Not All Revenue Is Equal

This week, we came across an in-depth paper written by Michael Mauboussin which explores the economics of customers' lifetime value and the component parts of CLV. CLV is equivalent to the value of each individual customer to a business:

"The present value of the cash flows that a customer generates while they are engaged with a firm minus the cost to acquire the customer. The present value of cash flows, in turn, is a function of sales, costs, and customer longevity."

CLV is an important metric when modeling a business's value. But most small business owners simply don't have the time to analyze customer value, lifetime revenues, and churn every quarter. CLV is like marketing ROI - it is clearly important, but time consuming to track. The biggest mistake we see most small businesses make regarding CLV is concentrating too much on topline revenue value and treating the cost side of the equation as an afterthought. At the end of the day, unit economics is more important than topline growth.

When examining the attractiveness of a new customer or new deal, both the revenue and cost side must be taken into account:

- How much time is involved onboarding the customer?
- How much time will be involved on an ongoing basis engaging with the customer?
- How much staff overhead will be required?
- What are the reporting requirements?
- How much time is involved in retaining the customer?
- Is the customer likely to renew after the contract has expired?
- How mission critical are your services or products to the customer?

Simply put, the best customers are less price sensitive, easy to deal with, require less hand holding throughout the process, and are looking for a quality business to address their need. The more of these boxes that are checked, the higher quality the revenue. Know what you are selling, and know who you are selling it to.

At the end of the day, big deals and big sales are only good for the company if they result in positive margin that moves the needle. It is OK to turn down big business if it won't lead to big profits. It is also OK to let go of customers that don't pass the 80/20 rule. The bottom line when determining whether new business will be profitable: be wary of the cost side of customer value.

Breaking new ground to IPO: The Procore story (Bessemer Venture Partners)
+ "Communication between architects, builders, contractors, subcontractors, and suppliers relied on paper plans, post-it notes, phones, faxes and walkie-talkies. Collaboration was poor—leading to inefficiency, waste, mistakes, and lawsuits. By some accounts, 2.5% of all construction spend is “re-work” from poor communication. Tooey decided there had to be a better way."

Starting a Company in a Space You’re Not an Expert in — This Founder Shares 6 Lessons (First Round Review)
+ "In this exclusive interview, Fain takes us back to how he went unreasonably deep in the earliest days of the company, and the most critical lessons that stick with him. Some he picked up from his first go-round as a startup founder, others caught him by surprise at Bowery — there’s a wealth of wisdom particularly for folks still toying with the idea of starting a company. From narrowing in on an idea with staying power, to convincing investors to climb aboard and assembling an early team, these are pages from Fain’s zero-to-one story that aspiring founders won’t want to miss. Let’s dive in."

Money aggregates, debt, pent-up demand, and inflation: evidence from WWII (Atlanta Fed)
+ "The debt-to-GDP ratio increased from 40 percent to 110 percent because of the war effort. Most of it was financed by Fed debt purchases, through a de facto yield curve control that held down short- and long-term interest rates. The money supply doubled in size, but inflation was muted during the conflict as private consumption demand was severely restrained. Private consumption was suppressed, as factories were fully devoted to the rearmament effort, food was rationed, and construction was practically prohibited. Households’ saving boomed as a result. After the war, swift pent-up consumption demand culminated in a short-lived spike in inflation from 2 percent to 20 percent in 1946–47, which quickly returned to 2 percent in 1949."

Texas’s oil and gas industry is defending its billions in subsidies against a green energy push (Texas Monthly)
+ "The state's energy business has long counted on special tax breaks and other largesse not available to others. Whether renewables or fossil fuels get more depends on how you do the math."

The state of household debt in America (Visual Capitalist)
+ "American households are becoming increasingly indebted. In 2003, total household debt was $7.23 trillion, but that figure has recently doubled to $14.56 trillion in 2020. With just under 130 million households in the country, this equates to an average of $118,000 of debt per household."

Calculating Customer-Based Corporate Valuation (Michael J. Mauboussin)
"This report focuses on the as the basic unit of analysis. The idea of customer lifetime value (CLV) has been around for decades. CLV equals the present value of the cash flows that a
customer generates while they are engaged with the firm minus the cost to acquire the customer. The present value of cash flows, in turn, is a function of sales, costs, and customer longevity."

Texas’s oil and gas industry is defending its billions in subsidies against a green energy push (Texas Monthly)
+ "The state's energy business has long counted on special tax breaks and other largesse not available to others. Whether renewables or fossil fuels get more depends on how you do the math."

The state of household debt in America (Visual Capitalist)
+ "American households are becoming increasingly indebted. In 2003, total household debt was $7.23 trillion, but that figure has recently doubled to $14.56 trillion in 2020. With just under 130 million households in the country, this equates to an average of $118,000 of debt per household."

Calculating Customer-Based Corporate Valuation (Michael J. Mauboussin)
"This report focuses on the as the basic unit of analysis. The idea of customer lifetime value (CLV) has been around for decades. CLV equals the present value of the cash flows that a
customer generates while they are engaged with the firm minus the cost to acquire the customer. The present value of cash flows, in turn, is a function of sales, costs, and customer longevity."

The man who sold millions in counterfeit wine to rich collectors (The Hustle)
+ "Kurniawan seemed to have boundless cash and a knack for finding extremely rare vintage bottles that lifelong oenophiles had only ever dreamed of — 1920 Petrus, 1945 Romanée-Conti, 1947 Château Lafleur. In a few short years, he would sell off millions of dollars’ worth of his wines to some of America’s wealthiest connoisseurs. But behind the ever-flowing stream of Burgundies, Kurniawan harbored a dark secret: He was carrying out history’s greatest wine fraud."

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