Optimizing the LTV:CAC Ratio

LTV:CAC is considered one of the most critical metrics used to value SaaS companies. Investors place a high focus on this metric, as it indicates good growth potential with limited marketing investment. As described in our previous blog on calculating the LTV:CAC ratio, companies with lower LTV:CAC ratios indicate that capital required to acquire new customers may not be utilized effectively. For SaaS companies in this situation, what can they do to optimize their LTV:CAC ratio and attract a higher valuation?

Customer Segmentation

Customer Segmentation is key to improving LTV:CAC ratios. Andrea Pitts, SVP of Global Sales at Arena Solutions talks about the importance of customer segmentation and sales and marketing best practices in a “Virtual Coffee” discussion.

A company should evaluate and segment its customer base by industry, product, size, or any other applicable metadata. Companies often find that though some customer segments generate significant revenue, they have a relatively shorter engagement period, leading to a lower LTV and reducing the timeframe over which CAC can be amortized. Andrea describes, “Very early on, we took a closer look at our customers by evaluating the prior ten quarters of new revenue and where it came from. We were selling to 89 industries. After we segmented our customers, we found that over 90% of our new revenue came from only 14 industries,” (Watch Clip).

Additionally, the higher revenue prospects resulted in misallocation of sales resources to customer segments with lower retention rates instead of focusing on revenue generating customer segments with high retention. Segmenting the sales team to sell to specific customer segments with targeted products has proven to be highly effective for companies, allowing them to focus their marketing efforts on high value customers.

Other Ways to Improve LTV and CAC:

Employ a targeted sales approach that uses role-based and value-based selling to target your efforts to the relevant areas of value for each individual. What matters to an engineer is not always the same as what matters to a manager. Selling to and addressing the needs of an engineer versus a manager requires a differentiated approach to demonstrate the value of your product.

Andrea suggests, “Instead of understanding what they do in their job, understand what is keeping them from being able to do their job. Make sure you can tie it back to the value you provide.” (Watch Clip).

Reduce sales and marketing expense through customer segmentation and sales specialization to concentrate efforts on high value customer segments. This will enable your team to develop expertise and propose the best fit product for potential high retention customers. Use of lower cost mediums or improved efforts at lead generation can also make more effective use of marketing spend.

Improve Average ARR through a combination of up-selling or cross-selling products. Providing existing customers incentives for upgrades can also boost ARR.

Shorten the sales and onboarding cycle to improve the number of new customers. Data is essential to this effort. Many organizations track everything. A more productive practice is to focus on key agreed sales metrics and hone in on those. Time-stamping every part of the sales cycle can also provide insights on where there are opportunities for improvement or redesign.

Reduce the churn rate through improved customer retention will significantly improve LTV. The key is customer segmentation and high-touch customer support. Knowing the value of your product and how it fits your customer’s needs is important to this effort.

These few things can go a long way in improving your company’s LTV:CAC ratio. With an improved ratio, your company will be on it’s way to reaching a higher valuation. Further, a healthy LTV:CAC ratio signals investors that your company has effective marketing and customer profitability. Please reach out should you wish to discuss the best method for optimizing the LTV:CAC ratio for your business.

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