This document discusses customer acquisition cost (CAC) and lifetime value (LTV), two key metrics for evaluating the financial performance of acquiring customers. It defines CAC as the cost to acquire a new customer and LTV as the total revenue generated by a customer over their lifetime. It provides formulas for calculating CAC, LTV, and the CAC payback period. A CAC/LTV ratio of at least 3x and payback period of 12 months or less are recommended targets. The document explains why these metrics are important for investors, bootstrapped companies, and reducing equity dilution. It addresses common questions about including costs in CAC calculations and estimating customer lifetime.

1. Customer Acquisition Cost and
Lifetime Value (CAC & LTV)
June 24, 2014

2. Who’s Red Granite?
(…and why should you listen to us?)
1. Founded in 2011 by Chris Arndt
2. The Entrepreneur’s Finance Team
3. Focus on financials AND key metrics
that affect the financials
4. Proud Associate Members of 1871!

3. What’s CAC?

4. Key Formulas
Customer Acquisition Costs (CAC)
CAC = (Total “Sales” Expenses per Month)/(# New Customers per Month)
Customer Lifetime Value (LTV)
LTV = (Monthly Revenue) * (Gross Profit %) * (# Lifetime Months1)
36 months or less recommended.
CAC Payback Period - Months (PBP)
PBP = CAC / ((Monthly Revenue) * (Gross Profit %))

5. Key Ratios
LTV/CAC >= 3x
CAC Payback <= 12 months

6. Time to Quit ☹
Image Source: forentrepreneurs.com

7. Happy Dance! ☺
Image Source: forentrepreneurs.com

8. CAC & LTV Illustrated
Image Source: blog.asmartbear.com

9. Which PBP is Better?

10. Why Do We Care?

11. Why Do We Care?
Investors want know!
($50)
+$150
e.g. For every $50 the investor gives you now, that will enable you
to acquire a customer and return $150 in three years.
Image Source: blog.asmartbear.com

12. Why Do We Care?
Bootstrapped? Save yourself from ramen noodles!
Working Capital Cycle
A faster PBP means more profit cycles in a shorter
time period.
CAC
CAC
Payback
$ Profit

13. Why Do We Care?
A faster CAC Payback let’s you keep more equity
Less money will be needed from investors so your
ownership won’t be as diluted.

14. FAQ’s

15. FAQ: What’s in CAC?
A: More than you think!
▪ Paid advertising
▪ PR
▪ Sales people base & commission
▪ Sales manager
▪ Free trial support and hosting
▪ On-boarding costs

16. FAQ: Customer lifetime?
Q: How can I guess the number of months of my customers’
lifetime when my site has only been live for two months?
A: In month two, start looking at the churn of the customers that signed-up
in month one (i.e. Month 1 Cohort). Keep track of the churn for the
Month 1 Cohort in the third and subsequent months as well.
Then use this formula…
# Months Lifetime = 1 / (Avg. Monthly % Customer Churn)

17. FAQ: Shorten PBP?
Q: I now understand that the shorter the CAC Payback period
the better, but how can I actually improve upon my current
PBP?
A: Two options: either reduce the CAC or increase the monthly profit margin
for the customer.
Continued on next slide…

18. FAQ: Shorten PBP? (cont.)
Image Source: forentrepreneurs.com

19. Other

20. Advanced Topics
1. Cohort analysis to see
improvements over time
1. Customer segmenting to identify
most profitable segments

21. Questions?
Chris Arndt, Founder
▪ Email: carndt@redgranitellc.com
▪ LinkedIn: http://www.linkedin.com/in/chrisarndt
Web: www.redgranitellc.com