Business logic of operation: CAC and CLV

We often talk about our hypothetical business model like this: Lao Wang, relying on his ancestral craftsmanship and Internet thinking, plans to open a steamed bun shop in Lujiazui. Lao Wang acquires a customer by charging an average of 100 yuan per person. In the next few months, customers will continue to buy Lao Wang's buns, and the reasonable income will be 500 yuan. If Lao Wang can get 3 million in financing now, this money will buy him 30,000 users. And generate more profits.

We call the 100 yuan for acquiring a new customer CAC, and the subsequent series of payments from the new customer CLV. These are the two simplest indicators in business logic.

If CLV is greater than CAC, Lao Wang's steamed bun shop will be able to continue operating and gain the favor of investors . Then Lao Wang will also reach the peak of his life and become Lao Wang next door.

For any Internet product, the feasibility of the product and its operation can be roughly judged by these two indicators. The COC (Customer Operation Cost) operating cost will also be introduced below.

In order to briefly explain the business logic relationship between CAC/COC and CLV, and illustrate their relationship with operations, I divide Internet products into four periods: incremental period, mature period, harvest period, and decline period. (After finishing the article, I looked back and realized that I could only use the word "Brief Talk" TT)

Incremental period:

Low CAC, low CLV

We often call this period the dividend period. From the Web era to the mobile Internet era, the earliest batch of products have more or less grabbed a lot of user dividends. Although the number of mobile users is much higher now than a few years ago, it is also more difficult to acquire users than in the past.

Looking at different channels, there are early Taobao, early Weibo, early WeChat public accounts and Moments. New developers have huge first-mover advantages, and the cost of acquiring a new user/fan/follower is much lower than it is now. The newcomers eat meat, and the later ones drink soup. That was the spring for early operators.

This is the bonus brought by traffic.

If a product single-handedly taps into user demand to open up a blue ocean market, and it happens that user demand is not met, there will still be a vacuum in the market. Then the CAC of early users will not be too high.

This is a market dividend.

For operations, whether entering the channel early or having the right product on the right track, it is often an opportunity. This model is not very replicable. Even in the current environment, where the Internet has been widely popularized, it is difficult for CAC to drop to the level it was a few years ago.

Operations related:

When a product is in its growth phase, the core operation task is to increase the number of new users and strive to seize the market.

When seizing the opportunity, don’t forget to pay attention to whether the user’s needs are met, so as not to fail in the wrong track.

The incremental period generally means new areas, and previous operating skills and experiences will be challenged and overturned. It depends more on the learning ability and flexible response of operations.

Maturity:

CAC is high, CLV is low

Many products are in the maturity stage when they are first launched.

When a certain model or field proves its feasibility, or simply due to capital enthusiasm, it will attract other players to enter the market, competitors will emerge, and the cake will be divided up.

Sufficient market competition will consume user dividends. Users rarely install two products of the same type; it's a zero-sum game. Whether it is a price war that burns money or a fight for user share, it will cause a sharp increase in CAC. One of the craziest days was between Didi and Kuaidi, Didi and Uber. Even different products in many fields will drive up the overall CAC of the Internet. If you find an advertising company to place an ad, you will never see an Internet finance ad costing 100,000 yuan, while an education ad only costs 1,000 yuan.

Many products that entered the market late have not even had time to enjoy the bonus period before they entered into a fierce operational battle. Only after entering the water did you realize it was a reef.

Operations related:

Reduce and optimize CAC and discover new user channels. For example, if there is a certain user base, we can encourage more dissemination. For example, if advertising is expensive, try more long-tail keywords.

Users may not necessarily choose good products, but they will definitely not choose bad products. Work with PM to polish the product and stand out from the competition.

Your users are more expensive and will remain more expensive, focus on retention and stickiness. Don't let your paid money go to waste.

Don't waste money on useless things. If you can survive a fight a little longer than your opponent, it is also a victory. Meituan is a good example.

Try to operate users accurately and realize user value. More and more Internet companies will no longer rely on occupying land to acquire users and then make money, but will move forward in parallel.

Understand the facts, no matter how well you operate, it is still difficult to shake the advantage of high subsidies.

Harvest time:

CAC+COC is high, CLV is high.

If the mature stage is a competition among many players. Then the harvest time is the coronation of the king. The vast majority of entrants will exit, as high costs and delayed profits are two swords hanging over the wind. Gradually, only one or two giant companies remain in the market, and the early burning of money is no longer sustainable.

The product and users create stickiness. For example, the relationship chain of social products, the membership of e-commerce products, and the user points and level system will allow the users who stay to begin to demonstrate commercial value. That’s why it’s called the harvest time.

Strictly speaking, the importance of CAC will decrease at this time (CAC may also decrease), and operations can shift their focus to operating costs COC, which will continue to increase with the scale of the company and users.

What’s important is CLV, which I like to simplify into three small periods: profit, profitability, and profitability. They correspond to:

Profit: No matter what, as long as there is GMV in turnover, it’s good.

Profitability: CLV>CAC+COC

Profit: Copy the model and expand the boundaries of business.

The requirements for overall operations in these three periods are becoming increasingly higher. Many Internet companies are subject to the C-round curse, which means they fail to survive until their CLV increases, or are unable to increase their CLV.

CAC is a one-time investment, which means that if I spent 100 yuan to acquire this user, then I have spent 100 yuan and there will be no further investment. COC is constantly rising. In theory, as long as users continue to use the product, it is an expense. CLV needs to be accumulated continuously. If I make 10 yuan from a user today and 5 yuan tomorrow, it may take a month for the product to recover the cost. But if users become unhappy and leave the product after ten days, you will still lose money. This complexity is the challenge for operations on the road to commercialization.

Operations related:

Calculate CLV with a relevant model. If you don’t have a model, ask yourself a few questions and focus on the relevant data for these questions. How much money can I make from one user right now? How long will it take to earn back the investment? How many users are there with commercial value? How long will these users continue to use the product?

The operation strategy is completely clear, including user stratification, user grouping, CRM, etc.

No longer focusing only on CAC, the core KPI of operations has become profitability. The number of users is still important, and the level of activity is still important, but neither is as important as CLV.

There is at least one core business profit point. The three most common profit points are advertising, e-commerce, and games . Operations revolve around profit points. For example, e-commerce will look at repurchase rate, shopping cart, SKU, etc., and advertising will look at exposure , CTR, conversion rate , etc.

Many indicators have become unimportant, such as the number of readings of WeChat public accounts ? If the number of readings is linked to advertising, you can pay attention to it. If the number of readings is related to the conversion of subsequent orders, you can pay attention to it. How many times does a single article get read? I'm sorry, few people care. This is very blunt, but operations during this period should understand a lot of data trade-offs.

The product will generate many functions, and these functions will be more or less related to business and require operational promotion. In fact, these commercial functions should be initiated or planned by operations.

The importance of data is becoming increasingly prominent, and corresponding to this is precise operation.

Precision operations also mean reasonable cost control.

Decline:

High COC, low CLV

We always hope that our products will continue to improve, but there will always be a period of decline.

The market is saturated and there is no continuous influx of new users to support the product. There used to be a joke circulating among big companies: How to acquire new users most quickly and efficiently? Just open up a market in a new region/country. In the later stage of product operation , the number of users is just a number. An increase of 1,000 early users may mean a 30% increase in the number of users. Now, an increase of 10,000 users may only mean an increase of 0.1%.

Users will churn at any stage. When the new product has only 10,000 users, the monthly user churn rate is 2%, which means 200 users leave. When a product has 1 million users, a 2% churn rate means 20,000 users. New users are weak, old users are constantly lost, and the user base is facing the risk of shrinking. However, it is very difficult to reduce the churn rate.

Internal challenges continue and costs rise, while externally we face innovations from disruptors or invasions of niche verticals. You can't expect users to use a product for a long time. Operators will find it increasingly difficult to make money from users.

Perhaps the decline of a product will last for a long time, or perhaps the product will never recover when a new trend arrives. There are challenges in operating at any time.

Operations related:

Extend product life, and PM continuously optimizes and improves.

Pay attention to user churn, especially high-value users.

Pay attention to new opportunities. Operations are the people closest to users and they think about how to transform the old.

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