💡 Heartcore Consumer Insights
Welcome to the 92nd edition of Heartcore Consumer Insights. Curated with 🖤 every two weeks by the Heartcore Team.
If you missed the past newsletters, you can catch up here. Now, let’s dive in!
Over the last few years, LTV/CAC has become the gold standard metric of a consumer business. Somewhere along the way, the concept of CAC payback got lost, but it has huge implications for a company’s ability to scale efficiently. In today’s evolving macro-environment, cash efficiency is becoming much more important.
The companies in the top-right quadrant have both strong LTV/CAC dynamics and fast payback. They get here by operating in large markets, having high-frequency user engagement, flattening retention cohorts, and high gross margins. Being in this quadrant doesn’t mean a company will stay here forever: these companies must push against market forces that will naturally erode their unit economics (LTV decrease & potential CAC increase due to core marketing channels saturation and competition).
Companies in the bottom-right quadrant have high growth potential due to strong LTV/CAC dynamics but given the slow payback, will require significant working capital to scale. Let’s walk through an example: Company A has 3x LTV/CAC but with 1-month payback, Company B has the same LTV/CAC ratio but with 18-month payback. If both companies were to invest $5M every month for the foreseeable future, by December 2024, company A would generate $110M of cumulative cash flow whereas company B would still be in the red, having lost $4M. Company B would have a cash low point of $45M, meaning it needs to rely on external funding. During 2020/2021, this strategy could have worked out for company B since growth capital was abundant, but in the new era we’re facing, company B faces tougher decisions. Companies that are able to successfully navigate this quadrant must demonstrate strong and flattening retention cohorts in order to sell the promise of long-term value creation.
Companies in the bottom left-hand quadrant have poor business fundamentals: weak retention, limited product differentiation, pressured gross margins, and high cost of user acquisition. These companies are highly reliant on outsized marketing. As aggregate marketing spend goes up, CAC follows, leading to lower LTV/ CAC and even slower payback periods - this is a brutal negative cycle. Given these, external capital is needed to stay afloat but often a challenge to secure.
Many consumer startups will inevitably reach a point of maturity and end up in the top-left quadrant. Some get pushed here directly from the top right quadrant while others take a different path. Products with weak retention will reach this maturity phase very quickly. The companies with the most defensibility through network effects, product differentiation, or other moats can succeed in counter-acting these pressures.
Note that nothing is static. Every company moves uniquely through this 2x2 matrix during its lifecycle in different ways.
Now that we’ve discussed how CAC payback and LTV/CAC influence growth and profitability, what are some benchmarks to follow?
Books don’t work. Think back to your favorite book from ~2015. How much of it do you remember? And that was your favorite.
Humans just aren’t wired to retain information well after a single read. That’s not how we learn. We need activities, feedback loops, and metacognition (thinking about what we’re reading). We need to spread out learning over time.
Of course, retention isn’t just a memory problem. It’s a startup problem too. User retention is what drives sustainable, scalable growth.
During onboarding, here are a few ways to boost business retention through cognitive retention:
Do > Show > Explain: the more action-driven your user's education is, the more effective it will be. For instance, instead of starting users off with a bunch of tooltips and videos, Grammarly guides them to fix a dummy page’s grammar.
Don’t show your user every feature: over-educating a new user will overwhelm them. Spread out learnings - and new feature introductions - to avoid info overload.
Connect through personalization: in general, personalization reduces friction and time to activation. To increase learning during onboarding, and make it more personalized in the process, try a “choose your own adventure” approach to onboarding, with users picking their path.
Following these steps increases the chance that users will reach their "aha moment" - the moment they realize real value from your product. And they need to do that to stick around.
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Heartcore Consumer Insights is a weekly newsletter covering notable consumer rounds and exits and top content in the B2C space.