Measuring your Startup: Unit Economics, CAC and CLTV

During my studies at ThePowerMBA I was introduced to the concept of Unit Economics. The main goal is to define clear metrics to measure the performance of our business, including the measurement of our costs, our revenues and our profits.

I will present below the main metrics, with a brief explanation for each, and then discuss my personal experience at my own startup company, KashKlik, an innovative Influencer Marketing platform.

Measuring Costs

CAC

The Customer Acquisition Cost (CAC) measures how much we are spending to acquire a new customer. In order to calculate the CAC, for a given period of time, we must know how much was spent on acquiring new customers and how many customers did we acquire.

Customer Based Calculation (CAC):

Total acquisition costs ( time ) / # of new customers per ( time )

We can also calculate the cost per action performed by the customers, which in general is the amount of money we need to spend in order to generate a sale or some other form of conversion (such as a registration or a subscription to our services).

Sales Based Calculation (CPA, “cost per action”):

Total acquisition costs ( time ) / # of new sales per ( time )

Measuring Revenues

CLTV

The Customer Lifetime Value (CLTV) measures how much total value we are getting from every customer. In other words, the CLTV measures the total value that one customer generates over their lifetime as a customer.

CLTV Calculation:

“lifetime” revenues per customer X Gross margin (%)

ARPU

The Average Revenue Per User (ARPU) measures how much revenue we are getting from a customer in a certain time period. The ARPU is a key metric in recurring revenue models.

Calculating the ARPU:

Revenue (per time period) / # of users (per time period)

CHURN RATE

The Churn Rate measures how many customers (percentually) we are losing in a period of time. The Churn Rate is also a very important metric in recurring business models.

Calculating the Churn Rate:

# of customer lost (in the period) / # customers at the start of the period

Measuring Profitability

CLTV – CAC

The difference between the CLTV and the CAC enables us to calculate how much profit we make off of each customer. By increasing this difference, we make our business more profitable.

CLTV / CAC

The ratio between the CLTV and the CAC enables us to calculate how much we multiply our acquisition investment by. This ratio represents our return on CAC investments.

CAC PAYBACK

The CAC Payback measures how long it takes to make back our CAC investment. This is the average amount of time that passes between investing money in CAC (acquiring customers) and getting it back.

The CAC Payback may be calculated as:

CAC / ARPU

The Unit Metrics in Practice

Measuring Costs in Practice

As we defined above, the CAC is a very important metric, and if we are not measuring the CAC we cannot even be sure if our business is profitable (since all the profitability metrics are related to the CAC). However, in practice, there may be multiple customer acquisition channels, and we should be able to measure the CAC for each one of these channels.

For example, one channel may be campaigns on Google AdWords, a second channel may be Facebook Ads and a third channel may be Influencer Marketing campaigns. Each one of these channels will probably have a different CAC, and so we should develop mechanisms to be able to measure it precisely. In other words, we should track where our customers are coming from, and have specific CAC measures per channel, instead of a single generic CAC value.

After we have clear CAC measurements, and we observe that some channels are more expensive than others, we have basically two choices:

  • Continue using only the channel that provides us the cheapest CAC, and stop using the other channels that are more expensive.
  • Try to improve the performance of the more expensive channels, through fine-tuning of the campaign parameters and the targeting.

Measuring Revenue in Practice

In general in order to measure the CLTV we should use several other metrics that depend on the behavior and the kind of transactions being performed by our customers. These are some of the metrics we may need in practice in order to obtain the CLTV:

  • What is the expected lifetime of our customers? For how long do we expect that our customers will be active?
  • What is the observed frequency of transactions? How many transactions do our customers perform in a specific period of time?
  • What is the average amount of money each customer spends on each transaction?

So for example if we measure that the average lifetime of our customers is 10 months, and that they perform transactions twice per month, spending in average U$ 35 per transaction, their CLTV will be: 10 X 2 X 35 = U$ 700

In practice, it may be necessary to do this analysis by separating our customers in different segments. We may discover that we have one customer segment with a very high CLTV while another segment has a much lower CLTV. Then, we should observe which one of these segments is growing faster, and check if the different segments are growing at similar rates.

One common problem for startup companies is that they are able to attract early adopters that are enthusiastic about their product, and thus have a very high CLTV. However, when they try to expand to other customer segments, they discover that these new customers have a very different behavior than the early adopters, and as a consequence a much lower CLTV.

Measuring Profits in Practice

Our profitability metrics are based on relationships between the CAC and the CLTV, but as we observed above, in practice the CAC may be very different depending on the channel being used for customer acquisition, and the CLTV may be very different depending on the customer segment being measured.

So ideally we should try to build a matrix to measure the profits depending on both the customer acquisition channel and the customer segment.

Below I give you an example of 3 acquisition channels and 3 customer segments with the respective profitability computation.

The first table has the CAC per acquisition channel:

Customer Acquisition ChannelCAC
Google AdWordsU$ 10
Facebook AdsU$ 12
Influencer MarketingU$ 18

The second table has the CLTV per customer segment:

Customer SegmentCLTV
Enthusiastic UsersU$ 120
Regular UsersU$ 80
Low-Frequency UsersU$ 40

The third table has the user segments per acquisition channel:

Acquisition ChannelEnthusiasticRegularLow-Frequency
Google AdWords10%60%30%
Facebook Ads20%60%20%
Influencer Marketing40%50%10%

Then we can compute the profit per acquisition channel:

Acquisition ChannelWeighted Average CLTVCACCLTV – CAC
Google AdWords0.1×120 + 0.6×80 + 0.3×40 = U$ 72U$ 10U$ 62
Facebook Ads0.2×120 + 0.6×80 + 0.2×40 = U$ 80U$ 12U$ 68
Influencer Marketing0.4×120 + 0.5×80 + 0.1×40 =  U$ 92U$ 18U$ 74

As you can see in the example above, when we make a detailed analysis taking in consideration the different acquisition channels and the diverse customer segments, we may discover that the most expensive channel is also the most profitable one, because the customers we are acquiring through this channel have a much higher CLTV.

Conclusions

I hope you have enjoyed this discussion about the practical usage of unit metrics such as the CAC and the CLTV, and that my example above has motivated you to try to measure these metrics as accurately as possible. Please feel free to share your personal experience in the comments below.

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Applications of Machine Learning INDT Webinar

This week I had the pleasure to be invited by the INDT (National Institute for Technological Development) in Brazil to participate in a webinar about Artificial Intelligence (in Portuguese).

In the slides and video below, I present several applications of Machine Learning and their impact on our lives, including Recommender Systems and Autonomous Vehicles, with several examples of recent innovations in the fields of Industry, Health and Agriculture.

Applications of Machine Learning – INDT Webinar from Hayim Makabee

Here is the video of the talk (in Portuguese):

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Angles of Analysis: KashKlik Case Study

During my studies at ThePowerMBA I was introduced to the concept of Angles of Analysis, which are the aspects we should consider whenever we analyze a business model.

The main goals of this analysis are:

  • Be able to analyze the business model methodically.
  • Understand hidden or subtle aspects of the business model.
  • Catch problems or missing details in order to plan ahead.

I decided to make a short exercise to check how these Angles are reflected in the business model of my own startup company, KashKlik (an innovative Influencer Marketing platform).

Below you see a short description of each Angle of Analysis and its respective evaluation for the KashKlik business model.

Is the market big enough?

Knowing the market size for your product or service is essential to predict your growth potential.

In the case of KashKlik we researched the market (in 2016) and reached these numbers:

  • The Digital Ad Spending (total advertiser budgets for digital advertising) was higher than 150 Billion Dollars (globally), and a growing part of this budget was being invested in Influencer Marketing.
  • The total number of micro-influencers in the different Social Networks was higher than 250 million people (globally) including an estimated 75 million at Facebook and 60 million at YouTube.

Can you reach the market in a sustainable way?

The question here is if the company has the right marketing and distribution channels in place to grow, what is also called an “Engine of Growth” (a repeatable, stable way to grow).

In the case of KashKlik, this was our planned Marketing Strategy (in 2016):

Sales efforts:

  • Partnerships with Digital Marketing Agencies to acquire several advertisers through a single contact point.
  • Direct contact with potential advertisers through our Regional Managers.
  • Participation at professional conferences and meetups.

Content-driven growth:

  • Publications of professional reviews about KashKlik on Digital Marketing media outlets.
  • Inbound marketing: bring traffic to KashKlik’s site through the publication of professional articles on our blog.
  • Creation of marketing material such as infographics and presentations.
  • Search Engine Optimization (SEO).

Paid promotions:

  • Marketing campaigns of KashKlik on Google AdWords, Facebook, Twitter and other Social Networks.
  • Bootstrap campaigns in which the influencers can promote KashKlik itself.
  • Affiliate campaigns in which influencers are paid when they bring new users to the platform.
  • Email marketing campaigns, acquiring lists of email addresses of potential customers.

Organic growth:

  • Active presence on Social Media, sharing useful material about Influencer Marketing.
  • Daily reach to thousands of real followers on Facebook, Twitter and other Social Networks.
  • Email newsletters to our users and to subscribers of our blog.

Is it important to customers?

Here the question is what is your value proposition and if you are solving a real problem.

In the case of KashKlik, our value proposition is:

  • For advertisers: provide a new channel to promote their campaigns.
  • For influencers: provide a new source of income (be paid to promote campaigns).

Are you customers happy and returning?

The idea here is to measure if our customers are satisfied and if they are coming back.

In the case of KashKlik we validated our platform by initially running several pilot campaigns and asking about the satisfaction of both our advertisers and our influencers. Later, with a higher volume of campaigns and more active influencers, we also started collecting metrics, such as the average number of campaigns being promoted per influencer.

Is it difficult for customers to leave you or switch?

The question here is if the service you provide has a lock-in effect (switching costs), in the sense that it is difficult for your customer to switch from your service to the competition.

In the case of KashKlik, when the top influencers promote campaigns, they gradually build a history of positive achievements with high performance scores. This success history will give them access to the best campaigns in the future. Thus our top users have a clear and concrete incentive to continue using the platform.

Do you have recurring revenue streams?

Here the question is if the company may benefit from repeat transactions from the same customer.

In the case of KashKlik, we clearly observed that the advertisers that were satisfied with the performance of their campaigns would promote new campaigns, generating recurring revenue.

What kind of margins do you have?

This aspect focuses on the company’s profit margins.

In the case of KashKlilk, we get a 20% commission on top of the budget for each campaign, which is mostly profit because we have low fixed costs.

Are you generating cash flow?

The question here is if the company’s cash flow is stable and predictable.

At KashKlik we adopted a policy in which the advertiser must pay for the campaign before it starts, but we only pay to the influencers after the campaign finishes. This mechanism has created a very positive and safe cash flow.

Is your business model scalable?

Scalability is the ability of a business model to grow considerably, rapidly, and with increasing margins (the revenues grow more than the expenses).

At KashKlik we have created a fully-automated Influencer Marketing platform based on advanced Machine Learning algorithms. This high level of automation assures that we are scalable, with very low fixed costs.

Do you have any barriers of entry?

A barrier to entry is anything that protects you from potential competitors.

In the case of KashKlik, our main protection against the competition are our proprietary Machine Learning algorithms, which were developed based on many years of personal experience in the field of Computational Advertising.

Have you reached product-market fit?

The goal here is to find a clear fit between the market and your value offer.

At KashKlik we were able to validate our product during the several pilots we executed with different types of advertisers. It is clear for us now that there is a real demand for our solution, both on the advertiser side and on the influencer side.

Conclusions

I really enjoyed doing this analysis. As I wrote in a previous post, when I joined ThePowerMBA, I had the goal to apply what I would learn to my own startup company. Now I feel that I’ve started doing that, so I’m already benefiting from what I’m learning.

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Planning Your Aliyah

This week I was invited by the Jewish Agency to give an interview about Aliyah (immigration to Israel according to the Law of Return). In particular I spoke about Kiriat Yam, the city where I live. Many Brazilian Olim (new immigrants) come to Kiriat Yam because of our Mercaz Klitah (Absorption Center).

I have been working as a volunteer for more than 5 years helping new Olim, and in this interview I share my main observations about their challenges and the most effective ways to guarantee a successful Aliyah.

The interview was in Portuguese and was broadcasted as an Instagram Live Event:

View this post on Instagram

A post shared by Agencia Judaica (@agenciajudaica) on Oct 19, 2020 at 12:58pm PDT

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Applications of Machine Learning

Last month I had the pleasure to be invited by the Brazil-Israel (BRIL) Chamber of Commerce to participate in a webinar about Artificial Intelligence (in Portuguese).

In the slides and video below, I present several applications of Machine Learning and their impact on our lives, including Recommender Systems and Autonomous Vehicles.

Applications of Machine Learning from Hayim Makabee

Here is the video of the talk (in Portuguese):

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Starting-Up with ThePowerMBA

During this Corona Pandemic, lots of people have decided to use their free time at home to do studies online. According to TheGuardian “increasing numbers of people are using the time to build their skillset, with an upsurge in enrolments on online learning platforms”.

I also decided to invest my time to learn new subjects online. As I wrote in a previous post about Continuous Learning: “Everything we know, including our professional skills, is rapidly becoming obsolete. This means that it’s not enough to work. We must be constantly updating our knowledge and acquiring new skills.”

After some investigation, my choice was ThePowerMBA. My background is in the field of Computer Sciences, but as an entrepreneur and CEO of my own startup company (KashKlik) it is important for me to learn more about Business Management, and in particular the topics that are more relevant for startup companies.

The Curriculum of ThePowerMBA has lots of subjects which are extremely relevant for startups:

  1. Business Model Innovation
  2. The Lean Startup
  3. Strategy & Business Fundamentals
  4. The Power of Being a (Real) Marketer
  5. Entrepreneurship
  6. Leadership
  7. Management Skills & Tools
  8. Finance & Accounting
  9. Disruptive Tech in Business

I think it is very important for new entrepreneurs to learn all these topics, which will certainly have a direct and immediate practical application in their startup companies. As I wrote in a previous post: “When you are the founder of a startup company you have to do many things that you have never done before, and many of these things are difficult. Actually, most things you are doing as an entrepreneur would have been difficult even for someone who has experience doing them.”

For example, the first module about Business Model Innovation covers the Blue Ocean Strategy (among other things). I read the Blue Ocean book when we were planning the features of our influencer marketing platform, and it was really inspiring. I have recently published a post in which I describe our experience applying the principles of the Blue Ocean Strategy at KashKlik.

Another topic I’m enthusiastic about is the Lean Startup. I read the Lean Startup book by Eric Ries several years ago, and since then the Build-Measure-Learn feedback loop has become an integral and essential part of every new project I execute. I’m excited that Eric himself is a contributor to the materials in ThePowerMBA classes.

But of course the ThePowerMBA curriculum also has several topics that I really need to learn more about. For example the module about Strategy & Business Fundamentals covers Industry Analysis, Competitive Strategies, Marketing Basics and Corporate Growth Strategies. These are very interesting subjects that I never really had the opportunity to study, because all my academic formation is in the field of Computer Sciences. In practice, I’m a technical CEO, and thus I lack this business background.

Another module which I’m sure will be very important for me is the one about Finance & Accounting. This module covers Accounting Fundamentals, Financial Statements and Analysis and Valuation (Investments and Companies). Unfortunately I still feel that I’m very ignorant about these subjects, so this will be a great opportunity for me to learn more about them. Of course to perform well as the CEO of a startup company I must also be able to understand all the financial aspects. This is even more important in our case, because KashKlik is already a global company, doing business with customers in several continents, and with diverse sources of revenue.

I’m excited to be learning these new disciplines, but what is even better is that, in the case of ThePowerMBA, I’m sure that I’m going to put these new skills in practice. I believe that if we really want to understand a new subject, we must be able to apply the new concepts that we are learning. Thus it’s simply fantastic that I’m going to do a course with so many relevant topics that I will be able to immediately use in my own startup company.

I decided to share with you (my readers) the main insights I will get from this course, and thus in the next months I will be posting here regularly about what I’ve learned. I’m sure it will be a great way to grow while we must stay mostly at home.

Posted in Agile, Efficacy, Lean Development, Startups | Tagged , , , | 2 Comments

Blue Ocean Strategy: KashKlik Use Case

I read the Blue Ocean book when we were planning the features of our influencer marketing platform, and it was really inspiring.

The Blue Ocean Strategy “presents a systematic approach to making the competition irrelevant and outlines principles and tools any organization can use to create and capture their own blue oceans.”

As summarized in the Wikipedia article about the book, it “presents analytical frameworks and tools to foster an organization’s ability to systematically create and capture ‘blue oceans’—unexplored new market areas.”

The authors analyzed the correlation of success stories across industries in order to formulate their innovation strategy.

In the slides and video below, I explain how we applied the Blue Ocean Strategy to plan the main features of the KashKlik platform and its business model.

Blue Ocean Strategy: KashKlik Use Case from Hayim Makabee

Here is the video of the talk (in English):

Posted in KashKlik, Startups | Tagged , | 1 Comment

Panel: Israeli Innovation at HackingRio

HackingRioI had the pleasure to be invited to speak at the HackingRio virtual conference in Rio de Janeiro. I participated in a panel about Israeli innovation together with my friends Ricardo Hechtman, Beny Rubinstein, Marcelo Treistman and Ricardo Lomaski.

Here is the video of the event (in Portuguese):

Special thanks to the HackingRio team that invited us and coordinated the panel: Lindalia Sofia Junqueira Reis, Rodolfo P. Lopes. and Bruna Petit.

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Gvahim Webinar: Managing Your Reputation

I was recently invited by Gvahim to present a webinar to a group of Olim (new immigrants) in Israel. In this talk I shared useful guidelines about how to manage and develop your personal reputation. I focused on providing practical advice about how to create opportunities by generating value to the people in your professional network.

You can see my slides and video below.

Here is the video of the talk (in English):

Special thanks to Gvahim and Limor Schwartz, who organized the event and invited me to give this talk.

Posted in Efficacy, Israel, Social Networks | Tagged , , | Leave a comment

Automated Machine Learning

This week I was invited to give a talk at the Haifa Tech Talks meetup. In this talk I presented an introduction to Automated Machine Learning (Auto ML).
I discussed some approaches to face the challenges of Auto ML, including Data Preprocessing, Hyperparameter Tuning and Algorithm Selection.
I also presented two popular tools for Auto ML: Auto-sklearn (based on Bayesian Optimization) and TPOT (based on Genetic Algorithms).

About the speaker:
Hayim Makabee has 25 years experience with Software Development, and in the last 10 years has specialized in the field of Data Science.
He is currently the CEO at KashKlik, an advanced Influencer Marketing platform.
Hayim provides consultancy and mentorship to startup companies in the fields of Machine Learning and Predictive Analytics.

You can see my slides and video below.

Here is the video of the talk (in Hebrew):

This talk was hosted by the Haifa Tech Talks meetup group. Special thanks to Roman Levin who organized the event.

Posted in Data Science, Machine Learning, Research | Tagged , , | 1 Comment