BUSI 103 - Introduction to Business (Chapter 10)
August 4, 2026
Marketing drives demand but hides in the numbers - so how do you tell whether a marketing dollar is an investment that pays, or just an expense to cut?
Read time ~51 min - ~7,632 words - problems ~50 min
Why this matters. Every business has to have customers, and customers do not just show up - money goes out today to win people whose value arrives over years. Most income statements make that spending look like a cost to contain, and managers who read it that way starve the thing that feeds demand.
What you’ll be able to do.
The big ideas.
Key terms. customer lifetime value (LTV), customer acquisition cost (CAC), LTV/CAC ratio, response rate, retention rate, churn, share of wallet, retention marketing, customer success, referral and advocacy loops.
Campus Threads is a student-run clothing rental service that offers short-term wardrobes to college students. They cater to three distinct customer segments with unique rental needs - and the three could hardly be more different.
First, the event goers. These are students who rent formalwear for campus events - formals, weddings, graduations. They need some nice clothes and they’re going to come in for these particular occasions. They don’t want to buy this stuff; they just want to be able to rent it and have nice clothes when the occasion requires it. Retention among event goers is high, about 70%, and students often return after a positive experience when the next event comes up. On average an event goer rents about two outfits per year, at $30 each. Marketing to them looks like distributing fliers at dorms and popular campus locations, especially around big formal events: $1 per contact, with a 15% response rate. Each rental costs $12 to service in variable costs, including the cleaning, the wear and tear, and the packaging.
The trendsetters are more frequent customers. They like stylish outfits for parties, photo shoots, and social media. They value the variety and the uniqueness, but they’re a bit less loyal than event goers because they’re doing a lot of these different things - their retention rate is only 40%, and they’re pretty scrappy about exploring other online rental services or borrowing from friends. Despite the lower retention they rent often, about six times per year, and on average pay about $20 a rental. Reaching them means partnering with Instagram influencers and hosting giveaways: $10 per contact, with a 10% response rate. Variable costs are low, $8 per rental, because the rentals are shorter and the inventory needs are simpler.
The final group are the career climbers - students renting professional attire, like suits and pantsuits, for interviews, career fairs, and presentations. They value affordable access to interview-ready clothes. Their retention is the lowest, 30%, because they often view this as a one-time need. They rent one outfit per year, but at a higher price, about $40 a rental. Campus Threads reaches them through partnerships with the campus career office: $3 per contact, with a 20% response rate. Variable costs are higher, $15 per rental, because of tailored adjustments and higher cleaning costs - everything has to be dry cleaned.
Campus Threads has to figure out which segment the business should prioritize. Three segments, three completely different economics. Hold the question - by the end of this chapter you will have the tools to answer it.
The income statement shows every cost - but the one that drives demand is buried in it, with no visible link to the volume it creates.
In the marketing strategy chapter (Chapter 9) we worked out who to serve and how to position. This lesson asks the finance question: what does all of that cost, and what does it return? Start with where marketing lives in the financial statements.
You know what a typical income statement looks like. Take a look at this one:
| Account | Period 1 |
|---|---|
| Revenue (Sales) | 100,000 |
| Cost of Goods Sold (COGS) | 60,000 |
| Gross Profit | 40,000 |
| Selling Expenses | 10,000 |
| General & Admin (G&A) | 8,000 |
| EBITDA | 22,000 |
| Depreciation & Amortization | 2,000 |
| EBIT (Operating Income) | 20,000 |
| Interest Expense | 1,000 |
| EBT | 19,000 |
| Taxes | 4,500 |
| Net Profit | 14,500 |
We remember the P&L from the two-perspectives chapter (Chapter 4), and we remember why it matters. Gross profit is a story of whether or not we’re making money at the product creation or service creation. Operating expenses, we deduct that from gross profit and we get EBITDA. We subtract depreciation and amortization and get to EBIT. Subtract off the interest expense, we get to earnings before taxes, and then net profit: $14,500 in this particular example. EBITDA is about operating discipline. EBIT against interest is the capacity to carry debt. Net profit, we get to distribute that or invest that. That is the profit equation that is embedded in the income statement.
Now here is the thing: where’s the marketing expense? We’re talking about marketing as the thing that drives demand, that makes sure we’re supplying customers to a thriving business. It’s a big part of the equation but it’s hiding in these numbers. It’s essentially misunderstood. It’s generating demand - the more we do of it, if we do it well, the more revenue or the higher the price we’re going to have - but it’s not here. Where is it? It’s buried in these financial statements, often somewhere in the sales, general and administrative expense. It’s in there. It’s kind of obfuscated.
The other thing is that when it’s there, you don’t really see its relationship to volume. We do this well, we get higher volume or we get higher prices. We don’t see that relationship in there. It’s not like cost of goods sold, where the more we sell, the more we expect that line to go up.
The thing about this is it’s easy to treat this as a line item expense - something that, if we just think about the raw math of the income statement, if we just find some way to minimize, we can have higher profits. The expense is a burden, and we’re looking to make it as low as possible. That’s just kind of the wrong attitude, because we’re not treating it as what it should be, which is the investment that it is. If we put more in here, we should expect, if we do it well, the business to grow.
Bottom line: measuring spend, tracking the return on investment, managing with discipline - that’s what we should be doing with marketing.
Three things break the analysis: costs you can see with results you cannot, attribution you cannot pin down, and returns that arrive long after the spend.
So why is marketing so hard to approach with this kind of analytical rigor? Three things.
First, the costs are very visible but the results are hard to track. We spend on advertising, we spend on salaries of marketing people, or we spend on a marketing event. It’s scattered across sales, general and administrative expenses - and the revenue comes later. It’s delayed, and we can’t exactly track, very often, how much of the additional revenue is due to this particular amount that we spent on marketing.
Second, the attribution is really messy. We have multiple customer touchpoints where we are talking to them multiple times. We get a message in front of them, let’s just say, six or seven times. Which is the one that finally got them to do it? Maybe it wasn’t until they were ready. Maybe the previous messages are what made them ready to hear the next one. Which one of these things actually finally moves the needle is unsure. Even in the digital age, where we can track what we call last attribution - what did they see, and then what was the behavior - we’re not really sure if that behavior is just due to that one particular touch or if it is the sum of all the things we’ve been doing, all the impressions before they finally act.
And third, there are big time gaps. Expenses appear in one quarter. Returns show up months, sometimes years, later. This makes it difficult to get the full picture of what we’re doing and what the payoff is.
Customers are an input to a thriving business - they have to be sourced as intentionally as labor, capital, or supply.
Here’s the thing: marketing is a growth input. We grow, if we’re doing it right, because of the marketing investments we make.
When we think about creating a product, we think about all the parts and supplies and inputs that go into a product. If we think about the business, marketing is a critical input to a thriving business, because we have to have customers in order to have a successful business. It’s just like we source a commodity or source supply - we have to source these customers and be intentional about it, and marketing is that input. As the lesson’s slide puts it: “Customers are a critical input to a thriving business system. They have to be intentionally sourced.”
It’s just like labor, it’s just like capital - something that’s critical to a thriving business. It feeds demand, but it doesn’t feed production, and value is only created when we manage it as an investment: when we think about what we are putting into this and get as sharp-eyed as we can about what we’re getting out. The things we should be asking are: What are we spending? That’s almost something that a lot of people get right. But what are we getting back, and how long is it till we break even? These are very similar questions to the ones we had when we were talking about production decisions (Chapter 5).
The investment toolkit applies to marketing spend - the value a customer brings has to clear what it cost to win them, usually by a comfortable multiple.
Now, in finance we talk about upfront costs and compare them to future cash flows, discounted for the time value of money - the same logic as the investment toolkit (Chapter 7). Marketing should be treated the same way. The key metrics are customer lifetime value (LTV) - the total profit per customer over the entire time we have that customer - and customer acquisition cost (CAC), the average spend to gain one customer. What marketers do is look at this as a ratio, the LTV/CAC ratio: what is the lifetime value of a customer over the acquisition cost?
\[ \text{LTV/CAC ratio} = \frac{\text{lifetime value}}{\text{acquisition cost}} \]
A healthy ratio that a lot of people talk about is three - a three-to-one payback of lifetime value over acquisition costs. That is not the same everywhere. There are different industries where they expect that to be different, and there are different types of customer economics where we expect it to be different. It often depends on the kind of margin we’re making per customer.
The point of it is that at a minimum, this definitely has to be more. Lifetime value has to be more than acquisition cost. If it’s not, we’re doing marketing all wrong. We’re spending all this money to get the message out to bring in a customer who’s actually going to make us less money than it took to acquire them. The numerator clearly has to be greater than the denominator. And there are going to be a lot of other costs to think about - the cost of servicing this and other things - so in the end we really want to make sure that marketing is really pulling its own weight. It’s got to bring in more value than it spends; in this case, a multiple thereof. What the right multiple is differs by industry and by what our expectation is. But this finally gives us a framework for thinking about the costs and benefits of marketing in a time horizon that makes sense.
Four numbers - price, cost, retention, acquisition spend - put the whole framework on the table, and the verdict hangs on retention.
Worked example: is this subscription’s marketing paying off? Imagine you’re running a subscription service. It charges $40 a month. The average customer stays four months - some stay longer, some leave quicker. The fulfillment costs are $15 a month, and you spend $60 to acquire every customer.
Step 1 - what a customer brings in. On average they stay for four months, so total revenue is four times $40:
\[ \text{Total revenue} = 4 \times \$40 = \$160 \]
The variable cost runs for the same four months:
\[ \text{Total variable cost} = 4 \times \$15 = \$60 \]
Step 2 - the profit on an average customer. Some leave early, some leave later, but on average the gross profit - the lifetime value - is what’s left:
\[ \text{LTV} = \$160 - \$60 = \$100 \]
That $100 is what the average customer is worth in profit, before we count what it cost to win them.
Step 3 - compare it to what the customer cost. The CAC is $60, which means the contribution after CAC is $40 per customer:
\[ \text{LTV/CAC} = \frac{\$100}{\$60} \approx 1.67 \]
That’s not super awesome. You’re making $40 a customer - positive, but well short of the 3:1 that healthy customer economics usually show.
Step 4 - pull the retention lever. But if retention improved to six months, the same math runs longer:
\[ \text{LTV} = 6 \times (\$40 - \$15) = \$150 \qquad \text{LTV/CAC} = \frac{\$150}{\$60} = 2.5 \]
And suddenly things are looking better.
When we look at these, the marketing numbers help us understand not just how things are performing, but what some of the levers are. Would we gain more by improving retention, or would we gain more by getting more customers? We can also check that with our intuition of which one of these would be harder to do. Would it cost more to reach out to more people? Would it cost more to convert more people? Would it cost more to retain more people? Then we can get smarter around understanding the trade-offs of our marketing spend and the eventual impact on the bottom line.
One shortcut you will see in practice compresses the whole calculation into a formula, using ARPU (average revenue per user per period), the gross margin g, and the churn rate c - the share of customers who leave each period, which is one minus the retention rate:
\[ \text{LTV} = \frac{ARPU \times g}{c} \]
Run our subscription through it: ARPU is $40, the margin is 25/40 = 0.625, and an average four-month stay means a quarter of customers leave each month, so c = 0.25. That gives 40 x 0.625 / 0.25 = $100 - the same answer as the long way. (Formula: lesson deck, LTV slide.)
Returns lag spend - and the income statement’s period-by-period cadence makes patient marketing look like waste.
I can’t overemphasize the issue of the timing. Imagine you’re a marketing manager and you came up with some really great ideas on how to invest in some great marketing - and the thing is, it takes some time for that to hit. It takes time for that message to be absorbed by the market and for them to start understanding it. In the first, let’s just say, year or year and a half, we’ve spent a lot but we’re not seeing all of that return yet. There’s going to be this lag.
You end up leaving the company, and some other manager comes and doesn’t do anything - but you see they’re just benefiting off all of that, this investment that you made before, as the customers start rolling in. That person looks like a hero. You look like a villain. And that’s not fair, because we need to think about this long-term investment and this long-term impact happening over time.
You can see how the cadence of always showing income statements in this period - connecting the expenses we had in this period to the revenue we had in this period - can obscure this. People who are more financially minded are going to have more trouble directly connecting the kind of impact you can have in the future from investments now. It takes some wisdom and some long-sightedness to really understand what’s going on here.
The same trap runs in reverse. Marketing can be seen as this thing where we always have to wait for the results, versus operations, where we can see things happening right away. When things are unprofitable, it can become very easy to cut marketing spend, because it’s not something that hurts us right away - but that can create a really long-term impact. A really strong marketing leader has to be a guardian for that: not just protecting what’s going on today, but protecting the future. If there’s a very good chance that we are suffering now, it’s potentially because of an investment that we didn’t make in the past. It’s really important that we’ve got strong marketers who can think the long term and can hold the line even when things get tough in the short term. That way, if we are cutting costs to survive another day, the next day right there is an opportunity to thrive.
Define the return, track the spend, match the timelines, test and iterate - and always ask what the next dollar buys.
We want to apply the same financial discipline and treat it like an investment. We have to define the return, which is the estimated lifetime value of the customer - with data, not just some thought or some hope or some rough woolly notion.
We want to track the spend. We want to know how much we are spending to acquire customers by each channel. We’re going to have multiple ways of reaching out to customers, and we want to track the performance of each one of those things. We want to match timelines and make sure that we’re not just looking at one period, because some of the stuff unfolds over multiple financial periods.
We have to test and iterate: if a message doesn’t work with an audience, do we track them? Are we seeing a difference from what we tried before? If we measure that, we can figure out how to improve that, how to optimize that.
And we’re always thinking about what our return is - are we investing our marketing spend in the smartest way versus all the other things that we could be doing? That’s what finance people do, smart operating people do, and that’s what marketing people have to do as well.
So finally, marketing’s not just about talking with customers and making sure they’re happy. It’s a very critical part about building a business. You have to manage this with discipline. It is both art, because there are some things that we can’t necessarily put a number to, but there’s a lot of analytics now. Every marketing dollar is just as important as a capital investment. We are looking to maximize the demand creation and be efficient at doing that over time.
The soft skills still matter - but the marketer who cannot work the numbers no longer sits at the table where budgets get decided.
Often in class I say something about the sociology around marketing. Marketing people are, by nature, often really interested in people. They’re really interested in that communication. They’re really interested in a lot of the soft skills - you need those to be a good marketer, but increasingly today you need to have hard quantitative skills as well. It used to be kind of a stereotype that marketing people were less quantitative than operations people and finance people, because they just didn’t use a lot of numbers to make the case for the kind of work they did. They frankly just didn’t have as much. With traditional print advertising showing up in newspapers and on billboards, we knew how much it cost, but we really weren’t able to track how well that impacted customer demand. At least those measurements were less precise.
Today so much is happening online, with so much trackability of how much commerce happens through the digital footprint. We can see a lot about what happens - whether we put ads out there, how people view them, how long they view them, and when they view them. We get a much more fine-tuned sense of the performance of marketing. It’s worth almost an entire class, but there are many more techniques that have to do with measuring and getting good attribution on how marketing performs, and that is really coming as more and more marketing has gone digital. So these days, to be a great marketer, you have to be incredibly comfortable with numbers and incredibly creative with finding what story we can tell with those numbers to make compelling cases.
In the past, when everyone’s sitting around the table, those with less quantitative capability just seem a little demoted. They’re not quite sitting at the grown-ups’ table when real decisions come out about who’s going to get allocated budget. They often didn’t get as much. I see that happening with some marketing people who just don’t embrace a more quantitative approach - because you’re competing for attention, resources, and status against people who have had all kinds of analytics for a really long time.
The more of a customer’s category spend you earn, the harder your brand is to replace.
A good LTV/CAC ratio, though, is an outcome, not a strategy. The rest of this chapter is about the relationship work that actually moves the two numbers.
Start with share of wallet. We can think about a customer as having the capacity for some spend, and the question is how much of that spend, at least in this category, is going to come to us. We can have some customers who only spend a little with us. We can have some really dedicated ones who spend a lot. This matters because the more we work with a particular customer, the more trust we have in the cross-sells of other products or offerings - migrating them to a higher-end product that we have, or bundling with other offerings. This becomes easier to do because we are building on this relationship we have with a customer. And a higher share of wallet is part symptom and part cause: it would suggest that they’re really delighted with us, they have a deeper relationship with us, they trust us to do more things, and we just affect more of their life.
When it comes to fighting off competition, that relationship makes our brand harder to replace, because to opt for something else you’re going to have to disrupt your own routine or potentially replace a lot of other spend - or at least, in your mind, think about the inconsistency of what this change means. That is a great defense against other people stealing your customer.
If you think about it, many of you have iPhones. What makes your iPhone particularly valuable is not just the platform itself, because what it functionally does can be done by a lot of phones, the Android phones as well. It’s how easily your phone connects or interacts with your computer, which is also an Apple. You get hardware like earbuds that seamlessly work with Apple, which would be difficult to do across different platforms. All the applications that you use every day - it’s very habit-forming. It becomes a part of your workflow, part of your life. If it sits on this phone and works really well, you don’t want to change that. A version on Android might be slightly different, or worse yet, that app might not even exist for Android. At a minimum, it would be a slightly different interface - you’d have to learn something new just to do what you’re doing every day. You can see how quickly having share of wallet, share of habit, and share of life makes it difficult to get replaced, which is why a lot of businesses are always interested in increasing this. It’s not just that we make money on the product or service immediately. It’s the long-term habit that makes that customer more valuable.
In addition to Apple, Amazon - another retailer that we’re very familiar with - is in the same situation: the Prime membership deepens the engagement across categories. Once we realize we were paying a lot for shipping or other things - hey, with Prime memberships we get discounts! That seems like it’s good, but what it’s really doing is building this recurring habit where every time we think about buying something that we could possibly get on Amazon, we go to Amazon. That recurring value is what drives the lifetime value of a customer, because it’s not just a one-off purchase - it’s a habit of making multiple streams of purchases, and that’s a good thing for Amazon.
Done well, personalization cuts through the noise and feels like service - and the data loop makes it better as it scales.
It’s not a bad thing for the Amazon customer, either. The more purchases you do on Amazon, the more they know you. The more they tailor messages, experience, recommendations, and offers for you, based on that data about you and data about customers like you. This matters because as things become more relevant to you, it cuts through a lot of noise for you. That seems valuable - and personalization, if it’s done well, is. If it’s not done well, it can seem kind of invasive, like they’re making assumptions that aren’t quite right about you. If they do make good recommendations and they do good personalization, it feels like a good service to you that’s valuable to you. That self-reinforcing loop is obviously beneficial to the companies that are skilled at this.
We see other brands who are really into personalization. Sephora is one - they sell beauty and health products, and what they’re looking to do is tackle this whole value of personalization. There are so many products in this market that it can be hard to know what to get. Helping customers understand, being a part of that process, sending targeted samples or bundling products, or being seasonal - that offers them a chance to increase their share of wallet. They’ll do partnerships with others who help create an experience that feels specific and tailored just to a particular individual, and that’s where that value lies. It’s not just the transaction of a specific product.
Keeping a customer you already won is usually cheaper than convincing a new one - so marketing does not stop at the sale.
Another thing that great marketing does is focus on retention. When we talk about customer success and retention marketing, what we’re talking about is the marketing that happens even after the sale, just to make sure that customers are happy and that they are realizing the value from a product. Why this matters is that once you have a customer, you’ve spent all of this investment getting them - and keeping them, as long as they’re happy, can be very profitable and potentially far less expensive than finding a new one. If you think about it, you have to convince a whole new customer: who you are, what the value proposition is, why they should listen to you, why they should choose you, and potentially that they should change a habit in order to work with you. This is a lot of work. It can be very expensive. If you have a current customer, the idea is: don’t get them angry, don’t disappoint them, don’t give them a reason to leave, because you’re already the incumbent.
If you can invest in helping your customers be successful, the more likely they are to stay. This is particularly true for things like subscription products or software, or things where the customers are interacting with you every day. Every day that it feels like friction, there’s one more reason to leave you. Every day that they’re learning more and getting more out of the relationship with your business is a reason to stay. For some places it really matters that the customer changes their habits in order to really get the benefits - education, where we have to put in this work, or fitness, where you have to be disciplined and work out to see the benefits of the equipment you’ve purchased. We start off doing some things and it’s valuable, but we don’t know it so well yet. As we learn more about it, we get more skilled and we get more value out of it. This flywheel of increased learning, increased involvement, making things more valuable, and seeing more value as the time goes by and as you invest more in it - that is what customer success and keeping an eye on retention is all about.
The best marketing is the marketing you do not have to do - but advocacy has to be earned, and virality is not a strategy.
I also talk about referral and advocacy loops. The best marketing is the marketing you don’t have to do. The best marketing is when your customers are happy and they tell other people what a good time they are having, what a great experience they had, and that brings in other customers.
The nice thing about this is that a customer referral is some of the best marketing you can have. If you think about it, they’re advocating for you - you’re not there. They’re more trustworthy. And who are they talking to? Their friends, people they could influence. They’re not just talking to everybody they know. They’re a trusted channel, and they’re probably bringing this up in a very specific instance, when the next customer both trusts them and probably is facing this problem that needs to get fixed. They are a prime customer at that point in time. The thing is, you have to earn the ability to be advocated for like this. You have to have an experience worth sharing - not just good, not just that it does the job, not that it’s barely good enough, but something that’s so great that people want to talk about it.
One thing I hear a lot about is, I think, some pretty reckless talk around “if you just make great products, you don’t have to do any marketing, because the product sells itself. Everybody loves it and talks about it and it goes viral and just takes care of itself.” A lot of people, their whole idea of marketing is just “we won’t do any of it and all our customers will do it, because word of mouth is really powerful.” The fact that word of mouth is really powerful doesn’t mean you can rely on it as a marketing strategy exclusively, or even as a main engine. The ability for something to go viral means that for every customer that you get, a significant enough share of them have to be mobilized to get not just one more customer or two more customers - it has to be a multiple. This can be really difficult, because most people just make products that are great but not so great that they’re going to have this viral effect. If that’s true, we cannot depend on growth to come just from a current sale. You have to think about the other forms of marketing, the traditional stuff: talking to customers, educating people about your offering, being persistent, working with them so they can fully understand your value proposition, tackling it one customer at a time. That costs money, but as long as we’re doing it in a way that is justified by the lifetime value of the customers we get, this all works out. I’ll say it again: just because you produce a good product, as evidenced by having a sale, doesn’t mean this thing is going to go viral. If it’s not, we need to think about marketing in a fuller portfolio form of all the things that we could do to drive demand.
Influence without trust does not last - trust is built through credibility, consistency, and care that customers can actually believe.
It can get kind of complicated, this whole idea of marketing. What do we say? What do we mean? What do they perceive we mean? How often do we have to say things? It’s not like the intuitive conversations we have with people. We build relationships in marketing, but how that happens is different from the way we build relationships in our everyday lives. There are some elements that are common, and it really is about trust. Trust is built through credibility and consistency - what you say is what you say, often. That makes it easier to believe, and it’s aligned with the values of the company that you’re representing and the customer that you’re reaching out to.
Marketing is about trust, not just about influence. If we influence and we don’t have trust, that is never going to last long, because eventually people get smart about it. People get less influenced by people who they think are just using them to make money. Trust is the foundation for the kind of attention we can earn, the kind of loyalty we can earn from customers. It’s not about being persuasive. It’s about being a part of someone’s life that just kind of makes sense in their own mind. It’s built over time by being consistent in what you stand for and being consistent in providing value for a customer. Great marketers think this way.
So what builds trust? First, you have to be credible. The claims that you’re making are easy to understand why they are true. That comes from all the typical sources: either it’s expertise, because you know something; it’s something that you can demonstrate and show; or it’s a relationship you’ve had over time, where you have always delivered your value to the customer. Second, you have to be authentic. People don’t want to be lied to - the basic tenets of trust have to do with representing yourself in a way that people can believe. You have to show that you care about them. Obviously you care about your own business, and you’re looking to make more sales when you’re marketing, but are you sending a message that you genuinely care about and respect your audience? Sometimes that’s just a real demonstration of showing something that benefits them that clearly does not benefit you - great salespeople and service people help their customers succeed, particularly in light of showing them that they are willing to do this even in the absence of an immediate return. And a reputation at stake is part of credibility, because customers know that making a mistake or providing bad service is something that’s going to hurt you. If you are putting your own brand at risk every single time you do something, they know that your endpoints are aligned - it’s an alignment on long-term value.
For example, imagine someone recommending two different types of repairs, and one of them is cosmetic. They say: “If you use this cheaper tire, the good news is they’re pretty cheap right now, but the thing is you’ll be replacing them sooner than if you use these nicer ones. The nicer ones are more expensive now, but they last longer.” And they can explain: I’m not just trying to make this quick short-term deal, because in the future, when you have the next problem, maybe I can help you solve that problem. “Look, I know it’s going to happen to you over the long run. Let me help you understand that, and let me do what’s best for you over the long run.” That is something that people can appreciate. Just being consistent - nothing builds trust like saying the same thing over and over and being consistent. Changing your mind every time is something that generates suspicion, so being consistent in message and in deed is something that helps build the capacity for people to trust you.
The strongest trust signals are behaviors too costly to fake - and what marketing is really earning is attention, belief, and time.
I’d like to also think about trust as behaviors that you can do that are unfakeable. It’s one thing to be consistent about something, but if you’re consistent about a lie, you’re just taking advantage of people. There are some things that we do that simply cannot be done by others who are trying to mislead us, because it’s too costly for them to do. It’s not worth it for them. Things that are hard to do for the people we don’t want to deal with, but easier to do for the people that we do want to do business with, are great signals of quality - and they are hard to fake.
If you consistently and reliably deliver something that is valuable, that takes a lot of work. You need to think about what’s valuable, and you need to show up every day in doing that. When you build a track record of doing that as a pathway to earning more business from a customer, that is the kind of work that somebody who’s a one-shot-and-done - somebody who wants to make a quick sale and then not worry about the future - finds hard to do. It’s hard for them because it takes time and it takes effort. Telling somebody a hard truth, even when it’s not convenient, is a way to earn a lot of respect, because people know that that’s difficult, potentially costly, and risky. It means that you’re putting the truth and the relationship above just something that’s advantageous for you. Standing up for something that you really believe in: let’s say you’re a brand that thinks about the environment and wants to protect it. Whether we’re sourcing sustainably could be very costly, and companies that do that take on that cost. If you really care about it, you’re going to invest in it. If you really care about it, you might disadvantage your cost base to show your customers. These are things that are hard to fake - to sustainably incur those costs if we didn’t believe it - and those send clear messages about what really matters to a company. And putting your name on something is a great way to show that you really value what you stand for. Being accountable in a very public way is hard to fake, because if you do not stand behind your product, people don’t want to put their name or their face or their personal association with it. It says something about their true belief in what they’re delivering.
So in the end, all marketers are thinking: you’re not just selling a product, selling a widget, selling a service, selling a subscription. You’re selling attention, belief, and time of the customer. Will they listen to you? Will they believe what you say? Will they give you the time to make that communication happen? It doesn’t matter if what you have is valuable - potentially valuable, for sure valuable - with this customer. If you don’t get them to listen to you, to believe in you, you’re always vulnerable to them finding somebody else that does match this for them to do business with. We have to have a great value proposition at the product level. What we do has to potentially improve the life of our customers. If they never understand that, if they never hear that, if they never trust us enough to take the risk that that is going to happen, we’re never going to be able to have a viable business. That’s one of those particular reasons why marketing is super important, and that relationship is an investment. It’s hard won.
Before you can rank Campus Threads’ segments, you need the machinery - the real cost of winning one customer, and the value of keeping them.
Now back to the anchor case. To decide which segment Campus Threads should prioritize, you need three calculations, and each one has an intuition worth walking through.
Calculating the customer acquisition cost is pretty straightforward. We take the acquisition cost per contact and we divide it by the response rate - the percentage of contacts who become customers:
\[ \text{CAC} = \frac{\text{acquisition cost per contact}}{\text{response rate}} \]
Think about what this means. If it costs you, let’s say, $10 to reach out to everybody, but we only have a 10% response rate, we spend this $10 - and for some of them we get nothing back, but for one in ten we’re going to get some value for it. What this means is, if we had ten different people and we spent $10 on each one of them to get that one customer, we had to spend $100 just to get that one customer, because all the other customers said no. You might think, “Why don’t you just not talk to the other customers - just talk to the one who’s going to say yes?” We don’t know that person in advance. When we work with marketing, we always are targeting a population. We know the percentage; we don’t know who particularly is going to say yes. If the percentage is high enough, it’s going to be worth doing, and we associate the cost of hitting that whole group of people with the number of customers it actually generates.
When it comes to annual profit per customer, this has a lot to do with the contribution logic from the cost-behavior chapter (Chapter 4): what do they pay, minus what it costs to provide that service, multiplied by the number of times that they interact with us during a year:
\[ \text{Annual profit} = (\text{price} - \text{variable cost}) \times \text{annual purchases} \]
Now we think about lifetime value. We want to sum it up over a horizon - for the case, ten years - accounting for the retention rate. That annual profit is going to occur again and again and again, but there’s always going to be a bit of a decay. Some people are not going to stay, and some people are going to leave. For a group of people we bring in every single year, we’re going to lose some of them, but for the ones who stay, we’re going to make another round of annual profits. That just keeps going until all of them finally disappear:
\[ \text{LTV}_{10} = \text{annual profit} \times \left(1 + r + r^2 + \dots + r^9\right) \]
If we make this a simple case: if there are two people and only one of them is going to stay next year, but I don’t know which one it’s going to be, we have a 50% retention rate. Instead of saying we don’t know which one is going to stay, we just say that half of the profits are going to stay. We’re able to make a model for an average customer: what is their lifetime value? This is about how long the average person stays, rather than thinking about one particular person who leaves right away. We’re taking the average. When we get that sense of what the average lifetime value of a customer is, and what the average cost of acquiring a given customer is, we take that ratio, LTV over CAC, and then we compare how these segments look to us as far as their economics.
Remember, we’re looking at the economics of a very specific part of the business. Before, we were looking at economics from the standpoint of product: when we sell this product, how much are we making for everyone we sell to? In this case, we’re talking about different customer segments: how much does it cost to bring them in and keep them here, and how much money are they going to bring in for us? The intuition here is that we would rather, if we can spend a smaller amount of money, have someone spend a lot longer with us. That’s going to be more efficient from a marketing standpoint.
So which segment should Campus Threads prioritize? Run the numbers, and the event goers are a strong segment, because it’s a segment that combines relatively strong retention with very low acquisition costs. It makes it an efficient segment to acquire, to retain, and to make money with. They generate almost as much ten-year LTV as the trendsetters, but they’re a lot cheaper to acquire, and their retention profile is stronger - they’re more stable and stick around longer, so when we attract them in, we’re going to make more money off them over a longer period of time. The trendsetters produce the highest annual profit, but getting them is really expensive, and that’s what’s going to make them less attractive in this particular business as it stands. The career climbers have moderate acquisition costs, but the lifetime value isn’t really high. And the analysis doesn’t stop at a forced ranking. If we find a segment that spends a lot of money but costs a lot to get, we start thinking: is there any way that we can improve these numbers for them? Is there any way that we could find a more affordable way to get the message out to them, or any way that once we do get a hold of them, we can get the lifetime value higher? This type of analysis lends itself to getting some insights, not just on force-ranking things, but perhaps getting creative about what we could do that would affect these numbers - that could, in fact, change our decisions. That is what it looks like to manage marketing as an investment rather than pay for it as an expense.
Work from the anchor case data - the segment economics are in the opening pages of this chapter.
10-1 Campus Threads: the cost of a customer. [LO2] Calculate the CAC for each of the three segments, using the acquisition cost per contact and the response rate. Interpret the response rate as the percentage of contacts who become customers.
10-2 Campus Threads: annual profit per customer. [LO2] Calculate the annual profit per customer for each segment from the rental price, the variable cost per rental, and the number of annual rentals.
10-3 Campus Threads: lifetime value. [LO2] Calculate each segment’s LTV over a ten-year horizon, accounting for the retention rate.
10-4 Campus Threads: the recommendation. [LO2, LO3] Calculate the LTV to CAC ratio for each segment. Rank the segments by LTV and by LTV to CAC. Recommend which segment Campus Threads should focus on, justify your reasoning, and comment on the trade-off between total customer value and acquisition efficiency.
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