Every startup has one key metric to grow their business to the next level.
For a software as a service business it is the CAC: LTV ratio
CAC standards for Cost of Customer Acquisition and represents the cost of signing up the customer including marketing, sales, and any other related expenses.
Lifetime value and stands for the total amount of revenue from the customer. This is typically calculated by looking at the churn rate which is how many customers are dropping out each month.
The metric compares CAC to LTV.
A base ratio of 1:3 indicates a business model that is successful. In this example for every $1 spent on acquiring the customer the customer is spending $3 on the service.
For venture funded companies the ratio needs to be 1:5 or better
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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.