Lecture 1 Business Models and the Lifecycle
- 1. Lecture 1: Business Models & the lifecycle Niall Naidoo, MBA The University of Cape Town (UCT) New Venture Planning (Computer Science)
- 2. Niall Naidoo New Venture Support Manager Niall Naidoo is the current New Venture Support Manager at The University of Cape Town. He is currently responsible for providing support services to the university’s spin-out companies regarding compliance, consulting services, strategy, and transactions. Prior to this role, he was a lecturer at the School of Applied Management, faculty of Commerce (UCT) and focused his teaching and research in strategy, innovation management (new product development and project management), corproate finance, and marketing. He is a current founder of a company called Rorshach Innovation Services, and has recently won pan-African award at Harvard Business School (HBS) for his work on Medicoach. RIS was the technology partner on a FIFA project that aimed to improve injury management in women's football. email: [email protected] contact details: 021 650 7038 Lecturer The university of cape Town spin-out portfolio Research COntracts & Innovation Research Contracts & Innovation serves as the dynamic technology transfer hub of the University of Cape Town (UCT). This pivotal office is entrusted with the critical mission of identifying, safeguarding, and commercializing UCT's intellectual property. Among the various pathways of technology transfer, the 'spin-out route' is rapidly emerging as a popular choice. Central to this approach is the Evergreen Fund, an internal funding mechanism at UCT. This fund functions as an equity partner, investing in promising ventures to facilitate their commercialization. Such investments are instrumental in accelerating the development of deep-technology projects, bringing them to the marketplace. This not only boosts employment but also ensures a profitable return to the fund, perpetuating a cycle of innovation and growth.
- 3. Overview of the course Lecture Series Reflection essay Case Study test New Venture Planning is a course that prepares aspiring entrepreneurs with knowledge and practical skills for starting and managing businesses. The eight-module lecture series offers entrepreneurs essential principles for successful business management, emphasizing practical case examples to enhance decision-making context. The Journal Entry assessment is a task worth 5% of the course mark. It helps students develop a start-up mindset by answering five questions that mirror real-world entrepreneurial challenges and considerations. The Open Book Case Study Test is worth 20% of the course grade and evaluates students' ability to apply theoretical knowledge to real-world situations, with a focus on a detailed start-up case study.
- 4. Eight sessions based on key academic principles that apply in practice Overview of the lecture series This eight-session course offers a comprehensive journey through the various stages of business development, from grasping the business life cycle and modeling, to understanding and meeting customer needs, and driving innovation in product development. It encompasses practical project management, team leadership, effective communication, and the intricacies of building a compelling financial model for pitching. Overview of each session: 1 Introduction to the business life cycle and model 2 Understanding your customer through requirements/ specifications 3 New product development through product and innovation management 4 Project management and implementation 5 Managing a team, recruitment and communication 6 Building a financial model and pitching 7 Engaging with investors and VCs 8 Selling your product, scaling your venture and navigating Africa
- 5. Relective essays The Open Book Case Study Test, accounting for 20% of the course mark, is a pivotal assessment designed to evaluate students' understanding and application of theoretical frameworks in real-world scenarios. The primary objective is to encourage students to deeply analyze and interpret a given situation, using their knowledge of relevant theories to inform their decision-making process. For this test, a detailed case study will be provided to students in advance, allowing ample time for thorough preparation and analysis. The case will present a start-up scenario, requiring students to engage critically with the content, identify key issues, and apply appropriate theoretical models to dissect and understand the underlying dynamics of the situation. There are five key questions that you need to answer: 1. Vision Beyond Fear: What ambitious venture would you undertake if you knew failure was not an option? 2. Optimizing for Success: In a scenario where your idea is destined to succeed, how would you approach and execute your work to achieve this inevitable success? 3. Risk Mitigation Strategies: What factors could potentially lead to the failure of your idea, and how would you strategically allocate resources to safeguard against these risks? 4. Harmony in Pursuit: As you embark on this entrepreneurial journey, what strategies would you employ to maintain a sense of peace and balance in your life? 5. Health as a Foundation for Success: How would you ensure your physical and mental well-being to fully realize and sustain the vision of your idea? Case study test
- 6. Strategic management framework A strategy focuses on long-term through actions in the present The strategic management framework is a comprehensive approach to formulating, implementing, and evaluating cross-functional decisions that enable an organization to achieve its objectives. Here's an overview of how to navigate through this process: 1. Strategic Direction: Vision and Mission: Establish a clear vision and mission to define the long-term aspirations and the core purpose of the organization. Objectives: Set specific, measurable, achievable, relevant, and time-bound (SMART) objectives that align with the vision and mission 2. Internal and External Analysis: SWOT Analysis (Internal – Strengths and Weaknesses): Assess internal resources, capabilities, and processes to identify what the organization does well and where it can improve. PESTEL Analysis and Porter's Five Forces (External – Opportunities and Threats): Examine the broader environment to identify opportunities to exploit and threats to mitigate, considering factors like politics, economy, society, technology, environment, and legal aspects, as well as the competitive forces in the industry. 3. Strategic Formulation: Resource-Based View: Consider internal resources and competencies as a basis for strategy, aiming to develop a unique competitive advantage. Business Models: Develop or refine the business model to ensure that the strategy is viable economically and creates value. Management Discussion: Engage in strategic discussions to consider various strategic options and their implications. 4. Strategic Implementation: Project Management and Implementation: Translate the strategy into actionable projects and initiatives, manage resources, and ensure alignment with strategic objectives. Managing a Team, Recruitment, and Communication: Build and maintain a capable team, recruit talent aligned with the strategy, and communicate the strategy effectively within the organization. 5. Monitoring and Evaluation: Analysis of Results and Controls: Establish performance metrics and monitor them regularly to evaluate the success of the strategic initiatives. Feedback and Adaptation: Be prepared to adapt the strategy based on feedback and changes in the internal or external environment. An overview of a strategic plan and tools required
- 7. Business model Business model canvas "A business model is a framework for making money. It is the set of activities which a firm performs, how it performs them and when it performs them so as to offer its customers benefits they want and to earn a profit" - Afuah, 2003 The Business Model Canvas is a strategic management template used for developing new business models and documenting existing ones. It offers a visual chart with elements describing a firm's value proposition, infrastructure, customers, and finances, facilitating an understanding of how these aspects interconnect and contribute to the company's operations. Value Proposition: What value do we deliver to the customer? Which one of our customers' problems are we helping to solve? What bundles of products and services are we offering to each customer segment? Which customer needs are we satisfying? Cost Structure: What are the most important costs inherent in our business model? Which key resources are most expensive? Which key activities are most expensive? Key Partners: Who are our key partners? Who are our key suppliers? Which key resources are we acquiring from partners? Which key activities do partners perform? Is there any new partners worth developing? Are there any partners we may loose? Key Activities: What key activities does our value proposition require? Are our distribution channels prioritised? Are customer relationships prioritised? Is our revenue stream predictable and upward trending? Key Resources: What key resources does our value proposition require? What are the key tangible and intangible resources? How can we achieve a superior advantage extracting and protecting them? Definition Key questions for each variable (Supply-side)
- 8. Business model Revenue Streams: What values are our customers willing to pay? What are they currently paying? How does this compare to our competitors? How does each value proposition contribute to the revenue stream? Customer Segments: For whom are we creating values? Who are our most important customers? What is our current potential market? What is the available market? Who is our target market? it is growing? What is our penetrated market? What are some of the hurdles experienced by our customer? Customer Relationships: Which type of relationship does each of our customer segments expect us to establish and maintain with them? Which ones have we established? Customer Channels: Through which channels do our customer segments want to be reached? How are we reaching them now? How are our channels integrated? Key questions for each variable (Demand-side) AIR BNB business model evoluation The Airbnb business model is showcased as a flow diagram emphasizing the critical success factors of peer-to-peer (P2P) accommodation networks. The model is built upon a foundation of key elements such as balance of power, the platform's ability to act as a P2P curriculum vitae (CV) showcasing users' network track record, the flexibility offered to both hosts and guests, and the inherent risk assessment mechanisms that provide users with permission to buy or book. Central to the model are the concepts of information and validation, which foster confidence among users. This confidence is critical in enticing both demand (from guests) and supply (from hosts). Airbnb's model is characterized by built-in mechanisms for quality control, such as mystery shopping, and guarantees that ensure the safety and reliability of transactions. Furthermore, the platform's ability to match guests with hosts through micro-segmentation ensures a perfect match for each booking, catering to the specific preferences and needs of users. The arrow pointing to the right signifies the direction towards which these factors contribute, leading to Airbnb's position as a leading player in the peer-to-peer accommodation network sector. The overall design of the business model is focused on creating a trusted community marketplace that enables people to list, discover, and book unique accommodations around the world.
- 9. Profitability The profitability case interview framework depicted in the image is a structured approach to analyze a company's profitability. It is divided into two main categories: quantitative and qualitative drivers. Quantitative Drivers: Revenue: This is typically broken down by the components that directly affect it, such as: Price: The unit price at which goods or services are sold. Quantity Sold: The volume of goods or services sold. Sales Mix: The composition of different products or services sold, which can affect the overall revenue. Costs: These are categorized into: Variable Costs: Costs that vary directly with the level of production or sales volume. Fixed Costs: Costs that remain constant regardless of the level of production or sales volume. Profitability framework Understanding the drivers of the business Qualitative Drivers: On the revenue side, qualitative drivers include: Change in Customer: This could include changes in customer preferences, demographics, or behaviors that could impact profitability. Change in Company: Internal changes within the company such as management, strategy, or operational efficiency. Change in Market: External market forces or trends that could affect the industry and the company’s profitability. Change in Competitor: Actions by competitors such as pricing changes, new product introductions, or changes in market share that could impact the company's profitability. On the cost side, qualitative drivers include: Change in Supplier: Changes related to the suppliers of raw materials or goods that could affect the costs. Change in Manufacturer: Adjustments or changes in the manufacturing process or entities that could influence production costs. Change in Distributor: Variations in distribution channels or partners that could affect the cost to market. Change in Retailer: Changes at the retail level that might impact the cost structure or sales volume.
- 10. Business lifecycle Overview of the business lifecycle Stage 4: Mature Growth Sales: Continue to grow, but the rate slows as the company reaches more of the market. Operating Costs: Growth in costs stabilizes or slows, efficiency improvements may be realized. Net Profit: Increases as sales grow and cost efficiencies are found. CEO Focus: Maintaining growth, market leadership, innovation, and exploring new markets or products. Stage 5: Mature Stable Sales: Plateau or have modest growth as the company has saturated its existing markets. Operating Costs: Well-managed and predictable. Net Profit: Stabilizes at a healthy level if the company manages costs effectively. CEO Focus: Preserving the core business, managing for efficiency, and paying dividends or returning value to shareholders. Stage 6: Decline Sales: Begin to decline as products/services become outdated or market conditions change. Operating Costs: May become a larger percentage of sales; cost-cutting becomes a focus. Net Profit: Declines, potentially becoming negative if sales decrease faster than costs can be reduced. CEO Focus: Identifying new growth areas, restructuring, and managing decline to minimize losses. The business lifecycle image with additional components of sales, operating costs, net profit, and the CEO focus for each stage would present a comprehensive view of a company’s growth trajectory and management strategies. Here's an overview: Stage 1: Start-up Sales: Minimal to none, as the business is just getting established. Operating Costs: High relative to sales due to initial investment and setup costs. Net Profit: Likely negative, as initial sales are not enough to cover high operating costs. CEO Focus: Vision setting, securing funding, and establishing a customer base. Stage 2: Young Growth Sales: Growing as the business starts to gain traction in the market. Operating Costs: Continue to be high but are now balanced by increasing sales. Net Profit: May still be negative or break-even as the company reinvests in growth. CEO Focus: Building brand recognition, expanding market reach, and managing growth sustainably. Stage 3: High Growth Sales: Rapidly increasing as the company’s products/services gain market acceptance. Operating Costs: Scaling, but ideally growing at a slower rate than sales. Net Profit: Positive earnings begin to emerge as sales growth outpaces the increase in operating costs. CEO Focus: Optimizing growth, managing operational scalability, and ensuring profitability.
- 11. Value Proposition Overview of value propositions The value proposition is essentially the promise of value to be delivered to the customer. It is a clear statement that explains how a product solves customers' problems or improves their situation (relevancy), delivers specific benefits (quantified value), and tells the ideal customer why they should buy from this company and not from the competition (unique differentiation). Key Points: 1. Customer-Centric Solutions: The value proposition is centered around solving customer problems or fulfilling their needs and wants. 2. Assessing Demand: It involves evaluating the market demand for the product or service and identifying early trends that could impact its success. 3. Differentiation from Fads: Distinguishing between durable trends that can sustain a business model and temporary fads is essential. 4. Gathering Information: Collecting extensive information about customer interests is vital to shaping the value proposition. 5. Complexity and Research: Crafting a value proposition can be intricate, requiring in-depth research into the product creation process. 6. Benefit-Risk Analysis: Understanding the benefits and risks associated with the product is part of developing the value proposition. 7. Expert Consultation: Often, the expertise of specialist consultants is necessary to navigate complex technological aspects. 8. Standardization and Scalability: Consideration of whether the product can be standardized and scaled is crucial to its long-term viability. 9. Consumer Acceptance: Anticipating and addressing any potential consumer resistance is important to ensure market adoption. Understanding the adoption rate The rate of adoption follows a bell curve and is segmented into different categories of consumers, each representing a stage in the diffusion process. The pace can vary widely depending on various factors including the nature of the product, market readiness, consumer attitudes, and the effectiveness of dissemination strategies. Key Points: Innovators (2.5%): This group is the first to adopt a new technology or product. They are willing to take risks and are often seen as the 'tech enthusiasts'. Early Adopters (13.5%, totaling 16% when combined with Innovators): Representing a larger segment, these are the individuals who are quick to embrace innovation after the innovators. They are usually opinion leaders and have a significant influence over the subsequent groups. Early Majority (34%, totaling 50% when combined with previous groups): This segment adopts new technology before the average person. They typically need to see that the technology is proven and beneficial before they are willing to use it. Late Majority (34%, totaling 84% when combined with previous groups): More skeptical and slower to adopt than the early majority, this group often adopts a new product mainly because of peer pressure or the result of increasing market saturation. Laggards (16%, totaling 100% when combined with previous groups): The last to adopt a new product, these individuals are the most resistant to change. They may only adopt a new product out of necessity or when all alternative options are no longer available. Practical tips 1. Validate your market early: research, survey, create a minimum viable product (MVP) to test the market. 2. Focus on cash flow management: keep track of expenses, invoicing promptly, and have a clear view of upcoming payables and receivables. 3. Build a strong network: connect with mentors, advisors, peers, and industry professionals through networking events, groups, and co-working spaces.
- 12. Customer markets Business to customer (B2C) In the business-to-consumer market, companies strive to meet a diverse array of customer needs that span from basic functional needs to more complex emotional, life-changing, and social impact needs. The Elements of Value Pyramid captures these needs across four levels: 1. Functional Value: At the base of the pyramid, this level addresses practical and direct benefits such as saving time, simplifying tasks, making or saving money, reducing risk, and providing sensory appeal. 2. Emotional Value: Moving up the pyramid, the emotional value includes aspects that affect how consumers feel when they use a product or service, like reducing anxiety, offering rewards, nostalgia, design aesthetics, and badge value. 3. Life-Changing Value: This layer encompasses elements that have a more significant impact on the consumer's life, such as providing hope, facilitating self-actualization, motivation, heirloom (suggesting legacy), and creating a sense of affiliation or belonging. 4. Social Impact Value: At the top of the pyramid, social impact refers to the broader effect of a product or service on society, including self-transcendence or contributing to the welfare of others. Key Points: 1. Tailoring Offerings: Companies can tailor their offerings to include multiple elements from this pyramid to create a compelling value proposition for their customers. 2. Customer Loyalty: Products and services that deliver higher up the pyramid tend to foster stronger customer loyalty and emotional connections. 3. Differentiation: By identifying and focusing on specific elements of value that are most relevant to their customer base, businesses can differentiate themselves in a crowded market. 4. Revenue Growth: There is a correlation between the breadth of values provided and a company's ability to grow its customer base and revenue. 5. Strategic Focus: The pyramid can serve as a strategic tool for businesses to identify potential areas for innovation and improvement in their product and service offerings.
- 13. Customer markets Business to customer (B2B) In B2B markets, the value proposition extends beyond the product or service itself and includes additional dimensions that can influence a business customer's decision to engage with a supplier. The elements of value in this context are designed to meet professional and company-level needs, emphasizing operational efficiency, strategic advantage, and individual employee benefits. Key Points: Table Stakes: Fundamental aspects like meeting specifications, acceptable price, regulatory compliance, and ethical standards are considered essential for any B2B interaction. Functional Value: This includes economic benefits like cost reduction and improved top line, as well as performance factors such as product quality, scalability, and innovation. Operational Value: Streamlining operations is key, with elements such as time savings, effort reduction, organization simplification, and risk reduction being pivotal. Ease of Doing Business Value: Features that make it easier for businesses to work with each other, such as transparency, availability, variety, and configurability, are highlighted here. Individual Value: On a personal level, B2B offerings can also provide value to individuals within a business through career development, network expansion, and personal growth. Inspirational Value: At the highest level, B2B companies seek to inspire through purpose-driven values such as a shared vision, hope, and social responsibility.
- 14. Customer Segments Overview of customer segment The goal of customer segmentation is to identify high-yield segments — that is, those segments most likely to be profitable or that have growth potential. By understanding the different segments, businesses can deliver more targeted and effective marketing messages, which can lead to increased sales, better customer retention, and improved customer satisfaction. Key Points: Demographic Segmentation: Separates customers based on demographic factors such as age, gender, income, education, and family size. It's one of the simplest and most widely used forms of segmentation as these data are easy to obtain and measure. Geographic Segmentation: Groups customers based on their location, such as country, region, city, or neighborhood. Geographic segmentation is important for businesses as consumer preferences can vary widely based on where they live. Psychographic Segmentation: Divides the market based on lifestyle, personality traits, values, opinions, and interests of consumers. It is more challenging to measure but can lead to very targeted marketing strategies. Behavioral Segmentation: Categorizes customers based on their interaction with a brand and their behavior, such as purchasing habits, spending habits, user status, and brand interactions. This form of segmentation looks at patterns of behavior to understand needs and potential desires. Needs-based Segmentation: Identifies and targets segments based on the specific needs and wants of customer groups. It is often derived from a deeper understanding of customer jobs to be done, their pain points, and how they use a product or service. Value-based Segmentation: Focuses on the segment’s overall profitability and values customers based on their economic value to the business. It is a strategic approach that looks at which customers are likely to be the most valuable over time. Framework to market size Creating a methodology to estimate market size involves a multi-step process that refines the broad concept of a potential market into the more focused target and penetrated markets. Here’s a step-by-step methodology based on the definitions provided: Define the Potential Market: Identify the broadest population of consumers who have shown a sufficient level of interest in the product category. This can involve analyzing search trends, market surveys, and industry reports to quantify the number of consumers who might consider the product. Determine the Available Market: From the potential market, identify the subset of consumers who not only have the interest but also the financial means (sufficient income) and access to the product. This step may require demographic data analysis, income distribution studies, and distribution channel assessment. Assess Accessibility and Restrictions: Refine the available market by accounting for any legal, regulatory, or company-imposed restrictions that limit who can be sold the product. This requires a detailed understanding of market regulations and company policies. Identify the Target Market: Segment the available market further to define the target market — the segment that the company intends to actively pursue. Use market segmentation techniques, such as demographic, psychographic, behavioral, and needs-based segmentation, to identify the most attractive segments in terms of size, growth potential, and alignment with the company’s capabilities. Evaluate the Penetrated Market: Analyze sales data and customer records to understand the size of the penetrated market — those who are already purchasing the product. This will involve sales analysis, customer database mining, and market share assessment. Calculate Market Size: Estimate the market size at each stage using the following: Total Addressable Market (TAM): The revenue opportunity available for a product or service, calculated by multiplying the total number of potential customers by the average revenue per user (ARPU). Serviceable Available Market (SAM): The segment of the TAM targeted by your products and services which is within your geographical reach. Serviceable Obtainable Market (SOM): The portion of SAM that you can capture, considering competition and real-world constraints. Conduct a Continuous Review: Regularly update and refine these estimates as new information becomes available about consumer behavior, market trends, income levels, access to technology, and competitive landscape changes.
- 15. Customer Channels Overview of customer segment The journey of a product from production to end customer involves several interconnected channels, each with its specific type of flow. Together, these flows ensure that products are delivered, sales are negotiated, payments are processed, information is exchanged, and promotional messages are disseminated. Optimizing these flows can enhance customer satisfaction, streamline operations, and improve profitability. Key Points: Physical Flow: Definition: The actual movement of goods from the manufacturer to the end consumer. Importance: It involves logistics, warehousing, inventory management, and distribution. Objective: To deliver products in a timely, cost-effective manner while maintaining quality. Negotiation Flow: Definition: The interactions and processes that lead to the transfer of ownership from seller to buyer. Importance: This includes sales negotiations, order management, and contractual agreements. Objective: To ensure clear, mutually beneficial terms of sale that are legally sound. Payment Flow: Definition: The transfer of funds from buyer to seller in exchange for goods or services. Importance: It encompasses billing, collections, payment processing, and credit management. Objective: To ensure smooth, secure, and efficient handling of all financial transactions. Informational Flow: Definition: The exchange of information related to the product, order, customer feedback, and more. Importance: It's critical for order tracking, customer support, and sharing product information. Objective: To keep all stakeholders informed and enable data-driven decision-making. Promotional Flow: Definition: The dissemination of marketing communications to build product awareness and persuade customers. Importance: Involves advertising, sales promotions, public relations, and personal selling. Objective: To generate demand, create brand loyalty, and inform customers of offers. Practical tips to optimise supply chain Optimizing supply chain efficiency is crucial for reducing costs, improving speed, maintaining product quality, and enhancing customer satisfaction. Here are five practical tips for achieving this: Implement Lean Inventory Practices: Adopt Just-In-Time (JIT) inventory management to reduce waste and lower storage costs. This involves keeping only the inventory you need, precisely when you need it. Employ tools like demand forecasting and inventory optimization software to refine your inventory levels. Leverage Technology and Automation: Invest in supply chain management software to streamline operations, from inventory management to order processing. Automation can also include the use of robotics in warehouses or the application of AI for better demand forecasting and route planning. Enhance Supplier Relationships: Cultivate strong relationships with a network of reliable suppliers. Consider strategic partnerships or agreements to ensure preferential treatment and reliability. Regularly assess supplier performance to ensure they meet quality and delivery standards. Optimize Transportation and Logistics: Evaluate your transportation strategy to identify cost-saving opportunities, such as consolidating shipments, optimizing routing, or switching to more efficient modes of transport. Regularly renegotiate contracts with carriers to ensure you're getting the best rates and service. Continuous Improvement Culture: Encourage a culture of continuous improvement within your organization. Use metrics and key performance indicators (KPIs) to track supply chain performance. Conduct regular audits and encourage feedback from staff at all levels for insights on how to improve processes.
- 16. Customer Relationships Overview of customer Relationships In the current business landscape, companies prioritize establishing and nurturing long-term profitable relationships with customers across B2B, internal, and consumer markets. The cornerstone of this approach is enhancing customer value, which in turn drives customer loyalty and retention. The rationale is that retained customers tend to contribute more to a company's profits over time, not only through increased spending but also through full-price purchases and lower operating costs due to streamlined transactions. Key Points: Customer Value Focus: Developing customer relationships is predicated on consistently delivering value that meets or exceeds customer expectations, which is fundamental for retention and loyalty. Benefits of Retention Marketing: Retention strategies are cost-effective compared to acquisition strategies, as loyal customers are more likely to repeat purchases and are less price-sensitive, often buying at full margin. Growth of Customer Profitability: Over time, as trust between the customer and the company grows, so does the likelihood of customers purchasing more products or services, increasing their lifetime value to the company. Efficiency Gains: Long-term customers become more familiar with a company's processes, which can lead to smoother transactions and operational efficiencies. Pareto Principle in Profits: Often, a large portion of a company’s profits comes from a relatively small fraction of its customers, as illustrated by the 80/20 rule, where 80% of the profits may come from just 20% of existing customers. Practical tips to improve relationships Personalize Your Interactions: Tailor your communication and services to meet the individual needs and preferences of each customer. Use customer data to understand purchasing habits and preferences, and address your customers by name. Personal touches can make customers feel valued and increase loyalty Implement a Customer Feedback Loop: Regularly solicit feedback from your customers through surveys, social media, or direct conversations. More importantly, act on the feedback you receive. Let customers know what changes you have made based on their suggestions to demonstrate that their input is valued. Provide Excellent Customer Service: Train your customer service team to handle inquiries and issues efficiently and empathetically. Ensure that your customer service is accessible through multiple channels (phone, email, live chat, social media) and that response times are quick. Engage Beyond Transactions: Build relationships with your customers that aren't solely transaction-based. Engage with them through educational content, social media interaction, community events, or loyalty programs. Consistent positive engagement can reinforce their connection to your brand. Reward Loyalty: Create a loyalty program that rewards customers for repeat business. This could include discounts, early access to new products, or exclusive deals. Recognizing and rewarding repeat customers can encourage ongoing business and turn customers into brand advocates.
- 17. Customer Relationships Overview of customer acqusition costs (CAC) & life time value (LTV) Customer Acquisition Cost (CAC) and Customer Lifetime Value (CLV) are two critical metrics used to assess the profitability and sustainability of a company's customer relationship strategy. Customer Acquisition Cost (CAC): This metric represents the total cost of acquiring a new customer, including all marketing and sales expenses over a given period. It's a critical measure in determining the investment required to expand the customer base and is key to understanding the return on marketing investments. Customer Lifetime Value (CLV): This metric estimates the total revenue a business can reasonably expect from a single customer account throughout the business relationship. It factors in the customer's revenue contribution, margin, and the projected duration of the business relationship. Key Points: Importance of Balance: It's crucial to balance the CAC with the CLV. A sustainable business model typically sees a CLV that is significantly higher than the CAC. CAC Calculation: To calculate CAC, divide the total costs of acquisition (including marketing and sales costs) by the number of new customers acquired in the period the money was spent. CLV Calculation: CLV is calculated by multiplying the average purchase value by the number of transactions and the retention time period for the average customer. This figure can be refined by accounting for the cost of goods sold and discount rates. Improving Efficiency: Reducing CAC while maintaining or increasing CLV is a common goal. This can be achieved by improving conversion rates through targeted marketing, enhancing the sales process, or increasing customer retention rates. Retention Over Acquisition: Focusing on customer retention can be more cost-effective than acquisition. Increasing CLV through upselling, cross-selling, and improving customer loyalty often yields better returns than the constant pursuit of new customers. Practical tips to improve LTV/ CAC ratio Enhance Customer Retention: Implement loyalty programs, personalized communication, and exceptional customer service to retain customers for longer periods. The longer a customer stays with your company, the greater their lifetime value becomes. Increase Average Order Value: Use up-selling and cross-selling strategies to encourage customers to purchase more expensive items or additional products. This increases the revenue generated from each customer, which can significantly boost the LTV. Optimize Marketing Spend: Analyze the effectiveness of different marketing channels and focus on those that provide the highest quality customers at the lowest cost. Refine targeting strategies to attract customers who are more likely to have a high lifetime value. Improve Customer Experience: Invest in customer experience improvements to differentiate your brand and create more value for your customers. A superior customer experience can lead to higher satisfaction, increased referrals, and reduced churn, all contributing to a higher LTV. Streamline the Sales Process: Reduce friction in the sales process to improve conversion rates. A more efficient sales process can lower the CAC by closing more sales with the same or less investment in sales and marketing efforts.