Strategic entrepreneurs are watching their LTV (Lifetime Value of a Customer) and CAC (Customer Acquisition Cost) numbers. Combining these two metrics into the LTV to CAC ratio creates a powerful metric.
Lifetime Value of a Customer (LTV)
The Lifetime Value of a Customer (LTV) formula shows us that profitability and customer retention determine the lifetime value of a customer. This ratio helps business owners manage the tradeoffs between driving short-term profits and maintaining long-term customer relationships. Finding ways to simultaneously improve profits and customer loyalty will have a profound impact on the valuation of your business.
Customer Acquisition Cost (CAC)
Customer Acquisition Cost (CAC) shows the average cost to acquire new customers for your business. This performance metric also helps you assess the effectiveness of your sales and marketing efforts. Tracking your Customer Acquisition Costs will help business owners see which sales and marketing initiatives are working well and which initiatives should be modified or eliminated.
LTV to CAC Ratio
The LTV to CAC ratio provides business owners with intelligence that can guide decisions on sales and marketing spending. Businesses with LTV to CAC ratios over five should consider increasing their sales and marketing spending. These companies have a strong potential for scaling and should consider raising capital. Showing prospective investors that every dollar spent on marketing increases value by five times or more can help secure capital at favorable terms.
Watch for Changes in your LTV to CAC Ratio
LTV and CAC are dynamic metrics affected by changes in your performance and your competitors, so set up a routine to monitor changes in these metrics. This could help you become a more strategic entrepreneur.
How We Can Help
LTV and CAC are nuanced calculations. Experienced CFOs like the partners in the Florida CFO Group can help you understand the nuances and validate your numbers. More importantly, it your LTV to CAC ratio suggests that your business has the potential to scale, we can help you strengthen your infrastructure (i.e. processes, technology and people) to support your growth.
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