LTV and CAC are common indicators that investors use to understand business value
A business looking to raise funding needs to understand the busines value that there business is creating. How do you know if business is creating value?
The two key parameters are customer Lifetime Value and Customer Acquisition Cost
If LTV/CAC ratio is less than 1 then your company is destroying value and if is more than 1 then business is loosing value.
How to calculate LTV and CAC?
Let us understand through an example. Lets say they Widget corporation is a SaaS company selling marketing automation tool to small and medium size businesses.
The company spends $10,000 on digital campaigns and acquires 1,000 new customers. The average revenue per customer is $50 and the direct costs of filling each order are $30. The company retains 75% of its customers per year
To calculate the LTV
Customer contribution margin = $50 – $30 = $20
LTV = $20 / (1 – 75%) = $80
To calculate the CAC
CAC = $10,000 / 1,000 = $10
LTV/CAC ratio = $80 / $10 = 8.0x
A LTV/CAC ratio more than 3 is considered a company of high value and interesting to investors.
One point to keep in mind is that Contribution margin may not be useful if there are significant fixed costs.
The model differs by E-commerce, SaaS, Marketplace etc. Our experts can help to provide a detailed LTV and CAC analysis.