1. Given the need to cover R D and G A costs, the average gross margin on a deal needs to be at least 1. Lessons Learned Business Planning Stage. My advice to entrepreneurs working on a new business plan is to build a model similar to those above to estimate the cost of customer acquisition. This is going to show you the dependency on several critical variables Cost per lead. Conversion rates at each stage of your sales process. Dreamworks Blender File'>Dreamworks Blender File. Level of touch required. Then compare this to your expected monetization. As a very rough rule of thumb here are two guidelines that you might find helpful LTV CAC. It appears that LTV should be about 3 x CAC for a viable Saa. S or other form of recurring revenue model. Most of the public companies like Salesforce. Constant. Contact, etc., have multiples that are more like 5 x CAC. Aim to recover your CAC in lt 1. Banks and wireless phone companies ignore this rule, but they have access to tons of capital. In the early days of the business, you will not be able to accurately predict your conversion rates, and the viability of your entire business may depend on this.