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Meet SaleslionThe first is a good way to figure out if you will be profitable in the long run, and the second is about measuring the time to profitability (which also greatly impacts capital efficiency).
The best SaaS businesses have a LTV to CAC ratio that is higher than 3, sometimes as high as 7 or 8. And many of the best SaaS businesses are able to recover their CAC in 5-7 months. However many healthy SaaS businesses don’t meet the guidelines in the early days, but can see how they can improve the business over time to get there.
The second guideline (Months to Recover CAC) is all about time to profitability and cash flow. Larger businesses, such as wireless carriers and credit card companies, can afford to have a longer time to recover CAC, as they have access to tons of cheap capital. Startups, on the other hand, typically find that capital is expensive in the early days. However even if capital is cheap, it turns out that Months to recover CAC is a very good predictor of how well a SaaS business will perform. Take a look at the graph below, which comes from the same model used earlier. It shows how the profitability is anemic if the time to recover CAC extends beyond 12 months.
Elevate your digital marketing efforts with expert consulting that identifies pitfalls, refines strategies, and drives measurable success in a competitive landscape.
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🕑 Reading Time: 21 MinutesDiscover the benefits of hiring a Fractional CMO for your SaaS tech company. Learn how this flexible, high-level marketing executive can provide strategic leadership without the long-term commitment and costs of a full-time CMO.
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