How do you measure value creation in your startup? There are 3 metrics you should be focusing on:
-LTV: Lifetime Value
-CAC: Customer Acquisition Cost
-LTV to CAC ratio
Here is a simple way to calculate them and get value for your business:
-LTV: Lifetime Value
-CAC: Customer Acquisition Cost
-LTV to CAC ratio
Here is a simple way to calculate them and get value for your business:
1/LTV: this will tell you the total cash flow your company expects to earn over the lifetime relationship with a single customer. One of the MANY ways to calculate it:
LTV = Av. Revenue per customer x No. of transactions per customer x retention time period x profit margin.
LTV = Av. Revenue per customer x No. of transactions per customer x retention time period x profit margin.
For example, Av. revenue per customer is $100 and customer shops 3 times per year with a margin of 40%, LTV = 120.
This is one of the MANY ways of calculating it, investigate and use the one that fits better in your business. You can add complexity by adding retention rates.
This is one of the MANY ways of calculating it, investigate and use the one that fits better in your business. You can add complexity by adding retention rates.
2/CAC: any cost related to acquire a NEW customer. A simple formula for digital advertising channels:
CAC = Digital marketing spent per month / No. of new customers per month.
CAC = Digital marketing spent per month / No. of new customers per month.
For example, this month you spent $1,000 in digital advertising and acquired 50 NEW customers from Twitter, then your CAC will be (1,000 / 50) = $20 per new customer. Track this metric weekly or monthly as you see fit for your business.
3/LTV to CAC ratio: This will tell you if your business model is creating or destroying value on your company. Ratio is < 1 you are probably destroying value. A ratio > 3 is considered good, above 5 is great but you are probably spending too little and missing out on business.
Once you start tracking these metrics you can start comparing your acquisition channels and optimize for the one that will give you a higher LTV to CAC ratio.
Reply with "Value" below if you want a copy of my LTV to CAC template.
Reply with "Value" below if you want a copy of my LTV to CAC template.
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