Entrepreneurship

Calculate the Lifetime Value (LTV)

of an Acquired Customer
(Disciplined Entrepreneurship: STEP 17)
Six Themes of the 24 Steps
• Who is your customer?

• What can you do for

your customer?

• How does your customer

acquire your product?

• How do you make money off

your product?

• How do you design and build

your product?

• How do you scale your

business?
 How do you make money
off your product?
15. Design a Business Model

16. Set Your Pricing Framework

17. Calculate the Lifetime Value (LTV) of an Acquired Customer

19. Calculate the Cost of Customer Acquisition (COCA)

Recap (Step 16)

• Set Your Pricing Framework
– Value Creation

– Customer Acquisition Analysis

 – Nature of the Customer

– Strength of Your Core

– Competition

– Maturity of Your Product

• Worksheets
– Set Your Pricing Framework
How do you make money off your product?

STEP 17: CALCULATE THE LIFETIME

VALUE (LTV) OF AN ACQUIRED
CUSTOMER
Calculate the Lifetime Value (LTV)
of an Acquired Customer
 Lifetime Value (LTV)
• In this step, you will learn to estimate the total profit you will
get from a new customer, on average, over the time period
that the customer would stay with you.
 Lifetime Value (LTV)
• The LTV is an important number because you will compare it
against your Cost of Customer Acquisition (COCA) to see if
your startup will make more money from a customer than it
costs to advertise and otherwise convince a customer to buy
your product.

• As a rule of thumb, LTV should be at least three times greater

than the COCA in order for you to be profitable, though this
factor varies wildly from industry to industry.

• Knowing what drives LTV will help you make smart decisions
about your product.
 Calculate the Lifetime Value (LTV)
of an Acquired Customer
Common inputs to estimate the LTV include:

• One‐time revenue (the initial purchase price of a product)

• Recurring revenue (maintenance contracts, etc.)
• Other revenue (e.g., upselling)
• Gross margin for each revenue stream (price of your product, minus
production costs—do not include sales, R&D, or administrative expenses
in this number)

• Retention rate
• Life of product
• Repurchase rate
• Cost of capital for your business (Cost of capital is essentially the interest
rate you will be required to pay to get more money for your new venture)

Worksheets
• Estimate the Lifetime Value (LTV) of an Acquired Customer
 Summary (Step 17)
• Lifetime Value (LTV)
• Calculate the Lifetime Value (LTV) of an Acquired Customer
• Worksheet
– Estimate the Lifetime Value (LTV) of an Acquired Customer

How do you make money

off your product?
15. Design a Business Model

16. Set Your Pricing Framework

17. Calculate the Lifetime Value (LTV) of an Acquired Customer

19. Calculate the Cost of Customer Acquisition (COCA)
 Entrepreneurship

Map the Sales Process to Acquire

a Customer
(Disciplined Entrepreneurship: STEP 18)
Six Themes of the 24 Steps
• Who is your customer?

• What can you do for

your customer?

• How does your customer

acquire your product?

• How do you make money off

your product?

• How do you design and build

your product?

• How do you scale your business?

 How do you make money
off your product?
15. Design a Business Model

16. Set Your Pricing Framework

17. Calculate the Lifetime Value (LTV) of an Acquired Customer

19. Calculate the Cost of Customer Acquisition (COCA)

How does your customer

acquire your product?
12. Determine the Customer’s Decision‐Making Unit (DMU)

13. Map The Process to Acquire a Paying Customer

18. Map the Sales Process to Acquire a Customer
 Recap (Step 17)
• Lifetime Value (LTV)
• Calculate the Lifetime Value (LTV) of an Acquired Customer
• Worksheet
– Estimate the Lifetime Value (LTV) of an Acquired Customer
How does your customer acquire your product?

STEP 18: MAP THE SALES PROCESS

TO ACQUIRE A CUSTOMER
Map the Sales Process to
Acquire a Customer

Map the Sales Process to

 Acquire a Customer
• In this step you will focus on the sales process, mapping out
your short‐term, medium‐term, and long‐term sales channels.

• In the next step, you will use this information to calculate

what the cost of your sales and marketing initiatives are per
customer.

• Once you calculate your Cost of Customer Acquisition (COCA)

in the next step, you are likely to come back and change your
sales process to lower the COCA.

Sales Channels
There are four main categories of sales channels to consider:
• Field Sales: Direct salespeople who are employees of the company. They visit
prospects in person at some point in the process. Also known as “outside
sales.”

• Inside Sales: They use telephone, e‐mail and other electronic communication
to create and continue a dialogue with the customer, but do not visit the
customer in person.

• Internet Sales: This is a general catch‐all category for sales done by computers
through automatically generated e‐mails, big data analysis, social media, etc.
The key differentiator is that there is no human in the loop.

• Third‐Party Resellers: These people sell your product but are not employees
of your company. They include Value‐Added Resellers (VARs), distributors,
stores, catalogues, independent sales agents, etc.

Your Sales Process Changes Over Time

The sales process is typically broken into three time periods over
time. You will use different sales methods or combinations of
methods in each period:

• Short Term

• Medium Term

• Long Term

Sales Process: Short Term

(Initial Market Entry)

• In the short term, the primary focus of your sales process is to create
demand for your product and to fulfill orders for the product.
• Your product is still new to the world, so you will need direct interaction
with the customer to explain your value proposition and why your
product is unique.

• Another important reason for direct contact with initial customers is so

that you can rapidly iterate to improve the product based on customer
feedback, which is more difficult if you funnel sales through
intermediaries such as distributors.

• This is the missionary sales stage and it ends when you start to see
demand for your product that you did not directly generate.

Sales Process: Medium Term

(Gaining Market Traction)
• At this point, focus shifts more from demand creation toward order
fulfillment as word of mouth and distribution channels take on some of
the demand creation burden.

• At this stage, you will also begin client management, which means
ensuring you retain existing customers and creating additional sales
opportunities for them.

• Distributors or value‐added resellers (VARS) are often used, especially to

serve more remote markets, or smaller customers who have a lower
LTV. This way, your direct salespeople (who are more costly to you) can
focus on larger customer opportunities with a higher LTV.

Sales Process: Long Term

(Steady State)
• Your sales group focuses on fulfilling customer orders. Your business will
do very little demand creation, and will continue client management
where appropriate.

• Internet and telemarketing avenues are commonly employed in a

longterm strategy.

• There will have to be adjustments made as competitors come into the

market, which will affect your ability to get to this stage and what you do
once you get there.

How to Map the Sales Process to

Acquire a Customer
• To map your sales process, you will start by determining for
the short, medium, and long term what proportion of sales
will come from different channels.
• Use the Sales Channels for the Short, Medium, and Long Term
worksheet to define the periods of time and proportions, as
well as sales goals to achieve during that period, and
assumptions and risks involved.

• You will also define what milestones you need to reach

during each period so that your company is prepared to shift
to the sales strategy for the next period.

Worksheets
• Sales Channels for the Short, Medium, and Long Term
• Second Draft Sales Funnel Worksheets
– 2nd Draft Sales Funnel Inputs

– 2nd Draft Sales Funnel with Actions

 – Techniques and Actions to Maximize Yield Rate at Each Stage
• Risk Factors

Summary (Step 18)

• About Sales Process to Acquire a Customer
• Sales Channels
– Field Sales (Outside), Inside Sales, Internet Sales, Third‐Party
Resellers
• Sales Process Changes Over Time
– Short Term, Medium Term, Long Term
• How to Map the Sales Process to Acquire a Customer
• Worksheets:
 – Sales Channels for the Short, Medium, and Long Term – Second Draft
Sales Funnel Worksheets

• 2nd Draft Sales Funnel Inputs, 2nd Draft Sales Funnel with Actions, Techniques and Actions to
Maximize Yield Rate at Each Stage

– Risk Factors

How does your customer

acquire your product?
12. Determine the Customer’s Decision‐Making Unit (DMU)

13. Map The Process to Acquire a Paying Customer

18. Map the Sales Process to Acquire a Customer

 How do you make money
off your product?
15. Design a Business Model

16. Set Your Pricing Framework

17. Calculate the Lifetime Value (LTV) of an Acquired Customer

19. Calculate the Cost of Customer Acquisition (COCA)

 Entrepreneurship

Estimate the
Cost of Customer Acquisition (COCA)
(Disciplined Entrepreneurship: STEP 19)
Six Themes of the 24 Steps
• Who is your customer?

• What can you do for

your customer?

• How does your customer

acquire your product?

• How do you make money off

your product?

• How do you design and build

your product?

• How do you scale your business?

 How does your customer
acquire your product?
12. Determine the Customer’s Decision‐Making Unit (DMU)

13. Map The Process to Acquire a Paying Customer

18. Map the Sales Process to Acquire a Customer

 How do you make money
off your product?
15. Design a Business Model

16. Set Your Pricing Framework

17. Calculate the Lifetime Value (LTV) of an Acquired Customer

19. Calculate the Cost of Customer Acquisition (COCA)

Recap (Step 18)

• About Sales Process to Acquire a Customer
• Sales Channels
 – Field Sales (Outside), Inside Sales, Internet Sales, Third‐Party
Resellers
• Sales Process Changes Over Time
– Short Term, Medium Term, Long Term
• How to Map the Sales Process to Acquire a Customer
• Worksheets:
– Sales Channels for the Short, Medium, and Long Term – Second Draft
Sales Funnel Worksheets

• 2nd Draft Sales Funnel Inputs, 2nd Draft Sales Funnel with Actions, Techniques and Actions to
Maximize Yield Rate at Each Stage

– Risk Factors
How do you make money off your product?

STEP 19: ESTIMATE THE COST OF

CUSTOMER ACQUISITION (COCA)
Estimate the
Cost of Customer Acquisition (COCA)
 Estimate the
Cost of Customer Acquisition (COCA)
• Estimate the total marketing and sales expense in a given
period to get new customers and divide that total expense by
the number of new customers.

• This will be the marketing and sales expense required to

acquire one additional average customer for the given time
period.

Why COCA Matters?

• Typically, in the early stages of the sales process, the COCA
exceeds the Lifetime Value (LTV) of an Acquired Customer.

• In sustainable businesses, the COCA decreases over time until

it is significantly less than the LTV.
• One of the key questions for your business is how long it will
take for the COCA to drop below the LTV of a customer,
because until you reach that point, your business is spending
more money than it is taking in
 Why COCA Matters?

During the long‐term stage of the sales process the COCA will level off, and will continue to
require an ongoing investment (represented on this chart by the dotted line X), but costing
less than the LTV of the customer.
 Caution
• The Cost of Customer Acquisition (COCA) is an extremely
important metric and can be difficult at first to understand
and calculate.

• This step explains the COCA in detail, but you will need to pay
close attention to the details to calculate it correctly.

• It requires a significant amount of effort and systematic

thought.

• Do not skip or skim this step because getting COCA right is

both critical and challenging.
 Process
• To estimate the COCA, you will take the plan from Step 18,
Map the Sales Process to Acquire a Customer, and build a
forecast of
– how many customers you expect to gain during the short‐term,
medium‐term, and long‐term time periods, as well as

– the total marketing and sales expenses for each time period that
would result in gaining the number of customers you forecast.
 Process: Sales Forecasting
Often entrepreneurs’ forecasts are incredibly naïve and wildly
overoptimistic. Have your forecast reviewed and tested by a
sales professional.
– Your sales forecast for your first 90 days, and possibly even for your
first year, should have specific names of the customers whose sales
you are going to record.

– Take the number of people you think will be buying and only record a
percentage of that on your forecast so that it is more realistic (maybe
80 percent, but that will vary by situation).

– In the longer term, your sales forecast can make more abstract
estimates based on growth rate, sales productivity, and market share,
but understand that the more abstract the assumptions are in the
 calculation of the forecast, the less credible and the more risky they
are.

Process: Expense Forecasting

• To forecast your sales and marketing expenses, you will need
to first estimate, based on your sales process from Step 18,
what all of your sales and marketing activities will be, and
how much they will cost.

• Marketing expenses will generally be the set of expenses that

build brand awareness and generate leads, and sales
expenses relate to converting those leads into paying
customers.

Process: Expense Forecasting

Sales expenses may include:

• Salaries of sales people

• The time you and other non sales people spend on sales activities
• Commissions
• Bonuses
• Travel and entertainment expenses
• Benefits (health insurance, etc.)
Process: Expense Forecasting
Marketing expenses may include:
• Salaries of marketing employees (and bonuses, benefits, etc.)
• The time you and other non marketing employees spend on marketing
activities

• Websites

• Social media

• Advertising

• Trade shows

• Public relations

• Consultants

Process: Expense Forecasting

• If some people aren’t collecting a salary or their salary is below
market rate, you should take the market rate for that person when
calculating the expense.
 – It is not sustainable to not pay salaries, so using anything less than market
rate in your calculations will significantly understate your expenses.

• It will take some time to go through at the level of detail and

thought required to produce a relatively accurate list of expenses.

– It is strongly recommend you work with someone who has experience

building a marketing and sales budget to help you, because otherwise
you will miss a lot of expenses.

– Also look at the expenses that your competitors and others in similar
markets incur.

Process: Calculation
Take the total marketing and sales expenses (TMSE), less
customer retention and support for each time period also called
Install Base Support Expense over Time (IBSE), and divide by the
number of new customers (NC) in that same time period. That
will be your COCA for that time period.
• Cost of Customer Acquisition = (Total Marketing and Sales Expenses Install
Base Support Expense) / Number of New Customers

• COCA = (TMSE – IBSE) / NC

Points to Remember
• The LTV and COCA analysis can kill many new businesses by
identifying problems early in the process; but more often it
highlights the importance of keeping an eye on key factors to
make the business successful.
• It provides a simpler scoreboard than financial statements
and allows you to make adjustments and refine your
business.

• It makes your path to success more transparent.

• Don’t let your optimism blind you in doing the calculations.

Make the numbers real and not what you want them to be.

Worksheets
• Estimate the Cost of Customer Acquisition (COCA)
– Assumptions for COCA Estimation

– Total Sales and Marketing Expenses List

 – Estimate the COCA

– Key Drivers of COCA and Ways to Decrease It

• Bringing It All Together

– Overall Interpretation of Unit Economics

– Risk Factors

Summary (Step 19)

• Cost of Customer Acquisition (COCA)
• Why COCA Matters?
• Process:
– Sales Forecasting
 – Expense Forecasting

– Calculations

• Points to Remember
• Worksheets
– Estimate the Cost of Customer Acquisition (COCA)
– Bringing It All Together

How do you make money

off your product?
15. Design a Business Model

16. Set Your Pricing Framework

17. Calculate the Lifetime Value (LTV) of an Acquired Customer

19. Calculate the Cost of Customer Acquisition (COCA)

How do you design and build your

product?
20. Identify Key Assumptions

21. Test Key Assumptions

22. Define the Minimum Viable Business Product (MVBP)

23. Show That “The Dogs Will Eat the Dog Food”
 Entrepreneurship

Identify Key Assumptions

(Disciplined Entrepreneurship: STEP 20)
Six Themes of the 24 Steps
• Who is your customer?

• What can you do for

your customer?

• How does your customer

acquire your product?

• How do you make money off

your product?

• How do you design and build

your product?

• How do you scale your

business?
 How do you make money
off your product?
15. Design a Business Model

16. Set Your Pricing Framework

17. Calculate the Lifetime Value (LTV) of an Acquired

Customer

19. Calculate the Cost of Customer Acquisition (COCA)

How do you design and build your

product?
20. Identify Key Assumptions
21. Test Key Assumptions

22. Define the Minimum Viable Business Product (MVBP)

23. Show That “The Dogs Will Eat the Dog Food”

Recap (Step 19)

• Cost of Customer Acquisition (COCA)
• Why COCA Matters?
• Process:
– Sales Forecasting
– Expense Forecasting
– Calculations
• Points to Remember
• Worksheets
– Estimate the Cost of Customer Acquisition (COCA)
– Bringing It All Together
How do you design and build your product?

STEP 20: IDENTIFY KEY

ASSUMPTIONS
Identify Key Assumptions
Key Assumptions
Now that you have completed 19 steps worth of
product/market fit planning, you can identify those
assumptions that stand out overall as the most critical for your
success.

• Determine which assumptions about your business have not

been thoroughly tested.

• Rank your top 5 to 10 assumptions in order of importance.

Why Identify Key Assumptions?

Until you have tested your business assumptions and you have
shown you will take a specified action, there is too much of a
leap of faith for our disciplined entrepreneurial approach.
• In the next step, you will test these assumptions, but for now,
don’t worry about how you will test them, or you will be
biased toward easily tested assumptions.

• Your goal for now is to identify the most important

assumptions, regardless of ability to test them.

Process
• Start by reviewing the work you have done in each step of
the 24 Steps thus far and build a list of key assumptions you
have made at each step.

• Prioritize the list and identify the 5–10 assumptions that are
the most crucial to the success of your product.
• Use the worksheet to list these assumptions, the related
step(s) from the 24 Steps, the risk level of the step (low,
medium, high, critical), and briefly describe what will happen
to your company if your assumption turns out to be
incorrect.

Worksheets
• Identify Key Overall Assumptions
 Summary (Step 20)
• Key Assumptions
• Why Identify Key Assumptions?
• Process
• Worksheet: Identify Key Overall Assumptions
How do you design and build your
product?
20. Identify Key Assumptions

21. Test Key Assumptions

22. Define the Minimum Viable Business Product (MVBP)

23. Show That “The Dogs Will Eat the Dog Food”
Entrepreneurship

Test Key Assumptions

(Disciplined Entrepreneurship: STEP 21)
Six Themes of the 24 Steps
• Who is your customer?

• What can you do for

your customer?

• How does your customer

acquire your product?

• How do you make money off

your product?

• How do you design and build

your product?

• How do you scale your business?

 How do you design and build your
product?
20. Identify Key Assumptions

21. Test Key Assumptions

22. Define the Minimum Viable Business Product (MVBP)

23. Show That “The Dogs Will Eat the Dog Food”

Recap (Step 20)

• Key Assumptions
• Why Identify Key Assumptions?
• Process
• Worksheet: Identify Key Overall Assumptions
STEP 21:
How do you design and build your product?

TEST KEY ASSUMPTIONS

Test Key Assumptions
 What We Do In This Step?
• Use a series of small and inexpensive experiments to test each
of the individual assumptions you identified in the previous
step.
 Why Test Key Assumptions?
• To decrease the risk of your startup.

• This scientific approach will allow you to understand which

assumptions are valid, which ones are not, and which ones
you can’t know for sure yet.

• As a result, you’ll have time to make adjustments to your

planning while the cost and time to do so is much less than it
will be in the very near future when you launch the product
development process.
 Process
• This step ties directly back to Step 20, Identify Key
Assumptions.

• Now that you have identified the most critical individual

assumptions, you will design experiments that test these
assumptions.

• Your goal in each experiment is to test a specific variable,

keeping all other factors as controlled as possible, so that
the result of your experiment gives you insight into the
validity of your assumption.
 Process
• If an experiment is more complex, such as one that tests
multiple assumptions at the same time, it gets much more
difficult. Hence, try to decouple assumptions and design your
experiments carefully.

• Here are some easy guides to designing and performing

experiments:
– What Is an Experiment? Definition and Design
https://www.thoughtco.com/what‐is‐an‐experiment‐607970

– A guide to experimental design

https://www.scribbr.com/methodology/experimental‐design/
 – How to Experiment
https://www.userfocus.co.uk/articles/how_to_experiment.html

Worksheets
• Test Key Overall Assumptions

• Results from Testing Key Assumptions

 Summary (Step 21)
• What We Do In This Step?
• Why Test Key Assumptions?
• Process
• Worksheets:
– Test Key Overall Assumptions

– Results from Testing Key Assumptions

How do you design and build your

product?
20. Identify Key Assumptions

21. Test Key Assumptions

22. Define the Minimum Viable Business Product (MVBP)

23. Show That “The Dogs Will Eat the Dog Food”