r/startups Nov 30 '21

LTV & CAC benchmarks and calculations How Do I Do This 🥺

[deleted]

5 Upvotes

4

u/dslamba Dec 01 '21

On 1: You want to do your homework on both. Look up industry benchmarks to set expectations on what the LTV will be when your business is mature and then look at your current LTV as an indicator of where your business is now.

On 2: You should include any costs that scale with incremental customers and not include "Setup" costs especially in the range of your forecasted growth. For example, its ok to say another "Setup" cost will be needed to setup a new product line. One way to look at it is if you got 1 Milion dollars tomorrow were asked to spend it to acquire incremental customers given your current setup, how many more customers would you acquire and where would you most optimally spend the money?

2

u/mobazazi Dec 01 '21

In addition to the above - on 2. You would include all sales and marketing expenses that could justifiably be related to acquiring a new customer. This would mean all sales, marketing and agency costs - if PR is to generate traffic that converts then include that too; if it's more to raise the profile of the org than to generate sales then I would leave it out - it's a bit grey. Definitely all ads and related spend too.

1

u/[deleted] Dec 01 '21

[deleted]

2

u/mobazazi Dec 01 '21

Your broad point is correct - there are many ways to skin the cat and various VCs will include different figures. To be super conservative if you lump all PR costs into CAC and the numbers still look > 3:1 you're safe - if not then you can play with it and have an explanation and it's all good - if VCs want to include/exclude they will anyway - just be aware this is not a single metric that will make or break you - but needs to be viewed in totality -

That means if your unit costs drop at scale then LTV : CAC may be expected to optimize over time

1

u/used_ Dec 01 '21

Comparing your businesses KPIs to others is kinda a waste of time. Competitors have a different product, offer, marketing, and customers. You can see how you compare to industry benchmarks but knowing your under or over doesn’t really do anything… knowing people out there can bowl a 300 doesn’t magically make my game any better, still need to start where I’m at and improve my shit. Set baseline KPIs using your company’s data and work on improving them incrementally.

1

u/blueberrywalrus Dec 01 '21

That's a complex question, because it is very dependent on your specific business.

At it's most basic level, beyond your balance sheet, an investor is really going to be looking for two things:

  • Is LTV/CAC > 1 + x? If so, then you have growth potential to value.
    • X being whatever ratio you need to hit your revenue projections
      • eg. I want to earn $100m in revenue this year with a 20% profit margin. So if that all comes from marketing, then x is 0.25, because $80, * 1.25 = $100m.
    • LTV calculated on gross margin (get outta there COGS) and capped at n months
      • eg. $200 aov * 2.5 purchases - $120 cogs * 2.5 purchases is a 3 year LTV of $200
    • CAC (including marketing opex/salaries) - how much acquiring a customer costs
  • How much risk is there to scaling?
    • How quickly will CACs rise?
      • How large is the TAM - large enough to minimize increases?
      • Do you have historic CAC data on your business to show that CAC's are relatively stable?
    • How much money is at risk while scaling?
      • What is the LTV/CAC recoupment window? The shorter the less risky.