5 Goals of Monetization

Monetization refers to how a business earns its revenues.

Monetization refers to the strategies and tactics for acquiring leverage by causing the trajectory of revenues and profits to inflect upwards.

A 1% change today in a company’s growth rate that remains stable will over time compound into exponential growth in both revenue and market share.

Monetization helps the company achieve the following objectives:

• Goal 1: Pay cost of transaction

• Goal 2: Afford customer acquisition

• Goal 3: Grow profitably by reducing payback period

• Goal 4: Grow competitively by outbidding while acquiring more customers

• Goal 5: Grow faster by offsetting churn

Pay cost of transaction

Often called as CoGS(cost of goods sold) these costs are expenses incurred in the sale of a single unit of the product or service.

Here is an example for better understanding,

Gross margins can improve either by increasing revenue per unit or lowering CoGS.

Afford customer Acquisition

Paid acquisition is one of the most effective ways to acquire new customers. However, it comes with the challenge of making the cost of acquisition viable.

Cost per Acquisition (CpA)

CpA is the cost of acquiring a lead. It is also known as the Cost per Lead (CpL).

CpA, or CpL, includes costs associated with all stages of the journey right up to becoming a lead. It excludes costs incurred by the business after becoming a lead up to becoming a paid customer.

Customer Acquisition Cost (CAC)

CAC is the cost of acquiring a paying customer. It includes costs associated with all stages of the journey right up to paid conversion.

Here is an example for better understanding,

Grow profitably by reducing payback period

This is the amount of time it takes for the profits to pay back the cost of acquiring customers.

The cost of acquiring each customer is an investment over a time horizon that should first break even by profits earned and then create positive cash flows going forward.

To have profitable growth, a shorter payback period provides capital to fuel growth and avoids borrowing against future cash flows.

Grow competitively by outbidding while acquiring more customers

Lifetime Value (LTV)

Very simply, lifetime value or LTV, is the cumulative profits generated by a customer over their lifetime, net of expenses such as CoGS and CAC.

LTV : CAC Ratio

The ratio of LTV to CAC informs the ease with which a company can acquire customers while remaining profitable.

• If the ratio is 1:1, it is impossible to be profitable -- you have barely broken even.

• If the ratio is slightly better than 1:1, it is hard to be profitable especially as you grow.

• For SaaS businesses, a ratio of 3:1 is generally recommended.

Higher LTV : CAC ratio vs competitors is a key leverage needed to dominate customer acquisition channels

Grow faster by offsetting churn

Churn is inevitable and starts registering immediately. If not harnessed it can become the number 1 killer of a company.

An effective strategy for containing revenue churn is increasing expansion revenue from existing customers.

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