Learn how calculating CAC, LTV, and client churn rates can help you make better business decisions.
Businesses need clients to survive. But if you’re spending all your resources on acquiring clients, your current cloud business will likely suffer. Yes, you need to invest the right amount of time and money to attract clients — but you also need to retain them for long as possible. Learning how to calculate your client lifetime value to client acquisition cost ratio will help you become more profitable and make better business decisions.
The Numbers You Need to Know
Client Acquisition Cost
The client acquisition cost (CAC) is the money you’re spending on marketing and sales per client in relation to the revenue those clients bring in and how long you’re retaining those clients. Whether it is spending money on ads or purchasing leads, you need to invest in getting people to use your services.
Datto’s State of the MSP Follow-Up Survey states, “MSPs were already expecting cloud migrations and security to be major drivers of managed services, and the impact of COVID-19 on SMBs is accelerating those trends.”
At the start of your business, you’ll be spending time, money, and resources on acquiring clients without bringing in a profit. But as they pay and subscribe to monthly services, the hope is that you will start to break even. As time goes on, you should start seeing an ROI from your initial sales and marketing costs. Ultimately, you want to be making more money from these monthly subscriptions than you’re spending on client acquisition.
Client Lifetime Value
Client lifetime value (LTV) is a number that tells you how much money a client has spent with your company. Some clients, due to their needs, spend more than others. These are the ones that you want to focus your attention on (not to say that you should completely ignore those who spend less).
One important thing you can do, once you’ve calculated the LTV for one client, is to compare it to another client’s LTV. This can help identify which clients are spending the most money with the company. Basically, client LTV tells you who you need to be paying more attention to. Other things that this number shines a light on include:
• How much time/money will you need to spend in order to get a similar client
• What services does a high LTV client prefer
• Which products or services net the most profit
• What type of clients spend the most (so you can target similar ones in the future)
Client Churn Rate
In an ideal world, you would keep all the clients you acquired forever. Unfortunately, that’s simply not the case. The client churn rate is the percentage of clients you lose per period of time. A high churn rate means spending more energy and resources on acquisition. It’s always better (and smarter) to retain the ones you already have.
Now, let’s look at how CAC, LTV, and client churn rate are calculated. Then, we’ll talk about why these figures are important for you to make good business decisions.
Retaining clients decreases your churn rate, which means that it’ll be easier for you to upsell them any necessary upgrades, security features, or data migration services. Plus, constantly looking for new clients drives up your CAC and decreases your LTV. Remember, running a successful cloud business isn’t just about bringing in new clients — it’s also about creating profit margins which can then be used to grow your business even more.
Doing the Math
How to Calculate Client Acquisition Cost
To calculate your CAC, simply take the amount you spent trying to acquire clients (sales and marketing) divided by the number of clients acquired.
CAC = (total sales & marketing cost) / (# of clients acquired)
For example, if you spent $1,000 this month on sales & marketing strategies and signed 5 new clients, then your CAC would be $2. As in, you spent $200 to acquire each client. This number will change as you grow your company, and it reflects what direction your business is going.
How to Calculate Client LTV
“More than half of MSPs said over 50% of their total revenue came from recurring services.” — Datto’s State of the MSP Follow-Up Survey
Each subscription a client pays for contributes to the LTV. This number is the total amount of money the client is projected to spend on your SaaS services based on what they’ve already purchased so far.
LTV = (price of services purchased) x (number of times per year client purchases the services) x (number of years they have been buying from you)
For example, if a client purchases $100 licenses from you four times a year and they’ve been with your company for eight years, then the formula would look like this:
LTV = $100 x 4 x 8
Your LTV for this client would be $3,200.
How to Calculate Client Churn Rate
The client churn rate is the percentage of clients you lose over a period of time. This can be an arbitrary period — so monthly, quarterly, or between two selected dates. All you need to do is subtract the number of clients at the end of the period from the clients at the beginning. Then, divide by the number of clients at the beginning. The formula should look like this:
Churn rate = [(# of clients at beginning of time period) – (# of clients at the end of time period)] / (# of clients at beginning of time period)(# of clients at beginning of time period)
Multiply the results by 100 to get the percentage of clients lost during the period in question.
For example, if you started with 10 clients at the beginning of January and ended with nine clients at the end of the month, your January churn rate would be:
(10 – 9) / 10 = 0.1 x 100 = 10%
Let Us Do the Math for You!
We know that this article was full of math that you thought you had escaped from after high school Algebra — but we’ve got a CAC calculator that will do most of the number crunching for you, leaving you more time to analyze the results of your LTV:CAC ratio. In short, our client acquisition cost calculator can help you determine where you can get more bang for your buck. And if you need someone to consult with, our team can support, educate, and advise you on how to go about it.
