CAC/LTV is a mediocre framework

Anecdote... I worked with a business that had been advertising on adwords bidding on their branded keywords. Google assured us that their studies showed that even though our brands were #1 ranked for their own keywords, that adwords would boost conversions and be ROI positive. Our LTV/CAC was around 6x ROI and we were spending around $30k/month. Sounds amazing right? Spend $30k and get $180k back?

We ran an experiment where we shut off ad spend for 2 weeks. Absolutely no drop in site visits, conversions, and revenue. Pretty much 100% of people who were clicking the ads were now clicking on the organic link. So LTV/CAC looked amazing on paper, but it was nonsense in reality.

I can understand where the critique is coming from but I find the definitions used a bit one sided. I never thought of CAC being used for a one-time payment, rather the cost for acquiring a „lifetime-paying“ customer. Further, focusing CAC on Facebook and Google Ads seems like a misunderstanding of the concept: I also can calculate my CAC on other marketing activities; it’s just more effort than looking at your Google/Facebook dashboard. I find CAC/LTV a quite reasonable „framework“ as it focusses on acquisitions and retentions; the two main sources to tell if your product is actually delivering value (with higher retention resulting in higher LTV). What do you think?

So in the end, his advice is to get really nuanced with your understanding of where to invest limited capital and avoid widely accepted frameworks for measurement. Seems obvious. (But as I'm learning on my journey, it's the most obvious advice that's often left unheeded).

Seems like this advice is in line with what many SaaS industries recommend as far as segmentation. As the Twitter thread mentioned, a customer acquired via fb (or any kind of paid means) often has a shorter life than one netted organically. If these customers are funneled into different segments rather than dumped into a CAC bucket together - then you can avoid mixing low value and high value customers and coming up with an average which basically tells you nothing.

Totally agree.

I think this is a great take in general but would love to hear from alternative points of view on this.

"LTV/CAC as a simple proxy for customer unit economics and therefore as a test of business model quality simply does not work because of a vacuum of context. For it to work, one would need a set of “actuarial” tables to find the minimum viable LTV/CAC given your cost of capital, your payment terms, your gross margin, your churn and your CAC."

https://www.linkedin.com/pulse/why-ltvcac-misleading-saas-metric-should-replaced-npv-scott-stouffer/

Interesting. Nobody's discussing/criticizing the whole concept of CAC/LTV ratios enough.

the danmark casino is the best https://casinodanmark.com/ for danish players. With a huge amount of games and even more fun, there are plenty of reasons to visit us again and again.