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Importance of Cost of Acquiring the Customer (CAC) and Life Time Value of that Customer (LTV)
Every start up has a business model on which it enters the market either with product or service, in doing so both models have one crucialness parameter which required attention of the top management or the founding team of start ups.
The basic fact of cost of acquiring the customer is sometimes considered as the parameter of gaining traction or making users, so the start-ups spends money on advertising, marketing and other forms of media to create awareness among its target segment in the market to bring them on board and make them the users of the product / service which is being offered by the start ups. In this process the actual need or the criticalness which the start-ups should look at the cost of acquiring the customer to the life time value the customer gives once he becomes a customer.
In common terms once you get a customer then next question is how long does he gives you business and remains your customer which is called as life time value of customer (LTV). The start-ups in order to gain the momentum spend or give discounts to its customers to encourage them to stay with your service or product.
The present scenario is such that if there are two or more prominent start-ups in same market and segment the only way to gain uphold over the other is to increase the media spends followed by discounts to acquire the customer. Here in this model the second aspect which is crucial keeping in mind the bottom line which is how long will this customer who has given business to you will remain doing so.
Just concentrating on increasing customers and keeping higher customer acquisition cost will not help in longer duration as the investors would also like to put full stop to the burning of money / cash that happens by providing discounts which is part of acquiring the customer strategy. The draw backs are customers get used to getting freebies and expect the same to continue. When it is stopped the customers move out to other platforms which are giving the same freebies.
The effect that happens is devastating as the life time value which the customer would give once on becoming customer is totally gone. Hence the start-ups need to understand these two parameters when they are scaling and operate in highly competitive field