In this episode, we talk about the most important metric startups should care about. It's not what you think.
One of the problems that shows like Shark Tank has is they focus on this metric: valuation. And a lot of discussions within the startup community is like "Oh, what's your valuation, valuation this, valuation that". But why does evaluation actually matter?
To me, valuation is a vanity metric. Your valuation will change from day to day, depending on how your business is doing. And if your business is drying up, your valuation could be wiped out right away. So whatever your valuation is, the reason why people like to use valuation is because they want to see how much of a paper millionaire they are. If they own 50% of a $2 million dollar company, then they could legitimately say that they are a millionaire because they own this company. But it's just a vanity metric. It's a ghost metric. It's only designed to make people feel better and it's only designed for investors so they can have some kind of convention when they're thinking about investing.
But if you're not interested investors and you're not interested, um, in having that control over your business and you're more interested in going vertical, then there really is only one metric that matters the most. And that metric is your customer lifetime value. So customer lifetime value is... and that was like my dog growling a little bit. She wants to play. So I'm gonna hold her and make sure she doesn't play... Um, customer lifetime value is calculated by looking at how much revenue a customer is going to bring in for your business.
So what we know is the cost of customer acquisition is going to be your largest cost in your business and getting your customer lifetime value as high as possible means that you will increase the profitability of your business and getting your customer lifetime value high means that you are keeping the customer happy and you're retaining them as long as possible. So this is how customer lifetime value is quickly calculated and you can probably google this and get more on depth.
But just to make a simple, quick calculation, let's say that you have a software as a service application and your subscription cost is $100 a month. So that's $1,200 a year. And let's say that, let's say it's a homework app. It's a homework management app and it's for college students. So for the typical college student, you can say that they're going to be in there for four years and I know that it's probably likely more than that and my dog is like growling because you want to play more. Um but let's say that the typical college a student is in there for four years and they're going to use your app for four years. That's $100 a month for four years. So 48 months, $4,800, which is the customer lifetime value.
Now, once you get this metric because you took the amount that someone's going to pay over the time that someone is going to be a customer. And once you get this metric, then your job is to basically increase this metric as much as possible. So how do you do that? You increase your customer lifetime value by nurturing the customer to spend more money with you or to stay longer with you.
So for homework management app, they're only going to be there for four years. So let's say that if we want to increase customer lifetime value for this app, then what we have to do is we have to think about what other products and services can we sell to this customer during that four years. So we can increase the amount that the customer spends and how much revenue as it comes to the company. So for these homework users then you want to have other products that are helping them out on their journey. So they're in college and for your company you have a homework management app, what else do they need? And you develop that you try to increase the customer lifetime value. So this is actually why it's so important to start with the list first and the audience first because the technology really doesn't matter. The technology is just one piece in the new portfolio of products and services that you're going to deliver to your audience if you have different audience segments, it really becomes difficult to try to maximize that customer lifetime value because you have so many different types of customers.
However, when you start with the audience first and you start with your customer lists first, then it's really easy to start with the focus on customer experience and start working backwards with whatever technology you want to start fulfilling that customer happiness that you're trying to deliver.
So that's the only metric that really matters is your customer lifetime value. Think about how long your customer is going to use your product, how much they're going to pay. And then what else you can do to increase that customer lifetime value? So you can, you can increase your profitability because that customer cost of acquisition, you've already acquired that customer, you might as well deliver as much value as possible, so you can increase your revenue and profits. Hope that helps. This is Robin Copernicus. Boom, bam, I'm out.
And one more thing, tune in to the next episode to learn more about the net promoter score, which is something that's going to help you increase your customer lifetime value, and we'll go more into the net promoter score in the next episode. Boom, bam. I'm out.
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