Calculating
Customer Lifetime Value (LTV):
- Suppose a company’s ARR (Annual Recurring
Revenue)= $500K
- Total number of customers= 2500
- Average Revenue Per Customer= $500K/ 2500= $200
- Gross Margin= 80%
- Gross Margin Per Customer= $200*80%= $160
- Annual Retention Rate= 95%
- Annual Churn Rate= 5%
- Discount Rate= 15% (for early-stage startups it varies from 15% to 20%)
- Discount rate in the LTV formula accounts for the Time Value of Money.
- An early-stage company values earlier payments more given its risk profile- Cash Burn Rate, urgent spending needs, irregular cash flows, etc
- Margin Multiple= 95%/ ((1+15%)-95%)= 4.75
- Customer Lifetime Value= $160*4.75= $ 760
Calculating Customer Acquisition Cost (CAC):
CAC= Entire cost of Sales & Marketing in a given period/ Number of New Customers Added in that period
What goes into CAC:
- Cost of Marketing Team
- Cost of Sales Team
- Advertising cost
- Creative cost
- Technical cost
- Publishing cost
- Production cost etc
- Let’s consider there are 5 Sales Executives with an average salary of $60,000
- Total Expense in Salary= 5*$60,000= $300K
- Digital Marketing (DM) Expense= $20K
- Search Engine Marketing (SEM) Expense= $10K
- Total Sales & Marketing Expense= $300K+$20K+$10K= $330K
Productivity Calculation:
- Suppose each sales executive brings in 60 new customers; so total new customers= 60*5= 300
- DM Conversion Rate (against % spend)= 4%, number of new customers from DM Campaign= 20,000*4%= 800
- SEM Conversion Rate= 2%, number of new customers from SEM Campaign= 10000*2%= 200
- Total new customer= 300+800+200= 1300
- Customer Acquisition Cost (CAC)= $330K/ 1300= $ 254
- LTV Value= $760
- LTV/ CAC= $760/ $254= 3, which means the company receives $3 per $1 spent to acquire the customer and this is a healthy ratio.
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