How much is it costing you to acquire each new customer in your business? Do you know that number? This is your CaC — Customer Acquisition Cost.
Basically, the CAC can be calculated by simply dividing all the costs spent on acquiring more customers (marketing expenses) by the number of customers acquired in the period the money was spent. For example, if a company spent $100 on marketing in a year and acquired 100 customers in the same year, their CAC is $1.00.
Okay, so how much is each customer worth to your business? This is their lifetime value or LTV.
LTV = ARPA x Gross Margin % / Customer Churn Rate,
Related Article: Why Misunderstanding Startup Metrics Can Cost You Your Business
– ARPA: Average Revenue Per Account (The average MRR across all of your active customers)
– Gross Margin: The difference between revenue and COGS (Cost Of Goods Sold). This is typically extremely high in SaaS (>80%)
– Customer Churn Rate: The rate at which your customers are cancelling their subscriptions.
Why Does These 2 Numbers Matter?
Because this calculation is the only part of your business growth that matters.
Your growth depends on ensuring that your CaC is going to be less than your LTV. You want to make sure that you’re spending less than you’re going to make from each customer once you’ve signed them up.
It’s not actually important (and nobody is going to care) if you have a bunch of new clients coming in the door every day, but it’s costing you more than you’re making. That’s unsustainable and unhealthy growth, no matter what Unicorn worshippers would have you believe.
So the simplest marketing equation is this:
LTV divided by CaC = Acquisition Ratio
If your business is making $1500 per client, and you’re spending $800 on an acquisition, your Acquisition Ratio is 1.88. If your business is making $25 per customer and you’re spending $2 to acquire them, your AR is 12.5.
If you can demonstrate a healthy Acquisition Ratio, you know that not only is your marketing working, your business model itself is probably working pretty fuck’n well too.