TRACTION / 1-10K users

You can get LTV1

300 %2 greater

than your CAC3

in 4 weeks.

¹ Customer Lifetime Value (LTV) is how much your average customer pays you over time

² 300% or 3:1 is the ideal ratio of LTV/CAC that you need to scale profitably

³ Customer Acquisition Cost (CAC) is how much you pay to gain an average customer

Customer

Lifetime

Value

LTV

Customer Lifetime Value

You can increase LTV to 300% over CAC¹ (a 3:1 ratio) by raising LTV and lowering CAC. For every $1 of LTV (revenue), aim for $0.33 of CAC (expense) or vice versa; both are inversely related. If your LTV is way higher, like 6:1, you can acquire twice as many customers (6:2 = 3:1) or take the profit.

¹ Customer Acquisition (CAC) is how much you pay (development, operations, sales, and marketing) to gain an average customer. CAC is often miscalculated and conflated with CPA (Cost Per Acquisition).

Logic

LTV

Treating customers like subscribers can raise customer lifetime value (LTV1) to 3x CAC2 (3:1)

¹ LTV = Annual revenue per customer * time retained

Getting customers to refer new customers can lower customer acquisition cost (CAC2) to 0.33 LTV1 (3:1)

² CAC = All annual expenses / total number of customers

CAC

Levers

“Design-driven companies outperform S&P by 228% over 10 years.” DMI

Market

If you choose a market that is growing big and fast and you'll have a tailwind pushing your potential LTV up. If you have no competitive advantage, your LTV goes down (bad) and CAC goes up (also bad).

Product

When you make something people love and they are willing to pay to help them accomplish something they do often, your LTV goes up and your CAC goes down.

Positioning

When you intrigue potential buyers with a story where they are the hero and your brand gives them superpowers, your LTV goes up. Sometimes it goes up so much it gives you more to spend on CAC.

Marketing

When you consistently repeat one important idea that makes people focus on the job they need to do, (not your product) your CAC goes down. Not having a consistent brand message makes CAC very expensive.

Channels

When you find the most important ways to communicate with buyers, your CAC goes down and your LTV goes up. Every channel is different. Measure them separately then do a bottom-up blended LTV/CAC.

Technology

When you scale your operations with tools that make your employees as effective as possible before you hire more people, your CAC goes down. Not just sales and marketing expenses. True CAC includes all operational expenses.

Ads

You can rent the attention of someone else's audience as you build your own to figure out which value propositions resonate best with potential audiences and to validate your LTV/CAC intuitions.

Analytics

When you collect important data to optimize your sales funnel, you'll be able to optimize your CAC/LTV to a 3:1 ratio (by channel).

Capital

When you finance your company's growth with capital from investors (instead of waiting for revenue from customers) you are subsidizing your CAC to accelerate your LTV.

"Erik has a velocitizing effect on people."

Matthew

Lehman

Head of Payments Security, Amazon