LTV-CAC – what’s the right number early-stage founders should track?
So we often speak about LTV/CAC in our episodes, and the importance of founders tracking this metric but what really is the right number?
When you invest in the stock market, which I don’t think you do, but what return would you expect?
40% - 30%
That’s a lot, but its typically 15% people expect a year and that becomes 2x in 5 years. But the reality is your opportunity cost is high, you’re young, so you should be expecting 30% - 40%. If you’re expecting 30% that’s 4x in 5. Why should my LTV to CAC _ CAC is my investment into a customer, why should it be lower than what I can get by putting it in the stock market. So in India people just benchmarking to low, they don’t think that ultimately it’s the customers economics that generates for businesses economics. If you want the business economics to be 35 – 40%, your customer economics better be like that. What does that mean? That means may be 5 to 6x should be the LTV to CAC.
It’s very hard to know that upfront because you have to wait 5 to 6 years. So I think the thumb rule that I atleast try to follow is 2 in 2 years, 3 in 3 years. So if you can see that LTV to CAC is getting 2 in 2 year or may be better, 3 in 3 years or may be better, then you are heading to the right direction because if you manage to retain a customer for long enough but ideal would be 5 to 6x in 5 years.
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