A great way to understand any business model is to answer the following simple question:
Can I make more profit from my customers than it costs me to acquire them?
This is effectively a study of the unit economics of each customer. To answer the question, we need two metrics:
- LTV – the Lifetime Value of a typical customer
- CAC – the Cost to Acquire a typical Customer
(For more on how to calculate LTV and CAC, click here.)
Entrepreneurs are usually overoptimistic about how much it costs to acquire a customer. This probably comes from a belief that customers will be so excited about what they have built, that they will beat a path to their doors to buy the product. The reality is often very different!
More SaaS + Software Stats
Between the SMB and Enterprise customer types, the top-quartile performers not only have net-revenue churn that is 14% to 23% percentage less than the average performers but also have net-revenue churn that is negative in an absolute sense