Thread by @AReviewOrTwo1

Was just revisiting some writing on LTV / CAC type analysis... I love it how @mjmauboussin was writing on this in detail in 2004: “The Economics of Customer Businesses, December 9, 2004”

This is a timeless piece of work including so many first principles...

“One of the keys to successfully analyzing a business is getting down to the most basic unit of economic analysis. For many consumer-oriented companies, and especially those that rely on a subscription model, the basic unit of analysis is the customer.”

“...the current accounting system does a very poor job of revealing the difference between a good and bad customer.”

“Value of a business = value per customer x number of current and future customers”

Love how math always linked to the qualitative:

“...competition also affects customer economics.”

“...analysts must always consider the demand side of the equation. How well does a good or service satisfy the customer?”

“...loyalty can have a profound impact on a business.”

“Reichheld’s recent work suggests one metric as the best proxy for customer loyalty and growth: the number of “net promoters.””

“A thoughtful valuation model requires a useful framework to evaluate how many customers a good or service will likely attract and how quickly the customers will accept the offering.”

“The goal of an investor is to find stocks where the stock market is likely to revise the embedded expectations for future financial performance. For long-term oriented shareholders, the expectations that matter surround the present value of a company’s free cash flows.”

”For customer-centric businesses a firm grasp of customer economics—the basic unit of analysis—is essential to maximizing the likelihood of successfully anticipating an expectations revision.”

Am sure @mjmauboussin will humbly suggest he was standing on the shoulders of others (eg Reichheld) but this paper basically gave people the tools in 2004 to understand some of the great businesses that have emerged over the next 15 years.