Product Price
Quantify the Lifecycle Costs of the Reference Product
Consider a customer’s use of a competing product or alternative method to address the problem of discovering and buying interesting products, the proposed product will be essential. If the reference product is traditional online shopping platforms. The customer spends considerable time searching for products, comparing prices, and reading reviews. Additionally, they might need to visit multiple stores or websites to find what they want, incurring travel costs and potentially shipping fees.
Emotional costs could include frustration due to a lack of personalized recommendations, buyer’s remorse if the purchased item doesn’t meet expectations, and the hassle of returns or exchanges. The overall life cycle costs for the reference product could include the purchase price of the product, travel costs (if applicable), time spent on searching and shopping, emotional costs due to inconvenience, and potential return-related costs.
Pricing the Solution
For the Otog app that facilitates discovering and buying products of interest, pricing is important. It is therefore crucial to set a price that motivates the new buyers. However, it is crucial to understand that this price must be competitive to attract new customers and facilitate generating profits. Considering these perspectives, it is crucial to adopt aa tiered pricing model as illustrated below.
- Basic Tier (Free): Allow users to access the app’s core features, such as browsing and liking products, sharing content, and interacting with others in the community. This encourages user adoption and growth. This tier will also be crucial to encourage new buyers to make initial purchases and custom orders.
- Premium Tier ($9.99/month): This price will provide users with advanced features, such as personalized product recommendations, early access to sales, exclusive content from influencers, and a seamless shopping experience. This price point offers added value without being excessively high.
- Pro Tier ($19.99/month): The last tier will provide enhance Target power users who seek an enhanced experience. This price will offer dedicated shopping experience, priority customer support, and additional perks like virtual shopping events with influencers. This tier will be imperative to target high-end users who are more likely to be interested on premium shopping experience.
Customer Value
Estimate the CAC
The Customer Acquisition Cost (CAC) for Otog social app venture will be approximately $2. This cost will be used to promote the new social app through different promotional channels. Essentially, this process will incorporate targeted advertisement in different community platforms such as social media which will aim to obtain a high number of participants. The conservative cost for this involves targeted adverted advertisements and influence costs, partnering with community groups and setting up the initial costs. The estimated average cost will also include initial costs of personalized messaging to all social platforms.
Estimate the LTV
To calculate the Customer Lifetime Value (LTV), considering it is critical to determine the average revenue generated from the new social site. This value will be assessed by determining the average revenue generated from a customer over their relationship with the app. Assuming an annual subscription model of $20 and an average customer retention period of 3 years, the LTV can be this
Estimate the TAM
Estimating the Total Addressable Market (TAM) requires considering the potential user base and the market size. With the increasing popularity of social media and e-commerce, a conservative estimate of 800,000 potential users is targeted. Assuming a penetration rate of 10%, the TAM would be 80,000 users. This population included a new generation of new user who would probably be interested in assessing new and innovative solutions to product marketing. Besides, this user base is critical in looking for a new and innovative solution to promoting their products. One assumption made in determine this user base is that a large proportion of this population is the younger generation who are tech savvy. Considering the global social media users’ trend, this market is essential in assessing the new population of young people who would be interested in social media purchase.
Assess the Viability
Based on the calculated CAC, LTV, and TAM, it appears that the profit model could provide a positive margin contribution. The LTV ($60) comfortably exceeds the CAC ($2), suggesting a healthy potential for profit. However, critical assumptions need validation. The most important assumption to test is the user retention rate and their willingness to pay for subscriptions and in-app purchases. Conducting user surveys, piloting the app, and monitoring actual user engagement will be essential in validating these assumptions. Additionally, focusing on user experience, refining marketing strategies, and optimizing the subscription model can further improve the profit margin and overall viability of the venture. This evaluation would be imperative to assess if the success of the new app is good or there is need for review to obtain more customers.
The LTV:CAC ratio is a crucial metric for analyzing the profitability and efficiency of customer acquisition efforts, particularly in SaaS and subscription-based businesses. The LTV:CAC ratio compares the lifetime value of a customer (LTV) to the cost of acquiring that customer (CAC).
- Formula: LTV:CAC Ratio = Lifetime Value (LTV) / Customer Acquisition Cost (CAC)
While a 3:1 ratio is generally considered good. Regular monitoring and optimization of this ratio can significantly contribute to a company’s long-term success and profitability. This means for every $1 spent on acquiring a customer, the company expects to generate $3 in value over the customer’s lifetime.
- Ratio < 1:1: The company is losing money on each customer acquired.
- Ratio = 1:1: The company is breaking even.
- Ratio 3:1: Considered healthy and sustainable for most businesses.
- Ratio > 5:1 or 6:1: May indicate underinvestment in customer acquisition.
The ideal ratio can vary by industry. For example:
- SaaS (B2B): 4:1
- eCommerce: 3:1
- Business Consulting: 4:1
- Legal Services: 4.5:1
Importance of Assessing the Viability:
- Helps assess the profitability and sustainability of customer acquisition strategies.
- Guides decisions on marketing spend and resource allocation.
- Indicates the overall health of the business model.
Optimization Strategies:
- Focus on conversion rate optimization.
- Use appropriate acquisition channels for target customers.
- Build customer loyalty to increase LTV.
- Improve customer retention to reduce churn.
Considerations:
- Should be calculated over a substantial time period (e.g., annual rolling average) to account for seasonal variations.
- More mature businesses typically see higher LTVs and lower CACs compared to startups.
- The ratio should be balanced – too high might indicate underinvestment in growth.
Limitations:
- Doesn’t account for fixed costs or overall profitability of the business.
- May not fully capture the complexity of customer behavior or market dynamics.