Lifetime Value/Customer Acquisition Cost Ratio
To break it down a little more, because these particular metrics are not always as obvious in our financials: the Customer Acquisition Cost (CAC) is found from taking your total expenses over a given amount of time, (normally a month) and dividing that by the number of new customers in the same length of time. You will notice that these KPIs would also be relevant to a product-based or e-commerce business model as well. The formulas for this popular KPI is:
Related read: Three ways to lower your customer acquisition cost (CAC).
Customer Acquisition Cost (CAC)
Lifetime Value (LTV)
Lifetime Value is your monthly recurring revenue (MRR) multiplied by Gross Profit % multiplied by the number of lifetime months. It’s common to see a Gross Profit of 80% or higher in SaaS models. Let’s use Dropbox as an example. Their margin may seem high if they’re charging $9.99/month, but there are some less obvious costs: payment processing, server usage, customer support costs etc.
Finally, take your LTV divided by your CAC and you’ve got your ratio. Aim for a ratio of 3 or greater to see optimal growth!
Payback Period (PBP)
It is your cycle of cash and it is our favorite forgotten metric: your Payback Period (PBP). You can dive into more detail in this post, but it’s similar to inventory turn. A key takeaway is to keep your PBP at 12 months or less. Meaning if a PBP is 12 months, it took you 12 months to recoup your costs for that customer. Returning back to our Dropbox example: why do they offer a 20% discount to pay upfront for a year? They have a better PBP if they get the cash immediately versus waiting for 12 months to receive all of your monthly payments.
What you might have noticed, is that even if your business model isn’t exactly E-Commerce, SaaS or Service, that you can still map a relevant metric to one of the above formulas and tweak that KPI to make it work for your scaling business. Once you understand which KPIs for growth are best for your business and the stage of growth you are in, you can strategize around them. Do that and you won’t just talk the “growth” talk, but you’ll be walking the “growth” walk!