CAC, LTV, & LTV ratios measure recurring revenue business models' scalability, consulting CFO for small businesses. Rolf Neuweiler, A2ZCFO. (image: signing)

Customer Lifetime Value (CLV) and CLV to CAC Ratio – Part 2 of 2

In Part 1, we discussed CAC (customer acquisition cost), how to use it and its limitations. In Part 2 here, we will explain about CLV and CLV to CAC ratio.

CLV – Customer Lifetime Value

CLV (sometimes referred to as LTV) represents the total amount of revenue a business gets from a customer over the length of the customer’s relationship with the business, before the customer stops paying (or “churns” in SaaS business model).

How To Calculate CLV

A simple formula:
(Annual revenue per customer X Customer relationship in years) – Customer acquisition cost

Example: A company generates $2,000 each year per customer with an average customer lifetime of 5 years and a CAC of $2,000 for each customer.

The company’s CLV is:  $2,000 X 5 – $2,000 = $8,000.

How to Calculate CLV to CAC ratio

Formula:

(Average Revenue Per User (ARPU) x Profit Per User) / Churn Rate

(Churn Rate: the percentage of service subscribers who discontinue their subscriptions within a given time period.)

How to Measure the Health of a Business with LTV to CAC Ratio:

The LTV to CAC ratio gives you insight into the business’ overall efficiency.  For a fast-growing and healthy business model, it can get a great bang for your buck with minimum spending while acquiring the highest value customer. 

With LTV to CAC ratio at 3:1, every dollar you spend, you get three dollars back in customer lifetime value. For growing SaaS companies, the industry standard for LTV to CAC is 3:1, as expected by VCs.  

A lower ratio at 1:1 signals near negative profitability. A higher ratio at 5:1 signals it is time to invest more on marketing. 

CLV to CAC ratio helps a business to focus on going after the ideal customers whose lifetime value is worth the cost, and with marketing strategies for expanding to new markets. After identifying the most valuable group of customers, come up with tailored services to keep them as long-term clients.

Factors that will help with LTV to CAC ratio:

A company can improve LTV to CAC ratio with many strategies, such as:

  • Lowing cost for sales, distribution and customer support with outsourcing,
  • Invest in persistent SEO & digital marketing for high visibility on the search engines,
  • Develop strategic referral partnerships that provide a steady supply of customers, and
  • High exit barrier of inconvenience for customers to leave, easy customer onboarding,

A2zCFO, both the Right and Left Arms for your organization:

A2ZCFO has decades of experience helping small business owners, technology startups and companies.  As a consulting CFO, I help business owners and management to “keep your ship on course.”

We help with any aspect of financial management from A to Z. By providing trusted financial advice, I create financial and goal clarity, resulting in increases in cash, profitability and sales all the while preparing the business strategically for a successful exit when the time is right.

  • Works at client’s location and directly with client’s staff;
  • Affordable and flexibility in hours – 4 hours a month to short term full time assignment;  
  • Excels at messy and difficult accounting clean up situations;
  • Meaningful financial reporting for management, bankers, and CPA’s.  Tax returns completed by 4/15;
  • Cradle to grave services – from bootstrapped startups to exit transition service experience.

Please call me (925) 216-5058 or email:  rolf@a2zCFO.com   A2Z CFO, we keep your ship on course.

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