Unpacking the Deep Diagnostic Value of LTV/CAC for SaaS Startups

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tomtunguz.com – In a recent podcast, Ron Gill, the CFO of Netsuite – a $7B+ market cap company with about $600M in 2014 revenue, which provides ERP software to mid-market companies – articulated the importance of the Lifetime Value / Cost of Customer Acquisition (LTV/CAC) ratio for his company. LTV/CAC is often used to justify marketing and sales investment to acquire customers. But there’s much more to it.

LTV/CAC is a powerful diagnostic tool for the performance of almost every team within the company: product, engineering, sales and marketing. Gross margin, which is an important factor in LTV, reflects the engineering architecture and the hosting costs required to support customers. Average revenue per customer is a function of the product and the sales efficiency (and arguably marketing/positioning.) The chart above isn’t meant to be comprehensive, but illustrate for a hypothetical company some of the constituent parts of the LTV/CAC. A real tree would be much more granular and could extend several layers deeper.

 

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