There’s something a bit magical about the LTV:CAC ratio. The idea of “a dime in, a dollar out” is the reason why the SaaS business model is so compelling: to the growth investor, it's the promise of partnering with a businesses into which heaps of CAC dollars can be invested, with the almost certain promise that multiples of those invested dollars will return to the fund and their LPs. So it seems natural to conclude that the ratio between (fully discounted) LTV, and CAC, or the so-called “LTV:CAC ratio”, is of paramount importance to both SaaS company and their prospective investors (or, ind ..read more

Q: If we are going to invest effort in ‘moving the needle’ with respect to just one of our core SaaS metrics, where will we get the most bang for our buck? A: Please read on. The short answer is: CAC, followed by churn. All other things being equal, if a genie granted you one wish, and that wish had to be which core SaaS metric you would wish to improve, by 10% in the right direction, then which would make the most sense? First, a caveat: depending on their absolute values, it is clearly not equal effort to reduce your churn by 10%, versus decreasing your CAC by 10%. First, because reducing 10 ..read more

Q: How does my CAC recovery time affect the rate at which I can grow, without taking on any outside capital? A: It relates directly; the more quickly that you can recover your CAC dollars, the more quickly you can use existing customer generated revenues to fuel additional organic growth. In all practical regards, this economic relationship is the geometric growth factor which is precisely the opposite of churn. CAC recovery time is an extraordinarily important metric in the SaaS world. Simply put, it is the amount of time (typically measured in months), that is required to recover the cost of ..read more

Q: Should I use revenue and churn alone to calculate LTV, or should I also consider COGS and the time value of money? A: The answer is that you should consider COGS and the time value of money (discounting at your cost of capital), and the other marginal costs of servicing and retaining a customer. Few companies do all of the above. LTV as it is often calculated, skews more as a vanity metric than one that reflects real managerial accounting or fully discounted economic value. Most companies do the following to calculate their customer LTV: So, for example, if the ARPC of our MidChurn example ..read more

Q: What’s more important as a determinant of financial value: growth or churn? A: Probably the most common single question we get – and the Quick answer is the Quick Ratio, which accommodates both. The Quick Ratio is the ratio between New/Upsold MRR and Lost (churned)/Downgraded MRR: Let’s take a simple example of an early stage SaaS growth business (HighChurn Inc.) with an SMB focus, currently running @ $1.2M ARR ($100k MRR) and aiming to grow 50% heading into a new calendar/fiscal year. To achieve this, they must add 50% x $1.2M = $600,000 of net new annually recurring revenue (ARR) over th ..read more

Preparing to sell your company requires a lot of work. Whether planned or unsolicited, when the time comes to ready the company for sale, you will be able to move much more quickly if your financial house is in already in order. The better prepared you are, the faster you can move (including interviewing advisors, and aligning on valuation expectations). By keeping financials organized you are increasing the probability that you sell quickly and efficiently, and at the best terms and price.   Below are a few tips for operating your business so that you’re continuously ready for acqu ..read more