Repeatable and Scalable Business Models
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Entrepreneur Steve Blank defines a startup as “an organization formed to search for a repeatable and scalable business model”.
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| Sources: Wikipedia |
Expanding on this definition,
“The creation of a repeatable and scalable business model is the point in the start-up lifecycle where a new venture finds ways to consistently acquire new customers for less money than the revenue they are expected to bring in, thereby generating (the potential for) profit.”
In the startup world, a wannabe company becomes a “real business” once it develops the ability to acquire customers quickly and at a cost that’s lower than the revenue that such customers generate.
The formation of a repeatable and scalable business model is essential to a startup’s vitality precisely because it opens up the possibility for a startup to accomplish its central objective, i.e., to grow and scale exponentially.
Achieving such a business model is, therefore, the ultimate goal of a startup.
Your company reaches this defining point when it secures the following 3 key developments:
1. Your customer acquisition cost (CAC) — i.e., the total cost of convincing a potential customer to buy a product or service — is lower than the lifetime value of customer (LTV) metric — i.e., the revenue that a customer is expected to generate during his/her lifetime;
2. You operate in accordance with economies of scale — i.e., a situation in which the more customers you have, the cheaper the cost of your product become — such that your CAC/LTV ratio decreases with growth; and
3. Your business model keeps replicating itself, i.e., you continue to successfully acquire customers without exhausting your customer acquisition channels.
Serial entrepreneur turned VC David Skok suggests that SaaS startups ought to pursue and institute a minimum 3 to 1 LTV to CAC ratio, i.e., the revenue that your average customer brings in should be at least 3x higher than the cost it takes to acquire him/her in the first place.
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