My Startup Guide Workbook

Stanford EMBARK
My Startup Guide Workbook
Activity 1: Get to Know Your Customers

CUSTOMER LIST TEMPLATE

INTERVIEW SCRIPT TEMPLATE

Activity 2: Build Customer Personas

CUSTOMER PERSONA EXAMPLES

CUSTOMER PERSONA TEMPLATE

Activity 3: Prototype and Test Your Idea

EXPERT TIPS FOR PROTOTYPE TESTING

PROTOTYPE TESTING TEMPLATE

Activity 4: Articulate Your Proposition

VALUE PROPOSITION TEMPLATE

Activity 5: Identify Your Go-to-Market Strategy and Partners

GO-TO-MARKET SYSTEM TEMPLATE

Activity 6: Price Your Product

PRICING TEMPLATE

Activity 7: Determine Your Customer Value and Acquisition Cost

CUSTOMER ACQUISITION COST TEMPLATE

PROGRESSO FINANCIERO EXAMPLE

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My Startup Guide Workbook

Activity 1: Get to Know Your Customers

Customer List
Template

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Guiding Questions
Responding to the guiding questions below will help you determine who your customers are. Be
open-minded. You may discover potential customers you hadn’t thought of previously.

1.What is the problem you want to solve?

Enter problem here…

2. Who most needs you to solve that problem for them?

Enter customers here…

TIP: Consider “extreme users.” For example, if you are targeting single parents, extremes users may
include working single parents, and recently divorced, separated, or widowed parents.

3. Who else might benefit?

Enter other customers here…

TIP: Consider “stakeholders”—people who share a concern in the problem. For example, if you are
targeting teachers, a stakeholder might be a school administrator, parent, or student.

4. Who has influence over your potential customers?

Enter influencers here…

TIP: An “influencer” is some who has sway over your target audience. For example, if you are targeting
individuals with diabetes, an influencer might be their doctor or a health blogger.

5. Whom did your brainstorming above reveal as your customers?

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Enter ideas here…

6. What value does your idea bring to those customers listed above?

Enter value here…

Ready or Not? Review Your List

Let’s review your customer interview list to make sure you identified people who can provide
the information you need to launch your business.

Does your customer interview list meet all the criteria in the checklist below? If not, take time
to make adjustments before moving forward. Starting this journey with a focus on your target
customer will save you time, effort, and money in the long run.

CHECKLIST

All of the individuals on my list are valuable to interview because they are either
potential customers or stakeholders in some other capacity.

I am planning to interview the right individuals, even if it takes a little effort to get to
them. My list is not just a convenience sampling of the individuals I have easiest
access to.
I am targeting extreme users.
Note: Extreme users are good to interview because they’ve likely hacked their own solutions
to a problem. Extreme users include people who face constraints on the extreme ends of the
bell curve. For example, if you are targeting single parents, extremes users may include
working single parents, and recently divorced, separated, or widowed parents.

I have identified and listed any influencers who will say or do things that influence my
customers.

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Support Tools
Check out the online support tools if you are feeling stuck. Support tools for this activity
include: Example customer lists, interviews with fellow entrepreneurs regarding how they
identified customers and customer needs, and an Embark community discussion board.

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Activity 1: Get to Know Your Customers

Interview Script
Template
You will need:

 Brainstorming notes from earlier in the activity

 Pad of sticky notes
 Pen or pencil

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Create Your Interview Script

The first portion of this template includes tips for developing questions. The second portion has space
for you to develop your interview script using the tips and your knowledge of your customers.

Tips for the opening:

 Help the person you are interviewing feel comfortable – exhibit welcoming body
language, thank them for participating.
 What do you need to tell them about yourself?
 Briefly explain why you are conducting interviews.

Tips for main act:

 Include prompts that ask customers to describe their situation: “Walk me through a day
in your life.” or “Walk me through the last time you…” These prompts can yield a wealth
of information and insights.
 Ask questions that might help customers illustrate pain points in their lives. For
example, “How has that experience been for you?”
 Ask questions that will give you clarity about your competition and how customer needs
are currently being addressed. For example, “What, if anything, have you previously
used to ______?”
 Ask follow-up questions that will help you dig deeper and explore the emotions of the
person being interviewed.
 Avoid leading questions. A leading question is a question that subtly prompts the
interviewee to respond in a particular way, therefore resulting in false or slanted
information. An example leading question is, ‘Do you have any problems with your
boss?’ Instead you might say, ‘Tell me about your relationship with your boss.’”
 Avoid questions with a yes/no or brief answer. Open-ended questions set you up to
gather richer data about your customers.
 Ask “why” a lot.
 Prioritize your questions, so you can adapt during the interview. This helps make sure
you get to ask your most important questions.

Tips for the closing:

 When you are about to wrap up the interview, do not rush to the end. Your interviewee
may want to share something with you. Invite them to do that. Ask, “Is there anything
else you’d like to share?” or “Is there anything else I should have asked?”
 Express appreciation as well as ask permission to follow-up, if needed.

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Interview Script Template

Opening Act
Introductions, setting context, and building rapport
Enter context setting statements and questions here…

Main Act
Questions to dig deeper and explore emotions
Enter questions here…

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Conclusion
Final thoughts and wrap-up
Enter final questions and thank you statement here…

Tips for Conducting the Interview

 Be open and friendly.
 Show genuine interest in the responses you get.
 Do not be afraid of pauses. You get the best insights after a pause. Give the customer
time. If you wait 15 seconds and do not get a response, ask the customer what is
causing them to pause and have them talk through exactly what they are thinking.
 Ask follow-up questions to get more detailed information.
 Pay attention to body language and emotions.
 If the person you are interviewing seems uncomfortable, slow down. Be kind and gentle.
Let them know that you understand that they may feel uncomfortable and offer to end
the interview.
 Take pictures and capture memorable quotes.
 Respect the time. Keep the interview to less than an hour.
 Thank them.

Capture the Interview

 During the interview get permission to record the conversation. If your user is
uncomfortable, that is okay. Play close attention to what they say, take notes if possible
and summarize at the end.
 Use the following template to summarize your interview.

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Interview Summary Template

Name:

Date and time:

Description of Who are they?

the person:
What stands about them?

What is unique about them?

Summaries of
memorable
quotes:
Their needs:

Products or
services they What works well with these products?
currently use:
What is problematic (from the perspective of your user)?

Money they
currently
spend to
address their
need:

Emotions that Strong positive emotions

stood out:
Strong negative emotions

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Activity 2: Build Customer Personas

Customer Persona
Examples

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One of our teams, Carta Health, has developed tools to help data analysts in
hospitals accelerate the time it takes to complete routine analyses of operational
data. Here is what their composite character analysis looked like. Take note of
how it clearly articulates the key motivators, practical needs, and emotional need.

Name:
Pythagoras the Data Geek
Why They are Important:
They are a growing group in an area with growing needs. They may have
leverage to drive purchasing decisions within their organizations because
data science is becoming increasingly important, and there is
competition for good data scientists so their employers wants to keep
them happy.

Who Are They: Needs:

Young, recent college graduates. Really good with
spreadsheets, data, and numbers. They see beauty in
data and elegance in getting answers from data
quickly. They believe they can make the world a better
place, one data point at a time. While they enjoy
digging into code like R or Python, they are impressed
by websites like fivethirtyeight.com that make
numbers transparent. Their favorite pastime is trying
to recreate data analyses at fivethirtyeight.com. They
want to impress with their data and communicate
them effectively to senior management. They work at
a hospital and were attracted to that job because of
the potential to do good. They envy their classmates
who work for Palantir because their data capability
platforms are so much cooler, but they find fulfillment
in the social mission.
How Many in the Population:
Not clear but every hospital needs one like them if
they do not have one or more. There are 6000
hospitals in the US. But the underlying problem exists
in many organizations that increasingly need to rely on
data. There will be 10K + and growing. (additional
research needed here)
To rapidly perform sophisticated data analyses and
turn them into meaningful insights for senior
management.
To feel the excitement of seeing their data turn into
better care for patients at the hospital.
It would change their life if they could spend more
time reflecting on how to present their analyses
instead of spending most of the time doing the
analysis.
It would be game changing if they could create
fivethirtyeight-like presentations for hospital
executives and get a wow reaction.
Nurturing the Relationships:
Data Science Meetup groups are a great way to build
relationships with them. Look for Meetups in the areas
where they work. The r/datascience community on
Reddit is also another way to engage in discussions
and build relationships.

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TezUsto, has developed a solution for finding and scheduling service for home
appliances, plumbing, and electrical issues. Here is what an initial persona looked
like. Take note of how it includes synthesized data from customer interviews.

Name:
Raphael the Busy Professional
Why They are Important:
They are employed and have no time to do the plumbing work at home
themselves. This target group makes up 57% of the target customers.

Who Are They: Needs:

Employed men in the age range of 30-45. Need plumbing and electrical services on average 4
Can afford to pay for handyman services and other in- times a year.
house repair work. 90% of this target group prefer quality plumbing and
90% live in apartments. electrical services over price.
All use mobile phones. They can be easily reached via
Facebook and other online platforms.
How Many in the Population: Nurturing the Relationships:
To be Identified. No accurate statistics. Build relationships via quality and satisfactory services.

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Activity 2: Build Customer Personas

Customer Persona
Template

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We encourage you to create 2-4 personas. As you develop and market your product or service,
focus on the persona who is most aware of the need you are addressing. The other personas
can help inform or reinforce your decisions and activities.

Image Gallery
Continue to visualize your personas. Cut and paste these images into your personas, or find
your own.

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Template #1
Add image here Name:
Enter name here
Why They are Important:
Enter 1 to 2 sentences here.

Who Are They: Needs:

Enter a couple paragraphs. Enter list of needs.

How Many in the Population: Nurturing the Relationships:

Enter short paragraph Enter short paragraph

Does your persona describe what drives and motivates this person?
Does your persona describe needs beyond practical needs?
Are your needs expressed as verbs (instead of nouns)?
Is the description specific and not generic?

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Template #2
Add image here Name:
Enter name here
Why They are Important:
Enter 1 to 2 sentences here.

Who Are They: Needs:

Enter a couple paragraphs. Enter list of needs.

How Many in the Population: Nurturing the Relationships:

Enter short paragraph Enter short paragraph

Does your persona describe what drives and motivates this person?
Does your persona describe needs beyond practical needs?
Are your needs expressed as verbs (instead of nouns)?
Is the description specific and not generic?

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Template #3
Add image here Name:
Enter name here
Why They are Important:
Enter 1 to 2 sentences here.

Who Are They: Needs:

Enter a couple paragraphs. Enter list of needs.

How Many in the Population: Nurturing the Relationships:

Enter short paragraph Enter short paragraph

Does your persona describe what drives and motivates this person?
Does your persona describe needs beyond practical needs?
Are your needs expressed as verbs (instead of nouns)?
Is the description specific and not generic?

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Template #4
Add image here Name:
Enter name here
Why They are Important:
Enter 1 to 2 sentences here.

Who Are They: Needs:

Enter a couple paragraphs. Enter list of needs.

How Many in the Population: Nurturing the Relationships:

Enter short paragraph Enter short paragraph

Does your persona describe what drives and motivates this person?
Does your persona describe needs beyond practical needs?
Are your needs expressed as verbs (instead of nouns)?
Is the description specific and not generic?

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Template #5
Add image here Name:
Enter name here
Why They are Important:
Enter 1 to 2 sentences here.

Who Are They: Needs:

Enter a couple paragraphs. Enter list of needs.

How Many in the Population: Nurturing the Relationships:

Enter short paragraph Enter short paragraph

Does your persona describe what drives and motivates this person?
Does your persona describe needs beyond practical needs?
Are your needs expressed as verbs (instead of nouns)?
Is the description specific and not generic?

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Activity 3: Prototype and Test Your Idea

Expert Tips for

Prototype Testing

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Expert Tips for Prototype Testing

Show. Do not tell.
Rather than telling your tester the value provided, show them what it does and seek their reactions on
their perception of the value.

Don’t sell!
The goal at this stage is to further your understanding of the needs and behaviors of your users.

Test with strangers.

Friends and family may be so supportive they delay you getting a true test of viability.

Role Play
Look for opportunities to role play the use of the prototype. If you aren’t working with a usable
prototype, set up a role play and ask those you are testing with to think out loud, walking you through
how they would use it.

Seek To Understand
If they ask “What does this do?,” ask them “What would you like it to do?”

Get to Know Your Users

Take advantage of the prototyping phase to:
 Gauge if your user is willing to pay for what you provide
 Discover your users as real human beings

Take Notes
For each prototype, download the data you receive. Take note of feedback and any unexpected
obstacles.

Be Mindful of Your Emotions

You will be gaining a lot of feedback on something you have worked very hard on. It will be tempting to
take all feedback personally, but try to stay focused on the larger goal. Feedback now will lead you to a
better end product that will meet the needs of your customers.

Pay Attention to the Emotions of Your User and Body Language.

It’s not only what your user says, but how she reacts, her body language. What does the body language
tell you? Is it welcoming the prototype (open arms, lean forward), does it resist the concept (closed
arms, leaning back)? How engaged is your user?

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Activity 3: Prototype and Test Your Idea

Prototype Testing
Template
You will need:

 Your customer interview data

 Your customer persona(s)

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Instructions
You’ve heard expert tips and seen examples of prototypes. Your homework is to step away from the
screen and start putting your ideas into action.
Select one of these prototyping approaches and move forward with creating your own prototype. Use
your prototypes to test your assumptions about your customers’ needs or behaviors.
 Storyboarding/Animated Video Storyboards: Used to show the solution.
 Wizard of Oz/Mechanical Turk: Used to enable interaction with the solution.
 Concierge MVP: Used to deliver value.
Keep in mind, entrepreneurs with all levels of experience make prototypes for great ideas that grow into
thriving businesses. If you can communicate your concept clearly, concisely, and energetically, you can
make a successful prototype on any budget. Some of the most effective prototypes are created with no
money at all.
You can revisit the examples, tools, and resources here in the startup guide anytime you run into a
challenge while developing or testing your prototype.
Use the template below to summarize your prototype testing data.

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Prototype Testing Template

Use the template to summarize your prototype testing data.

What worked well? What was confusing?

Be specific, provide examples, quotes, picture, etc. Pay attention to when the user hesitates, seems
puzzled, & asks questions like, “What would this do?”

What questions did the user have? What ideas did they have about
Write them all down. No matter how small. changes/modifications?
Listen for, “What if this could do…” or “What if it could
help me do …?”

Expert Tip: Make sure that you provide evidence in the form of quotes or body
language in each of the four quadrants. For example: What worked well? User
was open, responsive, engaged, asked lots of questions (provide specific
questions they asked — under “what questions did user have”).

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Activity 4: Articulate Your Value Proposition

Value Proposition
Template

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Value Proposition Method 1:

Worksheet Template

Who are you serving?

(Reference your customer persona(s) and interviews for greater clarity around this question
and question #2 below.)

Enter answer here…

What problems do they have?

Enter answer here…

What benefit do you provide in solving the problem?

(Think back to your prototype and prototype testing to confirm your thinking as you answer this
question.)

Enter answer here…

How do you do it differently?

(Think back to your customer interviews. What clarity did you gain around how others are
currently meeting this need/problem/opportunity? How do you address it differently?)

Enter answer here…

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Value Proposition Method 2:

Statement Template
Instead of – or in addition to – answering the four questions above, fill in the blanks in the
statement below.

For ___________ (target customer),

who _______________ (the need/problem/opportunity),
___________________ (product/service name)
provides ______________ (benefits/ statement of value).
Unlike ________________ (existing alternatives),
our product _______________ (point of difference)

Creating Your Tagline

A value proposition is more than just a great tagline. In fact, a really great value proposition will
lead you toward that perfect advertising tagline you long for.

Fifty years ago, Philip Morris, the owner of the soda 7Up, wanted to position its soft drink as an
alternative to the most popular soft drinks of the era, Coke and Pepsi. Their strategy involved
getting people to consider 7Up as a soft drink (along with Coke and Pepsi), but to choose 7Up
because of its clear, refreshing citrus taste – its point of difference over Coke and Pepsi. This led
to the advertising tagline, “7Up, the Uncola.” Essentially it was the strategy from the value
proposition – “What value do we provide and how is it different?” – that led to a creative
advertising campaign that reshaped the soft drink market.

If you don’t already have one, spend some time brainstorming a tagline that concisely
communicates your value proposition in a catchy way.  

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Identify Your Go-to-Market Strategy and Partners

Go-to-Market System
Template

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STAGE OF
CUSTOMER Awareness & Interest Creation
JOURNEY To sell your product/service, customers have to want to buy it. This starts with awareness
of the product/service and the benefits it provides.
How will you generate awareness of your product/service?Do you expect to have to go out
and find your customers, or do your customers find you?  If you find them, how will you
generate leads for your business? If they find you, how will you let customers know where
to find your product/service?  How will you generate customer traffic in the places where
you offer your product/service?
How do you plan to create desire for your product/service?
ESSENTIAL Type strategic tasks here
WORK

GTM
PARTICIPANT

STAGE OF Pre-purchase Activity: Information Search

CUSTOMER During pre-purchase, customers are analyzing competing products/services.
JOURNEY How will your customer learn about the features and benefits of your product/service?
Who will explain how to use it?
ESSENTIAL Type strategic tasks here
WORK

GTM
PARTICIPANT

STAGE OF Pre-Purchase Activity: Evaluation/Trial

CUSTOMER During pre-purchase, customers may need a trial to resolve uncertainty and may need help
JOURNEY realizing the benefits of your product/service.
Will your customer need help to see how your product can be used to solve their
problem?
Will your customers want to compare your product/service to other alternatives in order
to assess its relative benefits?  If so, how will you accomplish that?

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ESSENTIAL Type strategic tasks here

WORK

GTM
PARTICIPANT

STAGE OF Purchase
CUSTOMER The purchase is where the final GTM activities come together in a transaction.
JOURNEY Will you offer your product at a take-it-or-leave-it price? Or will there be some negotiation
involved (and who will negotiate the terms)?
Will your customer want to see a proposal from you before committing to your product? If
so, who will carry out the proposal process?
Does your customer require assistance to close the deal? If so, who is responsible?
ESSENTIAL Type strategic tasks here
WORK

GTM
PARTICIPANT

STAGE OF Post-purchase Activity

CUSTOMER The purchase is not the end. Many products need to be delivered, installed, and serviced.
JOURNEY Customer support is often needed to answer questions or address additional needs.
Who will repair and maintain the product?
Who takes responsibility for answering customer questions?
How will you maintain a relationship with your existing customers?
Who will handle complaints and returns?
Who will handle payment collection?
ESSENTIAL Type strategic tasks here
WORK

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GTM
PARTICIPANT

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Activity 6: Price Your Produce

Pricing
Template

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Setting Your Price

To set your price, you’ll need to do two things:
1. Establish a reference point as a basis of comparison for the new product/service. In
general, people are much better at making comparison judgments than they are at
making absolute judgments. By using the status quo (how customers are currently
dealing with their problem) we can quantify the relative benefit your product/service
delivers.
2. Break down the benefits delivered by your product/service (relative to the status
quo). If there is not an obvious economic value, then you need to find the right analogy
to justify the price. Consider these three types of non-monetary benefits:
1. Functional benefits
2. Emotional benefits
3. Self-expressive benefits

Expert Tips
Consider the following expert tips as you set your price.

Focus on one target customer segment.

Ensure you have clarity on what they care about. Use this information to guide your pricing.

Start by identifying functional benefits.

Functional benefits (if relevant) are the easiest to quantify. You can quickly calculate cost savings, time
savings, reduced errors, improved productivity, and other functional benefits.

Consider the differences between B2B and B2C.

Companies are typically most motivated by economic benefits.

Be creative when assigning value to emotional benefits.

Emotional benefits impact how people feel when they consume or use your product/service. They are
hard to quantify. You may need to develop analogies. What alternatives provide comparable feelings?

Be realistic when considering profitability.

You may find that the value delivered by your product/service does not justify a price that allows you to
be profitable. If this happens, you may need to go back to the drawing board to see if you can design
and deliver a product at a price that provides value and allows for profitability. One approach is to start

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by identifying the problem, then establish a price ceiling for the solution, and finally design a solution
that fits within that price.

Avoid superfluous added features.

Some make the mistake of adding features in an attempt to justify a higher price. If the feature(s) lose
sight of what the customer really cares about, they will not support a higher price for the added
feature(s).

My Price
Complete the table below to identify and consider all factors that impact where to set your price.

Target Customer Segment:  ______________________________________

Current Solution (Status Quo):  ____________________________________
INCREMENTAL WILLINGNESS TO
ANALOGY TO A
TYPE OF BENEFIT (VERSUS STATUS PAY
FAMILIAR BENEFIT
QUO)

FUNCTIONAL

EMOTIONAL

SELF-EXPRESSIVE

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Activity 7: Determine Your Customer Value and Acquisition Cost

Customer Acquisition
Cost
Template

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1. Customer Lifetime Value 2. Customer Acquisition 3. Comparison

If you haven’t done so already, use
one of the formulas introduced at
the beginning of this activity to
estimate your CLV.
Cost, based on Go-to-Market
System
Consider your Go-to-Market system. How does your CLV compare to the
What are the costs associated with CAC you’ve identified? Subtract your
bringing your product to market? CAC from you CLV and capture the
You may not have enough number below.
information to answer this question,
so check out the examples on the
next page and consider if one of the
approaches is similar to yours.

$_________ $_________ $_________

Ideas: Ideas: Ideas

Example 1: Inside Sales

CAC = $1000+

It its early days (circa 2006, long before its multi-billion acquisition by SAP), Qualtrics employed
a phone-based customer acquisition process. Inside sales reps, so called because they reached
out to potential customers from their desks (rather than traveling around the country to meet
them). Reps sold the Qualtrics Research Suite, a flexible platform for survey creation and
analysis, to companies and research groups within companies. Qualtrics, based in Provo UT,
hired inside reps to fit the following profile: smart (average GPA of 3.7 out of 4.0), able to

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manage multiple roles at once (most reps had worked while they were in school), college
athletes, and had lived outside Utah for at least two years (these were often Mormons who had
served as missionaries). These reps were paid a relatively low base salary (about $2,000 per
month), but earned commissions on every sale. As a result, the most successful reps were able
to earn upwards of $100,000 annually. The firm also incurred some overhead in training and
supporting these reps. If a productive rep was able to close ten new customer deals per month,
the CAC comes out to about $1,250 per customer.

Example 2: Digital Advertising and Paid Social Media

CAC = $25 – $100

Livionex is a small, privately-owned company in the San Francisco Bay Area. They sell a next
generation dental gel called LivFresh that is more effective than conventional toothpaste in
cleaning teeth. The Head of Marketing for the company is John Maull, an MBA from the
Stanford GSB. The company sells LivFresh, with a list price of $20, on its own website and on
Amazon.com. To create awareness for the product and to bring prospective customers to the
company’s website, the company engaged in a native advertising campaign (where paid ads
match the look and feel of the media format in which they appear). Clicking on a native
advertising link would bring the prospective customer to a specially designed landing page
designed to promote conversion. The economics of native advertising look something like this.
The cost of impressions is very low. One thousand impressions might cost less than one dollar
(e.g., a campaign delivering 50 million impressions might cost only $25,000). Click-through rates
are typically very low in native advertising (on the order of 0.1%. CAC depends on the rate at
which the company can convert the prospects who click through to their landing page. If
conversion rates are on the order of 0.5% to 1.0%, CAC in in the range from $50 to $100 per
customer. Livionex also experimented with running testimonial and direct response videos on
Facebook. Running these ads is much more expensive. The cost per thousand impressions
might 100x as expensive as native advertising, which means that a $25,000 campaign might
only generate 500,000 impressions. However, with click-through rates (2%) and conversion
rates (5% to 10%) much higher, the CAC for Livionex might actually be lower than native
advertising, in the range from $25 to $50 per customer.

Example 3: Freemium
CAC = $1 - $50

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Spotify uses a freemium strategy for its customer acquisition. It offers an ad-supported free
service to attract users. Over time, some of those users drop off, some continue using the free
service, and some decide to upgrade to ad-free Spotify Premium service (at a cost of $9.99 per
month). Ads do not cover the costs of the music licensing fees and royalties of the songs
streamed to users of the free service. Spotify thinks of these costs as a marketing and
acquisition expense. In 2017, Spotify reported revenues of roughly $5 billion and still reported a
loss of almost half a billion dollars. If we assume that it cost the company $5.5 billion to stream
music to roughly 150 million active users (both premium subscribers and freemium users), the
cost is between $35 and $40 per year per user. CAC would be higher if we also took into
account any marketing expenses incurred by Spotify to promote awareness and encourage trial.
Not all freemium services are the same with respect to the economics of acquisition costs.
Dropbox offers a freemium service in which users receive 2GB of storage for free. Users receive
incentives of additional free storage (in increments of 250MB) for referring other prospective
customers to Dropbox. Users can upgrade to Dropbox Plus (which increases storage to
1,000GB) for about $10 per month. Unlike Spotify, where roughly 40 percent of users subscribe
to the premium version), only about 4 percent of Dropbox customers do so. However, also
unlike Spotify, where the cost of servicing a free customer is $35 to $40, for Dropbox the cost of
2GB of space (and bandwidth associated with the use of that store space) is probably less than
$1 per month.

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Activity 7: Determine Your Customer Value and Acquisition Cost

Progresso Financiero
Example

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Introduction
Progreso was a socially responsible micro-lending company founded by Stanford MBA James
Gutierrez. The company opened its first location inside a Mexican grocery store in San Jose, CA
in 2006. The goal of the company was to help working poor and under-banked Hispanics build
credit by extending small loans at reasonable rates. In contrast to payday lenders, who charged
over 400% APR, and personal lenders in Mexico, who charged over 100% APR, Progreso offered
loans capped at 36% APR. Their secret sauce was a proprietary scoring algorithm that made use
of an interview-style assisted application process with personal references and data other than
credit histories.

Customer Lifetime Value

First let’s look at CLV.  The average size of the first loan taken out by a Progreso customer was
$900 which was paid off in 9 months. The total revenue generated by this first loan was $145.
The cost of the loan, which included Progreso’s cost of money and a charge off rate for bad
loans (which was less than 10%), was about $100. So the value of the first loan for Progreso was
about $45. About 65% of Progreso customers applied for a second loan, and 80% of these were
approved. For these loans, the revenue was the same, but the cost was less due to a lower
charge off rate. These loans netted about $90 each for Progreso.

If we assume that half of Progreso’s customers take out only a single loan (with a value of $45)
and half take out two loans (with a combined value of $135) over their lifetime with the
company, then the average CLV of a Progreso customer is $90.  What does this number tell us?
It says that the company has about $90 per customer to cover the costs of customer acquisition
and have enough left over to cover fixed costs and return a profit to the investors.

 First Loan Only:

o Average loan is $900 for 9 months
o Total revenue is $145
o Costs per loan
 Cost of money is 8% (APR) -> $30 to PF
 Charge off rate is 7.5% ($67.50)
o Value of first loan is $145 - $30 - $67.50 = $47.50
 Second Loan:
o 65% renewal rate and 80% loan approval = 52%
o Assume same size ($900); same revenue of $145

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o Charge off rate is 3.75% ($33.75)

o Value is $30 - $33.75 = $81.25 x 0.52 = $42.25
 CLV of two loans is $47.50 + $42.25 = $89.75

Monthly Customer Acquisition Spend

Now, we look at the costs to Progreso of acquiring a customer. Unlike many competitors that
used direct mail marketing to prospect for customers and solicit applications, Progreso used a
direct selling approach. They rented space in retail locations (like grocery stores) and staffed
each location with two FTE account executives (AE). AEs were paid a base salary plus a
commission on completed sales applications that started at $0 and increased to a maximum of
$35.

These sales costs make it possible to calculate the cost per customer acquisition depending on
the productivity of the AEs.  It turns out that at an average rate of 38 loans per month per AE,
the cost of acquiring a customer for Progreso was about $90.

 Rent $1000/month/AE (2 AE’s per location)

 AE base salary: $1,280 (40 hrs/week*$8/hr*4 weeks = $1,280)
 Monthly commission with CPA (per AE):

 Currently doing 38 AE (77 per store)

 CPA@38 loans/month = ((38 * $30) + $1,280 + $1,000)/38 = $90

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