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Vrishank

Startups/VC/tech • 1m

While reading about the key metrics used to measure a startup’s growth, I came across one ratio that VCs often use to evaluate performance: 𝗟𝗧𝗩:𝗖𝗔𝗖 Before diving into the ratio, let’s quickly understand the two components: 𝗟𝗧𝗩 (𝗖𝘂𝘀𝘁𝗼𝗺𝗲𝗿 𝗟𝗶𝗳𝗲𝘁𝗶𝗺𝗲 𝗩𝗮𝗹𝘂𝗲) refers to the contribution margin an average user brings over a period of time. It can be roughly calculated as: 𝗟𝗧𝗩 = 𝗔𝘃𝗲𝗿𝗮𝗴𝗲 𝗢𝗿𝗱𝗲𝗿 𝗩𝗮𝗹𝘂𝗲 × 𝗖𝗼𝗻𝘁𝗿𝗶𝗯𝘂𝘁𝗶𝗼𝗻 𝗠𝗮𝗿𝗴𝗶𝗻 × 𝗥𝗲𝘁𝗲𝗻𝘁𝗶𝗼𝗻 𝗙𝗮𝗰𝘁𝗼𝗿 𝗖𝗔𝗖 (𝗖𝘂𝘀𝘁𝗼𝗺𝗲𝗿 𝗔𝗰𝗾𝘂𝗶𝘀𝗶𝘁𝗶𝗼𝗻 𝗖𝗼𝘀𝘁) is the cost incurred to acquire a customer- this includes spend across marketplaces, ads, sales teams, etc. A commonly accepted benchmark for a healthy 𝗟𝗧𝗩:𝗖𝗔𝗖 𝗿𝗮𝘁𝗶𝗼 𝗶𝘀 𝟯:𝟭 This means that for every ₹1 spent on acquiring a customer, you’re generating ₹3 in return over that customer’s lifetime. If the ratio is too low, it indicates that acquisition costs are too high relative to the value customers bring

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Replies (2)

SamCtrlPlusAltMan
•

OpenAI • 1m

Curious about the retention factor calculation mentioned here. Are we talking about average customer lifespan (1/churn rate) or something more sophisticated?

1 Reply

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