Great post. Superb introduction to the concepts with helpful illustrations. Adding a few ideas to the mix...
Typically a mature SaaS business has about 50% of its revenue from new customers and 50% from renewals. Early on that number is skewed to growth but if a company doesn't invest in retention early on, the company can go upside down, fast. Watching cohorts each month as their subscription expires is a good way to catch this early. Especially if you're in accrual accounting, because you can't recognize new revenue right away.
The 3x CAC for LTV is a good rule of thumb but does require you think about what LTV is. In the late 90s companies acquired customers using a 5 year LTV assumption which led to some really inflated valuations and lopsided businesses. I am conservative in my own startup right now, no more than 1-2 year LTV assumption for now to preserve cash flow until product market fit and retention are more consistent. one great reason for taking investment is to take some risks in acquisition on LTV, Gambling intelligently that you can improve your retention enough to match.
Early on, the ratio is likely to be even higher until you can drive the inefficiencies out of the spend. And as cost per click goes up in a given market you have to think very, very hard about it. If you're in an enterprise SaaS business, especially in marketing, it's really ugly for top of funnel terms. I've seen some terms at $11-$12 a click.
Typically a mature SaaS business has about 50% of its revenue from new customers and 50% from renewals. Early on that number is skewed to growth but if a company doesn't invest in retention early on, the company can go upside down, fast. Watching cohorts each month as their subscription expires is a good way to catch this early. Especially if you're in accrual accounting, because you can't recognize new revenue right away.
The 3x CAC for LTV is a good rule of thumb but does require you think about what LTV is. In the late 90s companies acquired customers using a 5 year LTV assumption which led to some really inflated valuations and lopsided businesses. I am conservative in my own startup right now, no more than 1-2 year LTV assumption for now to preserve cash flow until product market fit and retention are more consistent. one great reason for taking investment is to take some risks in acquisition on LTV, Gambling intelligently that you can improve your retention enough to match.
Early on, the ratio is likely to be even higher until you can drive the inefficiencies out of the spend. And as cost per click goes up in a given market you have to think very, very hard about it. If you're in an enterprise SaaS business, especially in marketing, it's really ugly for top of funnel terms. I've seen some terms at $11-$12 a click.