It is 'the top hot model' for estimating the business's profitability, mainly aimed at predicting how long the relationship between customers and business will be alive. American Marketing Association (noted the study of CLV is becoming significantly more important, both in research and in practice.)
BUT FIRST, DO you Know what YOUR SALEs and MARKETING COSTS ARE AND HOW MUCH BUSINESS IT GENERATED?
CAC = $ spent on sales & marketing over a period ÷ $ of a customer business acquired within that period. But everyone knows there is a delay between marketing and sales costs and the business it generates. For example, your costs are front-loaded by six to nine months if you have a six to nine-month sales cycle.
Why it's important:
Sometimes it takes months or even years to earn back the money invested in bringing a customer in. Startups often find the amount they can spend on acquiring customers restricts their growth, creating cash flow difficulties in the first couple of years of operation.
IMPORTANT
The faster your business recovers CAC, the better your flywheel effect of reinvesting in more marketing and sales. SaaS companies should aim to recover this cost within 12 months to promote healthy financials.
BUT WHY SAAS SHOULD ESTIMATE CLV:
CLV = Estimating a customer's projected total value over its lifetime. Complete $ spent on sales & marketing over that period ÷ $ of a customer business acquired within the projected lifetime of a customer.
What are just some of the indicators to look for to improve your CLV:
You're not leveraging the total value of your SaaS through competitive pricing.
You have a poor product/market fit.
You are not prioritizing the correct marketing tactics.
You have a flawed onboarding process.
Your product roadmap is misaligned with customer needs and market size.
Your customer success, sales, and marketing teams aren't nurturing accounts effectively.
Or, it could be that your customer acquisition strategy is targeting the wrong prospects.
IMPORTANT
Whether you are a startup or a well-established software company, working towards maximizing Customer Lifetime Value is key to the success of your business. The faster your business builds CLV, the quicker your growth and valuation multiple. Structure your business with a higher CLV and lower Customer Acquisition Cost (CAC) to maximize growth.