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THE TWO METRICS THAT WILL SAVE YOUR SAAS BUSINESS
HOW TO CALCULATE YOUR CUSTOMER ACQUISITION COST + LIFETIME VALUE SO YOU SPEND ONLY ON WHAT BRINGS YOU SALES
WHAT’S THE PROBLEM?
▸ You’re working hard. Business is growing.
▸ Lot’s of happy, successful clients
▸ You’ve got a Business Development Team, CRM integration and are attending all the conferences
BUT…
WHY WILL CAC HELP?
It will help you:
▸ Know if you put in $ you’ll get $$$ out
▸ What’s working in your marketing and what’s not
▸ Know when you can afford to make hires
▸ Shorten your sales cycle by identifying bottlenecks
▸ See if you’re under or over investing in your marketing
TOTAL COSTS ASSOCIATED WITH GAINING A NEW
CUSTOMER
TOTAL # OF NEW CUSTOMERS
TEXT
IN THE PAST 12 MONTHS:
TEXT
COSTS TO INCLUDE IN YOUR CAC CALCULATION:
▸ All of your advertising spend (Adwords, Facebook Ads, Display Ads, and Print)
▸ Events and Conference Fees
▸ PR Retainer
▸ Sales Team Salary (base + commission)
▸ Any discounts, free trials or hosting costs
$2.62M1000 CUSTOMERS
TEXT
HERE’S AN EXAMPLE:
Ad Spend $1.06MConferences $50k
PR $60kSales Team $1.38MDiscounts $70.8k (1%)
Total - $2.62M
= $2,620 CAC
THIS ASSUMES
A PRODUCT COSTING $59 PER SEAT AVERAGE OF 10 USERS
ANNUAL REVENUE OF $7080 PER CUSTOMER WITH 1000 CUSTOMERS
TEXT
WHAT IS LTV?
▸ It’s the total amount of revenue you’ll receive from a customer over the life of them using your products
▸ Having a healthy and long LTV means you can more easily predict where the business will be in the future
▸ More sales and higher profit margins means a higher valuation, an easier time attracting the team you want and a sounder sleep.
MONTHLY REVENUE
PER CUSTOMER
IF YOU’RE JUST STARTING OUT ASSUME CUSTOMERS WILL STAY WITH YOU FOR 3 YEARS:
ANNUAL GROSS
PROFIT %
# OF MONTHS THEY’RE A CUSTOMER
X X
X X$590 3685% )(
)( - CAC
- $2,620
LTV = $15,434
BUT, THAT CAUSES YOU TO OVERSTATE THE LTV OF YOUR CUSTOMER. (IT DOESN’T ACCOUNT FOR THE FEES YOU INCUR ACQUIRING THE CUSTOMER)
TEXT
HOW DO I FIGURE OUT GROSS PROFIT %?
▸ Think about the costs associated with production of your product:
▸ Hosting and Monitoring
▸ Credit card fees and any transaction fees to partners
▸ Licenses and royalties of products embedded in the application
▸ Customer Success Teams
▸ Labor for your Dev Team doesn’t need to be included if it doesn’t really increase when you sell more of the product.
$1.07M1000 CUSTOMERS
TEXT
HERE’S AN EXAMPLE:
Hosting $10kCredit Card Fee $141k
App License $5kCustomer Success $920k
Total - $1.07M
= $1070 COST OF GOODS (COGS) PER CUSTOMER
THIS ASSUMES
A PRODUCT COSTING $59 PER SEAT AVERAGE OF 10 USERS
ANNUAL REVENUE OF $7080 PER CUSTOMER WITH 1000 CUSTOMERS
REVENUE:
TEXT
NOW, COMBINE THE TWO:
GROSS PROFIT % = 85%
/$7.08M 1000 = $7080
COGS: $1.07M 1000 = $1070/$7080 - $1070 = $6010 GROSS MARGIN
$6010 / $7080 = .8488
.8488 X 100 = 85%
TEXT
NOW YOU KNOW YOUR GROSS PROFIT, YOU CAN DETERMINE YOUR LTV:
MONTHLY PER
CUSTOMER REVENUE
ANNUAL GROSS
PROFIT %
# OF MONTHS THEY’RE A CUSTOMER
X X
X X$590 3685% )(
)( - CAC
- $2,620
LTV = $15,434
TEXT
YOU’LL NEED AT LEAST ONE MONTH OF SALES.
▸ This will be your ‘Month 1 Cohort’
▸ Look at your churn (# of customers who left) in this Cohort
▸ Then input it into this formula:
# Months used in your LTV calculation = 1/(Average Monthly % Customer Churn)
* More on that later…
TEXT
WHAT YOU CAN NOW DO:
▸ See how much $ will give you $$$ in what time frame. Investors especially like that kind of stuff.
▸ If your LTV negative some big changes for your product are needed. Now.
▸ Compare your LTV to your CAC as a ratio. That gives you a benchmark of how effective your marketing and sales is.
TEXT
:$15,434 $2620
6 : 1
LTV : CAC THIS ASSUMES
A PRODUCT COSTING $59 PER SEAT AVERAGE OF 10 USERS
ANNUAL REVENUE OF $7080 PER CUSTOMER WITH 1000 CUSTOMERS
TEXT
THE RATIOS (LTV:CAC)
▸ Less than 1:1 - for every dollar you bring in you’re spending more to acquire them. Webvan and you have something in common
▸ 1:1 - You’re losing money on every acquisition as you’ve still got salaries, overhead and engineers to cover.
▸ 3:1 - The golden mean. Perfect. Keep at it.
▸ 4:1 - You’re probably under investing in marketing
TEXT
If you have more questions (or notice an error)
EMAIL AARON (AT) STRATEGYBOX.COM
BOOK A CALL WITH ME ON CLARITY.FM