Understanding Customer Acquisition Costs 

The framework VCs use

Rob Moffat
Jun 23, 2014 · 5 min read

An area I have wrestled with as a VC over the last five years is how to really understand the unit economics of businesses. The basic concept of LTV>CPA (lifetime value greater than cost to acquire) is pretty simple. The complexity comes when you try to work out what will happen to these economics as the business scales.

I’m not going to get into lifetime value calculations here, as it is well covered elsewhere e.g. by Bill Gurley here. Where I’d like to focus is on CPA.

Often as a VC you are presented with a headline CPA figure and nothing more. This can look good on the surface but mask underlying issues. For example, take an early stage eCommerce business with an LTV of €30 and an overall CPA of €20. This looks like a solid business. Digging deeper, 50% of users are acquired through free channels (PR, SEO) and so the CPA for the remaining 50% (acquired through SEM) is €40. The free channels are often hard to scale up rapidly, so if the company wants to grow fast post-investment the obvious route is SEM. However, in this case customer acqusition through SEM is uneconomic (LTV of €30 is less than CPA of €40). As a VC you then start to worry about whether this business can grow fast in a rational way.


Below is a framework to take account of these mix effects and think about CPA in more depth:


The idea is to break down overall CPA into spend that attracts new customers, vs. bringing back old customers, and then to break down the major acquisition channels free vs. paid

Points to note:


Some caveats / limitations:


Once you have mapped out your customer acquisition costs along the lines of the above you need to think about the implications. One way to do this is the following:

Then it is time to think about growth:

Apologies if the above is a little theoretical — as always the theory is 10% of the battle here, 90% is execution and making sure you have accurate granular data to work with. Would love some ‘real world’ feedback. That being said, the best marketing operations I have seen (Lovefilm, The Hut, Wooga, Housetrip) have a really strong grasp of the theory above.

Growth Hacking, Marketing and Venture Capital

Notes as I scratch the surface of three nascent & hard…

Rob Moffat

Written by

Partner at Balderton Capital in London, working with Zego, Wagestream, Cleo, Carwow, Mojiworks, Primer, PlayPlay, Dream. Formerly Google & Bain.

Growth Hacking, Marketing and Venture Capital

Notes as I scratch the surface of three nascent & hard industries

Rob Moffat

Written by

Partner at Balderton Capital in London, working with Zego, Wagestream, Cleo, Carwow, Mojiworks, Primer, PlayPlay, Dream. Formerly Google & Bain.

Growth Hacking, Marketing and Venture Capital

Notes as I scratch the surface of three nascent & hard industries

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