Optimising for Profit

Do companies these days actually optimise for profit? Or are they too busy chasing clicks, conversions and top line revenue?

In economics profit maximisation is taught as marginal cost being equal to marginal revenue. Reading about SaaS (and running a SaaS business) I see an awful lot about CAC (Customer Acquisition Cost) and LTV (Lifetime Value). So much though is that CAC has to be less than LTV.

Well that is obvious but CAC < LTV is also a fail. Technically it is mCAC = mLTV, that the very last customer you get equals their lifetime value for their acquisition. Now it is very hard to get accurately right. Personally I’m on the side of keeping mCAC under mLTV rather than trying to push to close. Getting close requires really accurate analysis and hence higher costs.

This is why I believe there are a lot of startups, out there touted as success stories, are actually fundamentally unprofitable. What they’re paying for their last slab of customers is actually way too much. They also they’ll become profitable when they stop spending so much on sales and marketing. So why not do it now? Why not be profitable?

My answer is that many actually can’t be profitable without significant changes to their business model which would be awfully painful for many of them. It would make them better businesses though.

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