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Business Model Workshop



The Startup
  Metrics
    Keith McGreggor
   Director of VentureLab @   ...
How do you know you have
  product / market fit?
METRICS
Vanity
METRICS
Vanity
METRICS
innovation


Lean Startup Methodology
Agile Development
MVP
Minimum Viable Product
MVP
 Minimum Viable Product


                              HIGH
  LOW
                            FIDELITY
FIDELITY




           Built to LEARN
            Not to SELL
Moneyball!
 Actionable
METRICS
the Pipeline




               $$$
METRICS
AARRR
the Pirate Metrics


   Acquisition
   Activation
   Retention
   Referral
   Revenue




                     13
acquisition   activation   retention   revenue




              referral
the Business Model Canvas
Channels

Customer Relationships




                         16
Channels
How does your product get
     to customers?

How do you deliver value?
© 2012 Steve Blank
Physical vs Virtual Channels
Channels



                                           Virtual




Products



                                           Physical




           Virtual              Physical

                                                      21
Channels



                                           Virtual




Products
                                  Food
                                Clothing
                                 Horses
                                  Cars     Physical
                                 Radios
                                   ...


           Virtual              Physical

                                                      22
Channels


                             Insurance
                           Stocks & Bonds
                                            Virtual
                           Shrinkwrapped
                             Software
                                 ...


Products
                                  Food
                                Clothing
                                 Horses
                                  Cars      Physical
                                 Radios
                                   ...


           Virtual              Physical

                                                       23
Channels


                                 Insurance
                               Stocks & Bonds
                                                Virtual
                               Shrinkwrapped
                                 Software
                                     ...


Products
           Books (Amazon)             Food
           Movies (Netflix)         Clothing
           Shoes (Zappos)            Horses
              Consumer                Cars      Physical
             Electronics             Radios
                  ...                  ...


               Virtual              Physical

                                                           24
Channels


           Facebook friends      Insurance
             Twitter feeds     Stocks & Bonds
           Google searches                      Virtual
             ETrade stocks     Shrinkwrapped
                  ...            Software
                                     ...


Products
           Books (Amazon)             Food
           Movies (Netflix)         Clothing
           Shoes (Zappos)            Horses
              Consumer                Cars      Physical
             Electronics             Radios
                  ...                  ...


               Virtual              Physical

                                                           25
Business Model Workshop: the Startup Metrics
How Do You Want Your Product to
    Get to Your Customer?

   ü   From You Directly

   ü   Through a Distributor

   ü   Retail Stores

   ü   Wholesalers

   ü   Bundled with other goods or services




                                               27
Web	
  Channels




                  28
Physical	
  Channels




                       29
How Does Your Customer Want to
Buy Your Product from your Channel?

        ü   Same day

        ü   Delivered and installed

        ü   Downloaded

        ü   Bundled with other products

        ü   As a service

        ü   …


                                           30
Types	
  of	
  Channels

Direct            Indirect         Licensing


             – OEM
             – VAR
             – Reseller
             – Distributor




                                               31
Distribution Complexity
                                                                                                                 Global Systems
                        Evangelists                                                                 Systems Integrators
                                                                                                    WANs
                                                                                            Mainframes
Marketing Complexity




                                                                lu me              Direct Sales
                                                         r Vo                Minis
                                                g   he
                                           Hi
                                                                          LANs
                                                                        VARs
                                                            PC Servers                                    d ed
                                                         Desktop PCs                               e Ad
                                                Retail                                       alu
                                                                                           rV
                                        Printers
                                                                                   ig he
                                  Keyboards                                    H
                          Web, Telesales                                                                               Service
                                                                                                                     Technicians
                       Toner

                                                           Solution Complexity
                                                                                                                                  32
How	
  Do	
  the	
  Economics	
  Work	
  in	
  
  Different	
  Sales	
  Channel?
How	
  Are	
  Channels	
  Compensated?

 – Commission
 – Percentage of sales price
 – Discounted pre-purchase




                                         34
Channel	
  Economics:	
  “Direct”	
  Sales
                                                                             List
                                                               Your Revenue Price




                                                                                              End Consumer
                                                                                 Discounts
Cost of Goods
                                    Profit + SG&A + R&D
(Supply Chain)


Selling: Cost of Sales, which includes salaries, advertising expenses, rent, and all
expenses and taxes directly related to producing and selling product

General: General operating expenses and taxes that are directly related to the
general operation of the company, but don't relate to the other two categories

Administration: Executive salaries and general support and all associated taxes
related to the overall administration of the company

                                                                                             35
Channel	
  Economics:	
  Resellers
                                                          List
                              Your Revenue               Price




                                                               End Consumer
                                                  Discounts
Cost of Goods
                 Profit + SG&A + R&D   Reseller
(Supply Chain)




                                                              36
Channel	
  Economics:	
  Distributors/Resellers
                                                                     List
                          Your Revenue                              Price




                                                                            End Consumer
                                                            EU Discounts
                                   Distributor
Cost of Goods    Profit + SG&A +
                                                 Reseller
(Supply Chain)         R&D




                                                                           37
The	
  Channel	
  as	
  a	
  Customer

– Some products are embedded in others (OEM)
– Some products are resold by others (VARs)
– Some products are distributed by others
– Who’s the customer?




                                               38
Channel	
  Economics:	
  OEM	
  or	
  IP	
  Licensing
                                                                                                  List
 Your Revenue                                                                                    Price




                                                                                                         End Consumer
                                                                                         EU Discounts
                                                  Distributor


                                                                Distributor
              Cost of Goods




                                                    Master
                (Supply     Profit + SG&A + R&D                               Reseller
                 Chain)



    Cost of
    Goods       Profit + SG&A +    Reseller
   (Supply            R&D
    Chain)



Your	
  Product	
  Becomes	
  Your	
  Customer’s	
  Cost	
  of	
  Goods
                                                                                                        39
How	
  Are	
  Channels	
  MoKvated	
  or	
  Incented?


– Money! – what makes them the most?
– Training
– Marketing to the channel
– SPIF (Sales Performance Incentive Fund)
    • pay the channel’s sales rep a bonus




                                                     40
Customer
Relationships
How do you Get, Keep and Grow
         Customers?
Business Model Workshop: the Startup Metrics
Priming the Engine




                     44
Customer Archetypes Drive
                   Get/Keep/Grow
What’s their role?
How this person is evaluated / promoted /
compensated?
Who are they?
Buyer’s name
Position / title / age / sex
How do they buy?
Discretionary budget (name of budget and
amount)
What matters to them?
What motivates them?                        Lab Manager: Brian
Who influences them?
What do they read/who do they listen to?
Creating Demand




                  46
Paid Demand Creation Activities
         “Paid” Media

              Public Relations
              Advertising
              Trade Shows
              Webinars
              Email marketing
              On-line SEM
              Biz Dev
Free Demand Creation Activities
        “Earned” Media


            Publications in journals
            Conference speeches/papers
            Educational seminars
            Public relations
            Blogging / Sharable content
            Social Media
            Communities
Physical & Web Mobile Are Different


Physical




Web/Mobile
Physical




           50
Customer Relationships
Physical Products – Get Customers




                                © 2012 Steve Blank
Customer Relationships
Physical Products – Get Customers

  CAC   = Customer   Acquisition Cost
Sales Complexity
                                                  High Touch                 Field Sales
            No Touch          Light Touch
Freemium                                            Inside     Field Sales
           Self-Ser vice      Inside Sales
                                                     Sales                    with SE’s


                                             vs
  $0-        $50 –            $1,000 -            $3,000 -     $25,000 –     $75,000 –
  $10        $200             $2,000               $8,000       $75,000      $200,000



           Customer Acquisition Cost
Customer Relationships
Physical Products – Keep Customers
Customer Relationships
Physical Products – Keep Customers




                Attrition/Churn
Customer Relationships
Physical Products – Grow Customers
Customer Relationships
Physical Products – Get/Keep/Grow




         LTV = Customer Lifetime Value
Web/Mobile




             58
Customer Relationships
Web/Mobile Products– Get Customers
Web/Mobile Products– Get Customers

    CPM = cost per thousand hits
Web/Mobile Products– Get Customers


          CPA = Cost per Action
SaaS Products– Get Customers



                            Registered Visitors

                                                                Raw Leads
                                    Qualified Leads

                                              Inside Sales
                                                             Closed Deal




 Organic	
  Traffic,	
  
SEM,	
  Other	
  Paid	
  
    Sources
Web/Mobile Products– Keep Customers
Customer Relationships
Web/Mobile Products– Grow Customers
Customer Relationships
Web/Mobile Products Get/Keep/Grow
SaaS Example




               66
Paid Demand @ $1500 / 1k Clicks = $1.50 per Visitor
               Google Adwords




    Organic Traffic @ $0.00 = $0.00 per Visitor
                                                      67
Paid Demand = $1.50 / Visitor
      50%




        50%
     Organic Traffic = $0.00 / Visitor
                                         68
Cost per Visitor = $0.75




                           69
Cost per Visitor = $0.75
                    Visitor to Raw Lead


                      3%




                                          70
Cost per Visitor = $0.75
                    Visitor to Raw Lead
                            Raw to Qualified Lead
                      3%
                              20%




                                                    71
Cost per Visitor = $0.75
                    Visitor to Raw Lead
                            Raw to Qualified Lead
                      3%
                                20%




                              0.75
  Qualified Lead Cost =                  = $125
                           0.03 * 0.20
                                                    72
Cost per Visitor = $0.75
               Visitor to Raw Lead
                          Raw to Qualified Lead
                                   Qualified Lead to Closed Deal
                       3%
                               20%
                                           10%




                             0.75
  Closed Deal Cost =                        = $1250
                       0.03 * 0.20 * 0.10
                                                              73
Cost per Visitor = $0.75      Marketing Cost
                                                  Sales Cost
               Visitor to Raw Lead
                          Raw to Qualified Lead
                                   Qualified Lead to Closed Deal
                       3%
                               20%
                                           10%




   Marketing Cost = $1250          Sales Cost =   ?
                                                               74
Visitors
                                                 Sales Cost
    1,667     Raw Leads (RLC)
                       Qualified Leads (QLC)
                50                Closed Deals (CDC)
                           10          1




  Sales Cost = (1,667 * RLC) + (50 * QLC) + (10*CDC)
                                                              75
Visitors
                                                    Sales Cost
    1,667      Raw Leads $2.00
                        Qualified Leads $20.00
                 50                Closed Deals $200.00
                             10          1




  Sales Cost = (1,667 * $2.00) + (50 * $20. 00) + (10 * $200. 00)
             = $3,334 + $1,000 + $2,000 = $6,334                  76
Customer Acquisition Cost (CAC)


                3%
                           20%
                                            10%




CAC =    $1,250          + $6,334       =   $7,584
        Marketing Cost     Sales Cost                77
Lifetime Value of a Customer (LTV)




             LTV = ?                 78
Lifetime Value of a Customer (LTV)

            Average Revenue Per User (ARPU)




           Total Revenue
  ARPU =
            Customers
                                              79
Lifetime Value of a Customer (LTV)

                   Average Revenue Per User (ARPU)




         Total Revenue                      Revenue - Cost
ARPU =                     Gross Margin =
          Customers                           Revenue
                                                             80
Lifetime Value of a Customer (LTV)




        LTV = ARPU * Gross Margin
               not quite...
                                     81
Churn




          leave
churn =
          stay      82
Lifetime Value of a Customer (LTV)




              ARPU * Gross Margin
      LTV =          Churn
                                     83
Lifetime Value of a Customer (LTV)
          Suppose ARPU = $500 per month
          & Gross Margin = 40%
          & Churn = 1% per month




                         1%




            $500 * 0.4
  LTV =        0.01
                              = $20,000
                                          84
CAC =    $1,250          + $6,334           =   $7,584
        Marketing Cost       Sales Cost




             ARPU        Gross Margin

           $500 * 0.4
 LTV =        0.01                      =   $20,000
                    Churn                                85
Balancing CAC/LTV in a SaaS model




          LTV               > 3x                CAC

         Months	
  to	
  
        recover	
  CAC      <         12 months
       Required	
  for	
  Capital	
  Efficiency
What Investors are Looking For


A	
  well	
  balanced	
  business	
  model




                                             MoneKzaKon
                                                (LTV)



  Cost	
  to
 Acquire	
  a
 Customer
   (CAC)
The Balancing Act
                   • Viral effects
                   • Inbound Marketing
                   • Free or Freemium
                   • Open Source
                   • Free Trials
                   • Touchless conversion
                   • Inside Sales
                   • Channels
                   • Strategic partnerships

Cost	
  to	
  Acquire	
  a	
  Customer	
                     MoneKzaKon
                 (CAC)                                   (LifeTime	
  Value	
  LTV)



                                              • Scalable Pricing
                                              • Cross Sell/Upsell
                                              • Product line expansion
                                              • Lead Gen for 3rd parties
The Balancing Act

                     •   Viral effects
                     •   Inbound Marketing
                     •   Free or Freemium             • High Churn Rates
                     •   Open Source                  • Low customer
                     •   Free Trials                    satisfaction
                     •   Touchless conversion
                     •   Inside Sales
                     •   Channels
                     •   Strategic partnerships


Cost	
  to	
  Acquire	
  a	
  Customer	
                             MoneKzaKon
                 (CAC)                                          (LifeTime Value LTV)



                  • Field Sales                   •   Scalable Pricing
                                                  •   Cross Sell/Upsell
                  • Outbound Marketing            •   Product line expansion
                                                  •   Lead Gen for 3rd parties
Customer Relationships
Web/Mobile Products– Keep Customers




                                  © 2012 Steve Blank
Churn

• 1%	
  to	
  2.5%	
  churn	
  per	
  month	
  is	
  acceptable	
  
• Higher	
  than	
  that,	
  you	
  are	
  filling	
  a	
  leaky	
  bucket
   –Need	
  to	
  understand	
  why	
  you	
  have	
  low	
  customer	
  
    saNsfacNon	
  and	
  address	
  the	
  problem
the equation that matters...
     infrastructure           offer            customers



               activities              relationships

 partners                    value
                                                       segments
                             prop.

               resources                channels



                            financial


            COST
                            <          REVENUE
... is this one: CAC << LTV


    acquisition   activation   retention   revenue




      CAC                            LTV
                  referral
CAC << LTV
 if         and
       COST < REVENUE

then    COMPANY!

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Business Model Workshop: the Startup Metrics

  • 1. Business Model Workshop The Startup Metrics Keith McGreggor Director of VentureLab @ ...
  • 2. How do you know you have product / market fit?
  • 9. MVP Minimum Viable Product HIGH LOW FIDELITY FIDELITY Built to LEARN Not to SELL
  • 13. the Pirate Metrics Acquisition Activation Retention Referral Revenue 13
  • 14. acquisition activation retention revenue referral
  • 18. How does your product get to customers? How do you deliver value?
  • 19. © 2012 Steve Blank
  • 21. Channels Virtual Products Physical Virtual Physical 21
  • 22. Channels Virtual Products Food Clothing Horses Cars Physical Radios ... Virtual Physical 22
  • 23. Channels Insurance Stocks & Bonds Virtual Shrinkwrapped Software ... Products Food Clothing Horses Cars Physical Radios ... Virtual Physical 23
  • 24. Channels Insurance Stocks & Bonds Virtual Shrinkwrapped Software ... Products Books (Amazon) Food Movies (Netflix) Clothing Shoes (Zappos) Horses Consumer Cars Physical Electronics Radios ... ... Virtual Physical 24
  • 25. Channels Facebook friends Insurance Twitter feeds Stocks & Bonds Google searches Virtual ETrade stocks Shrinkwrapped ... Software ... Products Books (Amazon) Food Movies (Netflix) Clothing Shoes (Zappos) Horses Consumer Cars Physical Electronics Radios ... ... Virtual Physical 25
  • 27. How Do You Want Your Product to Get to Your Customer? ü From You Directly ü Through a Distributor ü Retail Stores ü Wholesalers ü Bundled with other goods or services 27
  • 30. How Does Your Customer Want to Buy Your Product from your Channel? ü Same day ü Delivered and installed ü Downloaded ü Bundled with other products ü As a service ü … 30
  • 31. Types  of  Channels Direct Indirect Licensing – OEM – VAR – Reseller – Distributor 31
  • 32. Distribution Complexity Global Systems Evangelists Systems Integrators WANs Mainframes Marketing Complexity lu me Direct Sales r Vo Minis g he Hi LANs VARs PC Servers d ed Desktop PCs e Ad Retail alu rV Printers ig he Keyboards H Web, Telesales Service Technicians Toner Solution Complexity 32
  • 33. How  Do  the  Economics  Work  in   Different  Sales  Channel?
  • 34. How  Are  Channels  Compensated? – Commission – Percentage of sales price – Discounted pre-purchase 34
  • 35. Channel  Economics:  “Direct”  Sales List Your Revenue Price End Consumer Discounts Cost of Goods Profit + SG&A + R&D (Supply Chain) Selling: Cost of Sales, which includes salaries, advertising expenses, rent, and all expenses and taxes directly related to producing and selling product General: General operating expenses and taxes that are directly related to the general operation of the company, but don't relate to the other two categories Administration: Executive salaries and general support and all associated taxes related to the overall administration of the company 35
  • 36. Channel  Economics:  Resellers List Your Revenue Price End Consumer Discounts Cost of Goods Profit + SG&A + R&D Reseller (Supply Chain) 36
  • 37. Channel  Economics:  Distributors/Resellers List Your Revenue Price End Consumer EU Discounts Distributor Cost of Goods Profit + SG&A + Reseller (Supply Chain) R&D 37
  • 38. The  Channel  as  a  Customer – Some products are embedded in others (OEM) – Some products are resold by others (VARs) – Some products are distributed by others – Who’s the customer? 38
  • 39. Channel  Economics:  OEM  or  IP  Licensing List Your Revenue Price End Consumer EU Discounts Distributor Distributor Cost of Goods Master (Supply Profit + SG&A + R&D Reseller Chain) Cost of Goods Profit + SG&A + Reseller (Supply R&D Chain) Your  Product  Becomes  Your  Customer’s  Cost  of  Goods 39
  • 40. How  Are  Channels  MoKvated  or  Incented? – Money! – what makes them the most? – Training – Marketing to the channel – SPIF (Sales Performance Incentive Fund) • pay the channel’s sales rep a bonus 40
  • 42. How do you Get, Keep and Grow Customers?
  • 45. Customer Archetypes Drive Get/Keep/Grow What’s their role? How this person is evaluated / promoted / compensated? Who are they? Buyer’s name Position / title / age / sex How do they buy? Discretionary budget (name of budget and amount) What matters to them? What motivates them? Lab Manager: Brian Who influences them? What do they read/who do they listen to?
  • 47. Paid Demand Creation Activities “Paid” Media Public Relations Advertising Trade Shows Webinars Email marketing On-line SEM Biz Dev
  • 48. Free Demand Creation Activities “Earned” Media Publications in journals Conference speeches/papers Educational seminars Public relations Blogging / Sharable content Social Media Communities
  • 49. Physical & Web Mobile Are Different Physical Web/Mobile
  • 50. Physical 50
  • 51. Customer Relationships Physical Products – Get Customers © 2012 Steve Blank
  • 52. Customer Relationships Physical Products – Get Customers CAC = Customer Acquisition Cost
  • 53. Sales Complexity High Touch Field Sales No Touch Light Touch Freemium Inside Field Sales Self-Ser vice Inside Sales Sales with SE’s vs $0- $50 – $1,000 - $3,000 - $25,000 – $75,000 – $10 $200 $2,000 $8,000 $75,000 $200,000 Customer Acquisition Cost
  • 55. Customer Relationships Physical Products – Keep Customers Attrition/Churn
  • 57. Customer Relationships Physical Products – Get/Keep/Grow LTV = Customer Lifetime Value
  • 60. Web/Mobile Products– Get Customers CPM = cost per thousand hits
  • 61. Web/Mobile Products– Get Customers CPA = Cost per Action
  • 62. SaaS Products– Get Customers Registered Visitors Raw Leads Qualified Leads Inside Sales Closed Deal Organic  Traffic,   SEM,  Other  Paid   Sources
  • 67. Paid Demand @ $1500 / 1k Clicks = $1.50 per Visitor Google Adwords Organic Traffic @ $0.00 = $0.00 per Visitor 67
  • 68. Paid Demand = $1.50 / Visitor 50% 50% Organic Traffic = $0.00 / Visitor 68
  • 69. Cost per Visitor = $0.75 69
  • 70. Cost per Visitor = $0.75 Visitor to Raw Lead 3% 70
  • 71. Cost per Visitor = $0.75 Visitor to Raw Lead Raw to Qualified Lead 3% 20% 71
  • 72. Cost per Visitor = $0.75 Visitor to Raw Lead Raw to Qualified Lead 3% 20% 0.75 Qualified Lead Cost = = $125 0.03 * 0.20 72
  • 73. Cost per Visitor = $0.75 Visitor to Raw Lead Raw to Qualified Lead Qualified Lead to Closed Deal 3% 20% 10% 0.75 Closed Deal Cost = = $1250 0.03 * 0.20 * 0.10 73
  • 74. Cost per Visitor = $0.75 Marketing Cost Sales Cost Visitor to Raw Lead Raw to Qualified Lead Qualified Lead to Closed Deal 3% 20% 10% Marketing Cost = $1250 Sales Cost = ? 74
  • 75. Visitors Sales Cost 1,667 Raw Leads (RLC) Qualified Leads (QLC) 50 Closed Deals (CDC) 10 1 Sales Cost = (1,667 * RLC) + (50 * QLC) + (10*CDC) 75
  • 76. Visitors Sales Cost 1,667 Raw Leads $2.00 Qualified Leads $20.00 50 Closed Deals $200.00 10 1 Sales Cost = (1,667 * $2.00) + (50 * $20. 00) + (10 * $200. 00) = $3,334 + $1,000 + $2,000 = $6,334 76
  • 77. Customer Acquisition Cost (CAC) 3% 20% 10% CAC = $1,250 + $6,334 = $7,584 Marketing Cost Sales Cost 77
  • 78. Lifetime Value of a Customer (LTV) LTV = ? 78
  • 79. Lifetime Value of a Customer (LTV) Average Revenue Per User (ARPU) Total Revenue ARPU = Customers 79
  • 80. Lifetime Value of a Customer (LTV) Average Revenue Per User (ARPU) Total Revenue Revenue - Cost ARPU = Gross Margin = Customers Revenue 80
  • 81. Lifetime Value of a Customer (LTV) LTV = ARPU * Gross Margin not quite... 81
  • 82. Churn leave churn = stay 82
  • 83. Lifetime Value of a Customer (LTV) ARPU * Gross Margin LTV = Churn 83
  • 84. Lifetime Value of a Customer (LTV) Suppose ARPU = $500 per month & Gross Margin = 40% & Churn = 1% per month 1% $500 * 0.4 LTV = 0.01 = $20,000 84
  • 85. CAC = $1,250 + $6,334 = $7,584 Marketing Cost Sales Cost ARPU Gross Margin $500 * 0.4 LTV = 0.01 = $20,000 Churn 85
  • 86. Balancing CAC/LTV in a SaaS model LTV > 3x CAC Months  to   recover  CAC < 12 months Required  for  Capital  Efficiency
  • 87. What Investors are Looking For A  well  balanced  business  model MoneKzaKon (LTV) Cost  to Acquire  a Customer (CAC)
  • 88. The Balancing Act • Viral effects • Inbound Marketing • Free or Freemium • Open Source • Free Trials • Touchless conversion • Inside Sales • Channels • Strategic partnerships Cost  to  Acquire  a  Customer   MoneKzaKon (CAC) (LifeTime  Value  LTV) • Scalable Pricing • Cross Sell/Upsell • Product line expansion • Lead Gen for 3rd parties
  • 89. The Balancing Act • Viral effects • Inbound Marketing • Free or Freemium • High Churn Rates • Open Source • Low customer • Free Trials satisfaction • Touchless conversion • Inside Sales • Channels • Strategic partnerships Cost  to  Acquire  a  Customer   MoneKzaKon (CAC) (LifeTime Value LTV) • Field Sales • Scalable Pricing • Cross Sell/Upsell • Outbound Marketing • Product line expansion • Lead Gen for 3rd parties
  • 90. Customer Relationships Web/Mobile Products– Keep Customers © 2012 Steve Blank
  • 91. Churn • 1%  to  2.5%  churn  per  month  is  acceptable   • Higher  than  that,  you  are  filling  a  leaky  bucket –Need  to  understand  why  you  have  low  customer   saNsfacNon  and  address  the  problem
  • 92. the equation that matters... infrastructure offer customers activities relationships partners value segments prop. resources channels financial COST < REVENUE
  • 93. ... is this one: CAC << LTV acquisition activation retention revenue CAC LTV referral
  • 94. CAC << LTV if and COST < REVENUE then COMPANY!