The Mathematics of Distribution Customer lifetime value, or CLV Average revenue per user (per month), or ARPU Retention rate (monthly, decay function), or r Average customer lifetime, which is 1 / (1-r) Cost per customer acquisition, or CPA CLV equals the product of ARPU, gross margin, and average customer lifetime. The basic question is: is CLV greater or less than CPA? In a frictionless world, you build a great business if CLV > 0. In a world with some friction and uncertainty, you build a great business if CLV > CPA. Imagine that your company sells second-tier cell phone plans. Each customer is worth $40/month. Your average customer lifetime is 24 months. A customer’s lifetime revenue is thus $960. If you have a 40% gross margin, the customer’s lifetime value is $384. You’re in good shape if it costs less than $384 to acquire that customer. Selling products is not just about perfect information sharing, where you simply provide prospective customers with all the relevant information that they then use to make dispassionate, rational decisions. There is much stranger stuff at work here. But understanding the critical importance of distribution is only half the battle; a company’s ideal distribution effort depends on many specific things that are unique to its business. Resources Peter Thiel’s CS183: Startup – Class 9 Notes Essay by Blake Masters]]>