A Retailistic View on CAC and LTV
by Jango – originally shared on jango.eth.limo
The Software-as-a-service business world loves to consider the cost per acquisition of a customer (CAC) and compare it to the lifetime value of that customer (LTV). It follows that if LTV > CAC, the business owners make money and can therefor spend money doing work to improve this ratio in order to make more money, etc. The bigger the LTV and the smaller the CAC, the more leverage the business has.
Imagine a software product, virtually free to serve once created. Traditionally, businesses are willing to pay some amount of CAC, say $0.99, to Twitter for showing someone an advertisement who ends up paying an LTV of $1 for access to their software, a $0.01 profit for the business owners. They must do this instead of simply charging $0.01 for the software because the customer would have otherwise never contemplated the exchange. If instead the customer pays the $1 after having been convinced of the software’s benefits from other customers’ posts they see on their feed, the business owners profit the full $1 at the expense of the customers.
Retailistic software distribution encourages growth differently by presuposing a networked environment where participants share the things they like with one another, help one another learn how to use things, and troubleshoot problems together. Instead of treating CAC as an input that yields LTV — i.e. spending less-than-$1 on Twitter ads yields a $1 purchase, the “CAC” incurred by the network is paid out at the time the “LTV” is paid in — i.e. the network issues less-than-$1 worth of its $TOKEN to whoever pays in $1.
Now, why would anyone make a fuss about exchanging their $1 for $0.99 back? Isn’t that just like paying the network $0.01? How is this encouraging anyone to spread the word about the software?
The fuel comes from the fact that the $0.01 in profit is being paid to the network owners who are the current $TOKEN holders. Although someone’s newly issued $TOKENs are only redeemable for a less-than-100% rebate at the time of their payment, their $TOKENs begin to be backed by the accumulation of future $0.01 contributions to the network. The more that is paid over time, the more the elder $TOKENs are worth, encouraging the network supporting the software to propegate itself.
Distributing software through a Retailist framework encourages people who appreciate the body of work to pay its fees even when free alternatives are available, since what’s being sold isn’t access to the software-as-a-service, but rather support of the software-as-a-network. At the least, the framework makes for a more compelling donation option for open source. More optimistically, it can supplant how we think about business models and sustainability in a networked world.