Business Growth Analysis
How do you analyze the cost of growth?
Has a business growth advisor told you it is impossible to calculate the ROI on marketing? That has been accepted for over 50 years, but the internet has changed everything. SaaS companies now validate the cost of growth by measuring their customer acquisition cost and lifetime value (CAC and LTV or CLV.) These metrics make it is possible to calculate an ROI or IRR on your marketing.
Customer Acquisition Cost Analysis (CAC Analysis)
CAC is the cost to acquire one new customer, on average. It is used to evaluate sales, marketing, and advertising efficiency. Marketers, advertising platforms, and business growth consultants all offer calculations of CAC. This makes for interesting comparisons – for example, what is more efficient: digital advertising or direct sales?
You need to be sure you are validating any CAC calculation provided to you by a marketing or business growth consultant. Additionally, be sure you calculate a blended CAC for all your channels combined rather than just a direct CAC provided by one channel partner.
Customer Lifetime Value Analysis (CLV Analysis)
CLV (sometimes called LTV) is the total profits you receive from a customer over their lifetime. This is important to compare against your CAC to understand if the money you invest in sales growth has a favorable return on investment. CLV analysis makes your business’s financial efforts easy to understand.
CLV analysis is challenging. The most accurate way to measure CLV is to wait for a sizable portion of your customers to reach their end of life (aka stop being a customer) and measure their overall performance. This takes too long and doesn’t give you a timely business growth analysis. You instead need an accurate CLV forecasting formula. Working with clv consulting experts will ensure you define a predictive formula that is accurate.
There are many ways to calculate CLV, and the correct formula will depend on your business. That’s why it’s important to meet with an experienced business growth advisor who can perform CLV consulting to help you define the correct formula.
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We’ll sit down with you for an hour and discuss your business, review your financials, show you what to focus on, and make you aware of major lurking financial risks.
Why should I care about cost of growth (CAC and CLV)?
Suppose you have $1M in revenue and would like to grow to $5M. Two questions you should be asking yourself:
- How much do I need to invest to grow the business?
- How long will it take before I get my money back?
CAC and CLV are the foundation for answering these two questions. They are essential for budgeting, building a cash plan, and validating your strategies. For example, your budgeted revenue growth should not exceed your budgeted marketing, advertising, and sales spend multiplied by CAC (unless you have specific reason to believe otherwise.). Business growth solutions begin by integrating these metrics into your processes. A business growth consultant can help with this integration.
What does a CFO do with CAC and CLV?
CAC and CLV are key performance indicators (KPIs) for every business, so they should be reported regularly. Often marketing or sales will perform the reporting function, but the CFO would use these figures as inputs to advanced forecasting. Best-in-class CFOs will:
