Understanding CAC and LTV in Ecommerce

3 Key Metrics Every Founder Must Know to Thrive Are you overwhelmed by marketing metrics? 😵💫 Struggling to figure out what really matters? In my journey of building Brain Apes, I discovered 3 critical numbers that can transform your business. Here's how mastering CAC, LTV, and 30-Day Cash can elevate your success. ↓ 1. Cost of Acquisition (CAC): Your CAC tells you how much it costs to acquire a customer. 👉 Include everything: ad spend, sales commissions, software costs, etc. 👉 This is your all-in cost per customer. 👉 Knowing your CAC is essential for sustainable growth. Understanding your CAC is like knowing the price of gas before a road trip. You need to know what it takes to get to your destination. — 2. Lifetime Value (LTV): LTV isn't just about revenue. It's about the gross profit over a customer’s lifetime. • Think profit, not just sales. • Use gross profit to understand true value. • Misunderstanding LTV can lead to overspending on acquisition. Imagine selling a $10 product that costs $9 to make. The true LTV isn’t the $10 sale, but the $1 profit. — 3. 30-Day Cash: 30-Day Cash helps manage cash flow and leverage other people’s money (OPM) for growth. → This measures how quickly you can recoup your CAC within 30 days. → Using credit effectively can fund customer acquisition. → It’s crucial for scaling without depleting your cash reserves. Fact: With smart use of 30-Day Cash metrics, you can grow using the bank’s money and keep your cash flowing. — 4. The Power of Ratios: Focus on two key ratios: LTV to CAC: Should be greater than 3:1. 30-Day Cash to CAC: Aim for a 1:1 ratio to break even in the first month. These ratios guide your strategic decisions and ensure profitability. Key Insight: A 3:1 LTV to CAC ratio means for every dollar spent, you make three in profit. This is your golden ticket to scalable growth. — 5. Real-World Application: At Brain Apes, understanding these metrics allowed us to scale rapidly and efficiently. When launching our agency, our CAC was tightly managed, and we leveraged 30-Day Cash to fuel growth. Within the first month, we hit 5-figure revenue and broke a 6-figure run rate by the second month. Story: I replaced my 9-5 income almost instantly (while dropping to fractional) and then reinvested in new hires and services to keep the momentum going. — 6. How to Improve Your Metrics: Struggling to hit these benchmarks? Here’s how to optimize: → Reduce CAC: Improve marketing efficiency, optimize ad spend. → Increase LTV: Focus on customer retention, upsells, and cross-sells. → Boost 30-Day Cash: Introduce fast revenue-generating offers, and leverage credit. Action Tip: Presell services by offering a discounted, prepaid option to increase your 30-Day Cash. ↓ ♻️ Smash that repost button! ♻️ Follow me for more insights and tips! 🔔 Then hit the bell—never miss a post 🔔 ↓ P.S. Which metrics do you focus on? 💬 Was this post helpful? 💬 Drop a comment below. ↓

Your CAC target should change by cohort and month. We know that customers who buy in November for most ecommerce brands have significantly worse lifetime revenue AND lifetime value (profit) than customers who buy in October. Why? Well obviously the holiday season puts everybody into a frenzy of shopping, discounts, and gift-giving. That means that consumers are looking for products that might normally be "outside" of their interests. For example, I have no interest in chef's knives but I might go shopping for a chef knife to buy as a gift for a friend who is. The likelihood that I come back and buy more knives or kitchen accessories from that brand is SIGNIFICANTLY lower than if my friend -- who loves to cook and kitchen gadgets -- bought from them. The easiest way to separate this out is to cohort your customers by month. Track the 1 year lifetime value they generate, and set your CAC target accordingly. It might look something like this: LTV is in pre-marketing profit, not revenue: • Jan: $100 LTV, $75 CAC target • Feb: $100 LTV, $75 CAC target • Mar: $80 LTV, $60 CAC target ... etc • Oct: $200 LTV, $150 CAC target • Nov: $60 LTV, $45 CAC target Your customers aren't a monolith. Understanding the value of seasonality, geography, first product purchased, and even characteristics (demo, behaviors, financials, etc) can help dial in your marketing program. #cac #cohorts #marketing

Product market fit is the major goal for most early-stage companies, but what comes next?  In addition to accelerating your growth, your attention should turn to your unit economics.  But what does that mean? Unit economics is an umbrella term asking whether a business is profitable for each unit of volume. It is critical for assessing the health of your business and whether your enterprise will become profitable eventually as you grow.  If this analysis reveals problems (i.e., weak unit economics), you need to prioritize fixing it immediately. Unit profit is typically where you start. This breaks down your business into a core “unit” that you sell – often a unit is just a customer, but sometimes it’s an actual unit like an individual loan. To calculate, you tally up the revenue less costs that pertain to delivering the unit.  You need to include all variable costs to do the analysis correctly. Obviously you want a positive profit number, and a higher profit margin (ideally above 50%) is obviously better. A related analysis is called LTV to CAC. This examines how much profit you would make from a given customer over the lifetime that a customer purchases from you, compared to the amount you spend to “acquire” that customer (i.e., marketing, sales). Unlike profit per unit, this analysis must usually be an estimate because you don’t really know how long a customer will usually stick around. But the analysis is still useful, especially in comparison to peers. Most businesses need their LTV to be 3-4x their CAC to build a sustainable, healthy enterprise. My favorite view is payback period, which is similar but different from LTV to CAC.  For this, you calculate for each customer how much unit profit is generated per month, and then you divide that into the cost to acquire each customer. This will tell you how many months it takes to return your marketing investment. A great payback period is less than 12 months, and amounts above 24 months are weak.  Better payback periods mean that you can grow without huge cash burn. There are some rookie mistakes that people make when doing all of this. The obvious one is to make this calculation without including all of the variable costs.  Many do this to look good for investors, but in reality, they typically end up fooling themselves too because they adopt it as accurate internally.  It’s better to be honest.  Another typical error is to calculate lifetime value on a revenue basis – simply to see how many multiples of revenue against CAC over a customer’s lifetime. This metric is easy to calculate, but analytically useless for anything beyond the superficial. And a final one occurs in fintech when folks make unrealistic assumptions about loan or insurance losses when estimating any of these metrics – it is common given how hard it is to predict losses early in a fintech’s life. It’s better to be conservative, both for yourself and your credibility with investors.

On the CAC to LTV Ratio... This is a benchmark that you hear a lot. And the standard ratio you hear for CAC to LTV is 1 to 3 or 1 to 4. That is, for every $1 you spend acquiring a customer, you should earn $3 or $4 back. This is helpful, but can be misleading for a few reasons. - First, where does that multiple come from? Why not just aim for anything better than 1 to 1? The buffer is there because LTV doesn’t represent all the costs a business incurs in order to gain and serve customers. There are other expenses, like rent, non-marketing or customer-facing employees, healthcare, insurance, etc that don’t get counted in gross margin. The buffer gives the business some room to still be unit profitable. - The second reason is payback period, as described above. If you have a lot of money flowing out the door on customer acquisition and time before you get paid back, you probably want multiples of it on the return trip. - Early-stage startups often don’t hit this ratio. They sometime have to pay higher CAC and they often have low or even negative LTV as they improve the product. As long as they’re improving, this doesn’t have to be a problem. - But the third reason is that it’s just too simple. It’s a standard benchmark that came to be used. You should reevaluate it depending on your goals. For example, if you’re after market share, then you could run a ratio closer to 1 to 1. If you’re not interested to grow at this time, but want more profitable growth, go higher than 1 to 4. Before investors ask about your CAC to LTV ratio, think about a few things: - Where you are today is not the long-term. Your CAC may be expensive in the beginning as you figure out who your idea customers are, how to target effectively, and build referrals. I often see per channel CAC start high, then decline to a point at which its profitable, and then increase again as you run out of targets in the channel. As you move through that curve you need to add new, more profitable channels of acquisition and also figure out how to generate customer referrals.  - Estimate where you could bring these metrics long-term. How would LTV change as you improve the product, increase retention, extend the product line, and reduce per unit costs? Pitch that future state rather than the current state.

3 important aspects of LTV:CAC analysis that your D2C brand must ensure: 1/ Accuracy of Profit Contribution Figures You know the drill: Profit Contribution > Net Revenue But your PC data is only as good as the data that you input into your LTV tool. That means keeping COGS and 3PL fees up-to-date. Failing to update those figures when they change could have a material effect on your understanding of customer LTV. Conduct regular check-ins to ensure accuracy of the data. 2/ Use Case and Context LTV:CAC is an instrument for many applications. It can answer various questions and fuel strategy. It can also answer questions wrong. Have you formulated business questions that you want answers for? Or do you simply stare at the cohort matrix in hopes that answers will manifest themselves? Knowing the why behind your analysis is far more important than doing the analysis. Formulate the problem before diving into the analysis. 3/ Retention Windows Benchmarks “10% of customer should return 1 months from their first purchase” Why? What if your product cycle is way over 30 days? Do you research product life cycles with your customers? Or do you blindly follow “industry standards” and set unrealistic goals? Instead, compare your business to YOUR business. Benchmark your previous months against your current months. Make strategic changes and measure the improvement. Double down on what works for YOUR brand. Not what other players in the industry claim will work. —- LTV:CAC analysis is a powerful tool if you have accurate data, clear purpose, and realistic goals. When used right, it will help your business’ propel to the next growth stage. P.S. if you need help bridging the gap between marketing and finance, DM me! #ecommerce #dtc