Customer Acquisition Costs and Customer Lifetime Value may be marketing KPIs, But CFO’s use these metrics in their everyday work. CAC and CLV (aka LTV) are essential components of business growth analysis. CFOs use CAC and LTV for forecasting revenue and planning cash flows. CAC and CLV are even useful for evaluating business trends and developing channel strategy.
Does a Chief Financial Officer deal with Acquisition Cost?
CFO duties include measuring and understanding acquisition costs. Why? Acquisition cost is an essential assumption to forecasting revenue growth. While there are forecasting methods that do not require CAC (like exponential smoothing or month-over-month growth rate targets) These methods are inferior to revenue projections built up from sales and marketing budgets divided by CAC.
Consider the following simple example: Company X is thinking about increasing their advertising budget from $100k to $130k. How much will that increase revenue? A CFO answers this question by taking the budget increase amount ($30k) dividing it by CAC and multiplying the result by the average client basket size.
How does CAC and LTV affect cash flow?
One of the CFO’s main responsibilities is cash planning. Both CAC and LTV affect cash flows in significant ways. First, CAC dictates the rate (and efficiency) with which your sales team adds new clients. Second, customer lifetime value defines the amount and rate a client pays your business.
Here is a visual demonstrating how CAC and LTV can vary across several customer segments or channels. For this company, direct sales is the best long-term return on investment (called the “golden ratio.”) However, direct sales also has the largest short-term cash impact due to high CAC and slow LTV recovery. This is a scalability challenge – in fact, growing too fast through direct sales would create a cash crisis! A wise CFO would therefore balance their investment in direct sales with a channel with better short-term cash flow (like radio advertising, in this example.)
Common CAC and LTV mistakes
There are a few mistakes commonly made by marketers and CFOs when calculating CAC and LTV which cause inaccurate KPIs, poor decision making, and misleading statements to investors.
What to include in Customer Acquisition Cost Formula?
Does CAC include marketing wages? Sales management? Fixed costs? The answer is: it depends. Most organizations measure two (or more) forms of CAC – direct CAC and blended CAC.
Direct CAC includes only directly scalable expenses like advertising fees or wages for direct sales. Direct CAC us useful for comparative channel analysis but ignores fixed and overhead expenses which can be significant.
Blended CAC includes all sales and marketing expenses. Blended CAC is easily calculated from a P&L statement and is considered the most conservative calculation of CAC.
Using the right CAC for the right purpose is critical. Evaluating a channel’s efficiency with blended CAC would result in under-budgeting and underperforming revenue. Presenting direct CAC to investors (in the wrong context) may set misleading scalability expectations. A CFO must be diligent in using the right calculation for the right purpose.
What to Include in Customer Lifetime Value Formula?
LTV was popularized by the SaaS industry where gross margins are often over 95%. As a result, most SaaS businesses calculate LTV as (avg. customer life in years) x (avg. customer revenue per year).
Using this calculation for non-SaaS businesses is a huge mistake.
At minimum, CFOs must multiply the above formula by the average gross margin. Performing a full cohort-based gross profit analysis is even more accurate but requires integral calculus (which most CFOs do not know.)
When business owners or CFOs forget to adjust LTV to their industry, they over-invest in growth, undercapitalize their business, and create long-term cash crisis.
Is your CFO using CAC and LTV?
Chief financial officer tasks are not limited to debits and credits – their financial plans must include CAC and LTV. Do you know how your CFO is calculating CLV or using CAC to project revenue? Start a conversation with your fractional CFO about these critical metrics to understand how they affect your business planning.
To learn more about how CFOs use CAC and CLV, schedule a consultation with us!
