Publications
Publications
- September 2022
- HBS Case Collection
On CUE: The Quest for Optimal Customer Unit Economics
By: Elie Ofek, Barak Libai and Eitan Muller
Abstract
Startups are often evaluated by how well they perform on unit economics, defined as the ratio of a customer’s lifetime value (LTV) to acquisition costs (CAC). A common target for unit economics, advocated by many VCs and analysts, is 3:1 (i.e., LTV/CAC=3). While there is certainly appeal to having a relatively high unit economics – and it provides the firm with a guide on how much to expend on acquiring customers - it is not obvious whether this prescribed “rule of thumb” ratio is in the firm’s best interest. This note analyzes the problem by exploring how a company should go about determining the optimal amount to expend on customer acquisition. The approach proposed, in effect, calls for maximizing customer equity (the sum of lifetime values gained from all customers that are acquired less the acquisition costs incurred) and takes into account that there are decreasing returns to marketing efforts. The resulting customer unit economics (referred to in this note as CUE for short) is shown to often be lower than 3:1 – suggesting that firms have more leeway to grow while at the same time being mindful of profits.
Keywords
Unit Economics; Business Startups; Performance Evaluation; Customer Value and Value Chain; Customer Relationship Management; Analysis
Citation
Ofek, Elie, Barak Libai, and Eitan Muller. "On CUE: The Quest for Optimal Customer Unit Economics." Harvard Business School Background Note 523-050, September 2022.