4 ms·

I've seen these LTV / CAC ratios before, but what about when CAC is zero? That is often the case for startups that don't spend any money on sales/marketing...

melindajb 12y ago
CAC is never zero from an accrual based accounting standpoint. You have marketing software, discounts, staff, etc. that technically count against it. That said, CAC never remains zero in the long run, unless you're Facebook with huge viral coefficient, and still, it's not zero. If it was zero, you'd be in a massive arbitrage that's likely to be unsustainable. Certainly not in any competitive market.
- patrickxb 12y ago
  Ok, so you could do CAC = (quarterly business expenses [like salaries, rent, health insurance]) / number of customers acquired in that quarter ?
  - melindajb 12y ago
    this is an accounting question. Rent is not a marketing expense and neither is health insurance. But salaries are. As is any SaaS you buy, from hootsuite, optimizely, etc. If you're on accrual accounting (and as a startup, why? no reason to do this until you're much farther along) you recognize the expenses in the month you have them, but the revenue is divided by 12. this is the math the post is describing and why SaaS businesses are so hard--early on the metrics look terrible because the revenue is deferred but the expenses are not.
  - pdq 12y ago
    CAC is the cost directly related to the acquisition of the next customer (ie the variable costs). This is not the fixed costs of running a company (salary, rent, etc). It includes basically anything you spend before you sign up the customer, like answering emails to prospects, implementing new features, fixing bugs found during trials, writing blog posts, etc. Or for high $$ SaaS companies, advertising, phone calls, meetings, proposals, demos, seminars, writing letters, lunch & learns, etc. If CAC is zero, you are basically saying customers are finding you and signing up on their own, with zero effort from you. This is possible (ie Twitter), but the LTV (life-time value) for these products is usually very low. Usually, the company is expecting a few dollars per year of revenue from each customer from advertising.
    - melindajb 12y ago
      did my response below not show up, because that's what I just said.
orky56 12y ago
It's also important to address Customer Success Costs. For single-license model companies, all the costs are front-loaded into customer acquisition. For subscription SaaS companies, the product & overall service needs to be continuously improved in order to retain customers. For this reason, it is not uncommon for these companies to release updates at a very frenetic pace not seen in the older style companies.
programminggeek 12y ago
You never have a CAC of zero. I mean, you could pretend that all of your costs are R&D or Development, but is that actually true? What about the time you spend posting to the company blog or building the website, or AB testing or any of the other things hat end up getting you customers? Say you are putting an app in Apple's App Store. Your CAC at the very least is $100 + any time spent to integrate with Apple's store, get approval, etc. because if you aren't in the store, you don't get those customers. You might classify them as development costs or somehow marketing/sales costs but the bottom line is if you're talking generically about what it takes to acquire a customer, plenty of things you do in development are to acquire more customers. How you classify those costs is sort of up to you, but don't be under the assumption that just because you are doing SEO or App Stores or Craigslist that you have $0 CAC. Your time has a cost. Development time or content creation time has a cost. It might not be easy to track in the traditional accounting sense, especially in the early days of a company, but never believe your CAC is $0.
justinlilly 12y ago
CAC doesn't really play into things when you're relying on word of mouth. It helps answer the question "When I go to scale this business, how will it scale?"

melindajb 12y ago

CAC is never zero from an accrual based accounting standpoint. You have marketing software, discounts, staff, etc. that technically count against it. That said, CAC never remains zero in the long run, unless you're Facebook with huge viral coefficient, and still, it's not zero. If it was zero, you'd be in a massive arbitrage that's likely to be unsustainable. Certainly not in any competitive market.

patrickxb 12y ago
Ok, so you could do CAC = (quarterly business expenses [like salaries, rent, health insurance]) / number of customers acquired in that quarter ?
- melindajb 12y ago
  this is an accounting question. Rent is not a marketing expense and neither is health insurance. But salaries are. As is any SaaS you buy, from hootsuite, optimizely, etc. If you're on accrual accounting (and as a startup, why? no reason to do this until you're much farther along) you recognize the expenses in the month you have them, but the revenue is divided by 12. this is the math the post is describing and why SaaS businesses are so hard--early on the metrics look terrible because the revenue is deferred but the expenses are not.
- pdq 12y ago
  CAC is the cost directly related to the acquisition of the next customer (ie the variable costs). This is not the fixed costs of running a company (salary, rent, etc). It includes basically anything you spend before you sign up the customer, like answering emails to prospects, implementing new features, fixing bugs found during trials, writing blog posts, etc. Or for high $$ SaaS companies, advertising, phone calls, meetings, proposals, demos, seminars, writing letters, lunch & learns, etc. If CAC is zero, you are basically saying customers are finding you and signing up on their own, with zero effort from you. This is possible (ie Twitter), but the LTV (life-time value) for these products is usually very low. Usually, the company is expecting a few dollars per year of revenue from each customer from advertising.
  - melindajb 12y ago
    did my response below not show up, because that's what I just said.

orky56 12y ago

It's also important to address Customer Success Costs. For single-license model companies, all the costs are front-loaded into customer acquisition. For subscription SaaS companies, the product & overall service needs to be continuously improved in order to retain customers. For this reason, it is not uncommon for these companies to release updates at a very frenetic pace not seen in the older style companies.

programminggeek 12y ago

You never have a CAC of zero. I mean, you could pretend that all of your costs are R&D or Development, but is that actually true? What about the time you spend posting to the company blog or building the website, or AB testing or any of the other things hat end up getting you customers? Say you are putting an app in Apple's App Store. Your CAC at the very least is $100 + any time spent to integrate with Apple's store, get approval, etc. because if you aren't in the store, you don't get those customers. You might classify them as development costs or somehow marketing/sales costs but the bottom line is if you're talking generically about what it takes to acquire a customer, plenty of things you do in development are to acquire more customers. How you classify those costs is sort of up to you, but don't be under the assumption that just because you are doing SEO or App Stores or Craigslist that you have $0 CAC. Your time has a cost. Development time or content creation time has a cost. It might not be easy to track in the traditional accounting sense, especially in the early days of a company, but never believe your CAC is $0.

justinlilly 12y ago

CAC doesn't really play into things when you're relying on word of mouth. It helps answer the question "When I go to scale this business, how will it scale?"