Part V – Case Study

  • July 28, 2018

Here’s a case study of a company that we invested in, in large part due to its phenomenal Core Ratio.

This chart shows the Realized Core Ratio. The Realized Core Ratio portrays a business with a strong underlying economic engine, with most cohorts paying back in less than 5 months so far.

But as these next charts show, the Core Ratio is getting worse on average. These charts each show the Realized Core Ratio after 1, 2 and 3 months as a function of the cohort birthmonth.

In order to understand why this business is doing so well but has been slightly worse recently, let’s take a look at each of the three underlying drivers of payback period: margin, sales and marketing efficiency and retention.

  1. Margin

The company’s margins have remained between 30% and 45% and have steadily increased over the past 12 months.

2. Sales and marketing efficiency

A typical measure of sales and marketing efficiency is the Customer Acquisition Cost (“CAC”). The CAC measures the number of Sales and Marketing (“S&M”) dollars spent for every new customer.

In this case, it turns out that the CAC shown above hides critical information. In fact, the increase in CAC is explained the greater costs to acquire customers in a new market. In aggregate, CAC is increasing because the company is adding new markets at an increasing rate. The CAC in the company’s oldest market is constant at around $15 and trending downward in nearly all markets.

3. Retention

The best way to measure improvement in revenue retention is to look at the retention in any one lifemonth across cohorts. Each of these charts shows retention in one lifemonth (2, 3, … left to right, top to bottom) for all cohorts. An increasing trend line indicates improving retention.

In this case, revenue retention is improving dramatically across all cohorts, which is highly unusual and a strong sign of better retention marketing and/or a significantly improved product and user experience.


Written by: Thomas Gieselmann and Jonas Nelle

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