In plain words
Peak cash need is the deepest point of a spending plan's running total. Each month you pay to acquire customers who will repay you over the following months. Until earlier cohorts' renewals outweigh the new month's spend, the total owed keeps growing. Its lowest point is the cash the plan requires.
A plan can be profitable on every customer and still fail on this. The return arrives later than the spend. Growing faster makes the gap wider, because each larger cohort adds its loss before the previous ones have paid back.
Formula
- Cumulative cash at month m = Σ over months so far of (margin from every cohort's orders − ad spend)
- Peak cash need = the lowest cumulative cash, as a positive amount
Worked example
Spend $3,000.00 a month for six months acquiring coffee subscribers at $30.00 each, 600 in all. The engine puts the plan's peak cash need at $6,273.95, reached in month 5.
The running total turns positive for good in month 8, and after twelve months the programme has returned $8,806.67 on $18,000.00 of spend.
The example order
A $40.00 bag of coffee, shipped free, every cost counted
2 declared kinds cost nothing on this option
| Step | Grain | Amount |
|---|---|---|
| Revenue | – | $40.00 |
| Cost of goods | per unit | −$12.00 |
| Pick and pack | per order | −$1.18 |
| Packaging | per parcel | −$0.50 |
| Shipping label | per parcel | −$7.50 |
| Card fee per order | per order | −$0.30 |
| Refunds | percent | −$2.00 |
| Card processing | percent | −$1.16 |
| Contribution margin | – | $15.36 |
| 2 kinds costing nothing | – | $0.00 |
Computed by the margin engine in Offer Suite's own code, in whole cents, from a $40.00 bag of coffee with a $12.00 unit cost.
Peak cash need is not total spend
Spend is partly repaid as you go, by first orders at once and by renewals month after month. The cash you need is the largest gap between what has gone out and what has come back, which is well under the total spent.
Using it
Lay out the spend month by month before committing to it, and find the low point. If it is more than you can fund, lower the monthly spend or shorten the payback. Raising the total budget does neither. Remember that stock has to be bought ahead of the orders too, which this figure does not include.
In Offer Suite
Offer Suite's simulator can lay out a spending plan month by month for a subscription offer and report the peak cash need, the month it falls in and the month the plan turns cash positive. It can also solve for the first month's spend that keeps the peak under a ceiling.
Source: Offer Suite's offer simulator.