The appendix slides are not part of your core pitch deck. It’s hugely beneficial to prepare them as it allows the founder (or presenter) to have clarity while answering questions. Also, investors like founders who come ready to answer tough questions. We work with every client through the appendix slides just like how we work with the core slides. Note: You can have unlimited number of appendix slides. What goes inside your appendix section depends heavily on your startup and your business modal.
When it comes measuring the viability of your business model, the metrics that investors look at are your CAC and LTV. If the cost of acquiring customers (CAC) turns out to be higher than expected, and exceeds the ability to monetize your customers (LTV) , then the failure of your startup is imminent.
Customer Acquisition Cost (CAC)
“One of the most important metrics for any tech startup companies is CAC, or Customer Acquisition Cost, or some others call it Cost of Acquiring Customers.“Faiz Rahman, Senior Investment Analyst at Convergence Ventures
Customer acquisition cost or CAC is simply the cost of convincing your potential customer to buy your product or service.
CAC is important for investors as it indicates how good are you in acquiring your customer. For example, if you have a lower CAC compared to another similar company like yours, it’s apparent it’s a better decision to invest in your company as naturally you will be able to get more customers with the same money.
CAC = Total customer acquisition cost over a period / Number of customers acquired over a period
CAC can be calculated by dividing all the costs spent on acquiring more customers (marketing expenses) by the number of customers acquired in the period the money was spent. For example, if a company spent $1000 on marketing in a year and acquired 100 customers in the same year, their CAC is $10.
Startups make a big mistake by missing out some costs incurred while acquiring the customers in their CAC. This is bad cause when the analysts or investors do their due diligence, your CAC will be understated compared to the real number. At this point, you have lost credibility with your investors and it might prod them to revisit all your reported metrics. To avoid this, I tend to follow these steps when calculating CAC:
- I make sure that the startup has included all the wages and salaries of people who worked on closing the sale or marketing. Some analysts like to exclude the wages out of your CAC as it doesn’t grow even if the number of customers grow. I just like to include it as it’s better to overstate compared to understating.
- If the startup have a freemium product, it’s important to add the product & support costs to the total sales and marketing cost too. This is because the product acts as your acquisition channel in this case.
- I include ALL the costs of paid marketing efforts during the time period including PPC campaigns, influencer campaigns, trade shows, exhibitions, any demos with your potential corporate clients.
- I like to show a time series graph (i.e. line chart or bar chart with a period based x-axis) when it comes to CAC. It’s a better presentation to explain how you figured out how you have been able to lower your CAC over time compared to just showing a static number with no context.
- I like to use 30 days or a month as my time period as it allows you to also show seasonality within your chart.
- I like to answer in a range when the investors ask about what’s the CAC: I will say $100 to $150 depending on the channel compared to saying $100. If you are forced to a single number, say the upper limit: Our CAC for about $150, and decreasing month-on-month.
Customer Lifetime Value (LTV)
To compute the LTV of a customer, you start by calculating the Gross Margin (GM) that you would expect to make from that customer over the lifetime of your relationship with your customer. Gross Margin should take into consideration any support, installation, and servicing costs inclusive of one time payments and recurring payments.
The simplest way to calculate the LTV is to just take annual gross profit and multiplying it with the average number of years that your customers stay with you.
There are multiple way to calculate your LTV, depending on what type of startup you are and what’s your business model. For example:
If you are an ecommerce company:
($) Average Order Value X (#) Repeat Sales X (# months) Average Retention Time = ($) LTV
For mobile apps:
($) Average revenue per user X (1/monthly churn) + ($) Referral value = ($) LTV
If you are an SaaS company:
($) Average monthly revenue per customer X (# months) customer lifetime = ($) LTV
($) Average monthly revenue per customer / monthly churn = ($) LTV
Or, for more precise calculation, you can include your gross margin:
($) Average Order Value X (#) Repeat Sales X (# months) Average Retention Time X (%) gross margin = ($) LTV
If you are not sure about your churn rate or monthly churn, you can visit this guide.
How to measure business viability with CAC and LTV?
If your CAC is greater than LTV
Your business model is not viable as it’s heading to bankruptcy in a long enough timeline.
If your CAC is less than LTV
Your business model has the potential to work with the right execution.
The above two statements on CAC and LTV might seem like simple logic, but lots of founders fail to address this or even measure this. Investors typically like this ratio:
CAC: LTV = 1:3
LTV of the customer is 3x the cost to acquire him/her
Startups that get funded with huge premium typically have a better CAC to LTV ratio of 5 or more. Investor pay a premium on your ability to acquire profitable customers.
Strong B2B companies in their growth stage should have an LTV:CAC ratio of 3-5.Mike Volpe, former CMO, Hubspot
Another way to think about it is how long it takes for you to make back the money you spent on acquiring the customer. If it is less than 12 months, then your business is viable.
Further reading on CAC and LTV: