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

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!

What’s CAC?

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 %))

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

Time to Quit ☹
Image Source: forentrepreneurs.com

Happy Dance! ☺
Image Source: forentrepreneurs.com

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

Which PBP is Better?

Why Do We Care?

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

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

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.

FAQ’s

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

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)

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…

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

Other

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

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