(2024-01-04) Is Ltv To Cac The Nickelback Of Saas Metrics

CJ Gustafson: Is LTV to CAC the Nickelback of SaaS Metrics? Today I’ll explain why LTV to CAC is flawed, yet a consistent recipient of misplaced love.

• see similar past (2012-09-04) Gurley The Dangerous Seduction Of The Lifetime Value LTV Formula

There are a million reasons startups fail. But one is getting over your skis on customer acquisition cost and running out of gas.

People make a few very common mistakes

Forgetting to Gross Margin Adjust your LTV

Using the Wrong Churn Rate

Refusing to segment

The difficulty of landing a customer changes over time

General benchmarks are like general life advice - lazy and not that helpful

Whenever you ask what a “good” LTV to CAC looks like, you’ll often get quoted an unhelpful 3 to 1 ratio...In B2C print media, 2 is pretty good. In life insurance, 10 is normal. In SMB SaaS, 3 is solid...

It takes too long to get an accurate read

In summary, companies make two potential foot faults here:

• Imputing an LTV to CAC based on too small of an “n” sample size, and extrapolating it out over the entire customer base.
• And calculating LTV to CAC on a cohort of customers that literally can’t churn

As a rule of thumb, I’m skeptical of any LTV to CAC that quotes a number longer than the time the company has been selling software. so mainly an issue when significant chunk of LTV is on long customer relationship

Bigger isn’t always better

My friends on the world wide web agree:

What should you use instead?

CAC Payback Period will tell you how long it takes to get your money back - very important so you don’t spend into the ground and not survive to see your estimated LTV to CAC horizon.