How did covid affect the funding amount of seed startups and spin-offs in Switzerland?
Switzerland seed startups experienced a positive trend in the amount of funding despite Covid-19 but were most likely negatively affected…
The customer lifetime value to customer acquisition cost (CLV:CAC) ratio is a good metric to measure the scalability and profitability of your business.
The formula to calculate the CLV to CAC ratio is as follows:
(gross profit per customer / customer churn) /(total marketing & sales spending / no. of customers acquired)
Let’s look at an example of how the formula works: A startup spends $10,000 on a Google AdWords campaign and acquires 1,000 new customers. The average revenue per customer is $50, and the direct cost of filling each order is $30. The company retains 75% of its customers per year.
Gross profit per customer = $50 – $30 = $20
CLV = $20 / (1 – 75%) = $80
CAC = $10,000 / 1,000 = $10
CLV/CAC ratio = $80 / $10 = 8.0x
In this case, the ratio is quite high and the company is profitably acquiring customers – assuming there are not a huge amount of fixed costs in the business.
A good benchmark for CLV to CAC ratio is 3:1 or better. Generally, 4:1 or higher indicates a great business model. If your ratio is 5:1 or higher, you could be growing faster and are likely under-investing in marketing.
The main drivers of your ratio are as follows and should be observed to find optimization potential,
The above mentioned drivers can be used to extract relevant information for optimising your customer lifetime value to customer acquisition costs ratio. As shown in the graphic, if your ratio is less than three, you should focus on making your product more scalable; if it is greater than three, your business is scalable, and you should consider spending more on marketing and sales to gain more customers.