Visualizing the Interactions between CAC, Churn & LTV
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Anyone that has taken an accounting class or learned basic business financials knows the interaction between key elements of a P&L (revenue, cost, expense) and a balance sheet (assets, liabilities, equity). But it’s surprising to me how many companies with recurring/subscription revenue don’t understand the interactions between the elements that make up customer acquisition cost (CAC), churn and lifetime value (LTV). There are other important operational metrics to help steer your company but these are some of the first to start with.
While serving as COO of a SaaS company, I came up with a simple graphic that I used to educate the company’s employees about these all-important levers of success. In this article I use the graphic to explain the basics and then explore various “what if” scenarios. Hopefully you will immediately identify some actions and opportunities that, if properly exploited, will improve your own success. There are numerous online resources to help with the exact mathematical formulas for CAC, CAC payback, churn rate and LTV. So instead of concentrating on the calculations, I’ll instead focus on the interactions and influences these key metrics and their underpinnings have on each other.
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Note: A majority of concepts described in this article are also included in the video that comes next in this module.