While the general assessment is correct, I think the core argument confuses marginal and fixed costs.
Say the average customer represents R dollars in annual revenue. That’s:
$4R of revenue over the lifetime of the customer. But:
$1.5R is spent to acquire the customer (the pay-back period).
$1.2R is spent in gross margin to service the customer (4 years times 30% cost).
$0.6R spent on R&D (15% over 4 years).
$0.6R spent on Admin (15% over 4 years).
The last two items strike me as decidedly fixed. That is, that until some critical mass is hit, there is no difference in cost for R&D and things like HR between supporting one customer, five customers, or fifty customers. Therefore it isn't appropriate to allocate a set percentage to each customer as once you've established an R&D department, each incremental customer is not contributing 15% of its margin to that cost.
Additionally, there is an inherent assumption that no matter what, as long as the company is growing it will necessarily be unprofitable. This is only true if you can assume that there is no point that your customer base is large enough to overcome customer acquisition costs. In reality, the pace of growth is probably going to level off at some point whereas the churn rate of the customer base could be low enough to turn a profit.
I know that the assumption was 70% retention but this seems largely speculative and unfair considering the considerable R&D spend. If new developments are made, one might assume higher retention is a possibility.
"And that is without any growth at all. But you need to grow enough to keep up with cancellations at minimum, so that consumes the last notion of profitability."
Growth to keep up with cancellations is covered by the $1.5R acquisition cost.
Although to disagree with you slightly I would say that Admin at least would be partially proportional to the number of staff (which is likely to be related to the number of customers) although improving the system so that less support was required (better documentation, easier to use software) should have a knock on effect here. Some parts would be fixed costs though.
Say the average customer represents R dollars in annual revenue. That’s:
$4R of revenue over the lifetime of the customer. But: $1.5R is spent to acquire the customer (the pay-back period). $1.2R is spent in gross margin to service the customer (4 years times 30% cost). $0.6R spent on R&D (15% over 4 years). $0.6R spent on Admin (15% over 4 years).
The last two items strike me as decidedly fixed. That is, that until some critical mass is hit, there is no difference in cost for R&D and things like HR between supporting one customer, five customers, or fifty customers. Therefore it isn't appropriate to allocate a set percentage to each customer as once you've established an R&D department, each incremental customer is not contributing 15% of its margin to that cost.
Additionally, there is an inherent assumption that no matter what, as long as the company is growing it will necessarily be unprofitable. This is only true if you can assume that there is no point that your customer base is large enough to overcome customer acquisition costs. In reality, the pace of growth is probably going to level off at some point whereas the churn rate of the customer base could be low enough to turn a profit.
I know that the assumption was 70% retention but this seems largely speculative and unfair considering the considerable R&D spend. If new developments are made, one might assume higher retention is a possibility.