Comment by jmduke | Hacker News Reader

Comment by jmduke | Hacker News Reader

I love Jason's blog but I'm having some trouble understanding this post.

It's okay to spend $X on customer acquisition if $X is less than the lifetime value of a customer (where X ends up being rather high for enterprise customers). But if it takes (pulling this number out of the air) two years to recoup that initial $X, then each customer is unprofitable for the first two years. And if you're a growth-minded SaaS firm, it's going to feel like a lot of customers are in those first two years: but once your initial batch of customers pay off their debts, so to speak, their profit can be invested back into customer acquisition -- it's not like your profits have to be funneled outside of the company, or that your growth has to be rampant and unchecked (with enterprise sales, you're more or less determining your own rate of expansion by the quality and quantity of your sales fleet). Acquisition begets acquisition.

Besides the fact that you need a cash reserve (either through your own savings or outside investment) and patience, I don't see what's particularly wrong with this strategy.

The problem is that the costs are all front-loaded. By the time your first batch has come through, you already have another batch costing you. If you're going to become positive, your per-customer expenses have to go down over time, or you'll never catch up to the debt.

I think he implies that the two years you mentioned are longer than the average customer life cycle.

The tl;dr version is that your company will never get to a size where the executives will suddenly go "oh, well, we're big enough" so you'll always be in that customer acquisition phase, and thus you'll never be profitable.

huh?

If the average customer brings in $500 and the cost to acquire the customer is $200 then you'll be profitable as long as the provisioning* cost is less than $300.

*everything else associated with a customer

If the cost to acquire a customer is $200 and taken in the first 6 months of finding a customer lead and the average customer brings in $100/year and stays for 5 years and starts becoming a paying customer after an initial 6 month sales period then you will not be profitable easily as long as you continue growing. It'll take 30 full months to amortize the net cost of acquiring a customer down to 0. That's a long time.

Also, if your growth accelerates you'll just keep digging deeper and deeper into a hole.

I agree with you. It's perfectly reasonable for a firm to pour money into its customer acquisition machine so long as the return is greater than the cost of capital plus a risk premium.

Failure to reinvest every dollar under those circumstances is a Type I error.

This risk premium is an important part of that equation.

"So out of the original $4R, we’re left with $0.1R in profit. That’s 1/40th of the revenue making its way to actual bottom-line profitability, and even that takes 4 years to achieve", Jason Cohen.

That a very tight profit margin, but still could be valid business mode. Especially when you hope that over time 'brand' grows in strength and average customer acquisition costs may lower, conversions can be optimised, R&D costs will be shared across a larger user base. You might even 'max-out' the customer base.

The issue is that revenue is at risk. You might spend $300m acquiring customers for that $0.1R profit 4 years down-the-line. 2 years into that 4 year, a competitor suddenly innovates and steals the customer before you've realised the required revenue.

It doesn't even need a massive innovation. A margin that tight is very sensitive to very small changes. A competitor enters the market and your annual retention drops from 75% to 66.7% and that will probably be enough to destroy any hope of profitability.

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