Today, more and more businesses are migrating their products from a purchase-based to a subscription-based model. Ever since Salesforce.com pioneered software as a service (SaaS), companies across industry sectors—B2B and B2C alike—have made the move. In the entertainment business, Netflix ushered in monthly-DVD and online-streaming subscriptions, and Spotify supplanted iTunes. Even the everyday razor has been transformed from a one-shot transaction to a monthly plan, with Dollar Shave Club. Welcome to the subscription economy.
For business leaders, this move raises a raft of challenges, which boil down to this: How do you get an accurate reading of the business? Selling through subscriptions is, after all, fundamentally different from selling on a pay-up-front basis. It shifts the value from transactional event to lasting relationship; indeed, the lion’s share of the value is generated after the initial sale. For example, we’ve observed that for a customer lifetime of five years, a company went from earning 60% of the customer value in the first year to earning more than 90% in the subsequent four years. Otherwise stated, the subscription model flips the risk from the customer (in the form of adoption risk) to the vendor (as customer retention risk). An investment today presupposes a longer-term client relationship—and a longer-term profit stream.
As empresas que oferecem produtos de assinatura precisam de uma visão clara do desempenho dos negócios, porque a recompensa de suas decisões está mais distante, mas o impacto é muito mais imediato. As métricas tradicionais não se aplicam mais. Não é surpresa que continuemos ouvindo as mesmas perguntas de empresas que estão fazendo a transição:
- Como medimos a verdadeira saúde sustentável de nosso negócio de assinatura?
- Como identificamos as maiores alavancas de melhoria? Devemos concentrar -se em preços ou produtos de produto e mercado? Reforçar a eficácia da força de vendas? Refine nossa estratégia de entrada no mercado? Ou pegue uma das dezenas de ações operacionais?
- Como podemos saber quando investir em crescimento e quando se concentrar na tomada de lucros? custo. Por meio de nosso trabalho com clientes, juntamente com nossa extensa pesquisa, entrevistas detalhadas com concorrentes e investidores e análise de benchmarking, vimos várias vezes que o LTV/CAC pode produzir informações poderosas sobre a saúde de um negócio de assinatura. Resposta, vamos começar com uma definição. (Veja a caixa abaixo.) É uma versão simplificada da proporção LTV/CAC, projetada para ilustrar os diferentes componentes de LTV e CAC. calculado com as seguintes entradas:
- How do we determine where to invest across our portfolio of subscription businesses?
To answer those questions, many adherents of the new subscription model use the ratio LTV/CAC: lifetime value of the customer divided by the customer acquisition cost. Through our work with clients, along with our extensive research, in-depth interviews with competitors and investors, and benchmarking analysis, we’ve seen time and time again that LTV/CAC can yield powerful insights into the health of a subscription business.
The What and the Why of LTV/CAC
Before we describe the many business-critical questions that the LTV/CAC ratio helps answer, let’s begin with a definition. (See the box below.) It is a simplified version of the LTV/CAC ratio, designed to illustrate the different components of LTV and CAC.
Lifetime customer value is a comprehensive metric that is calculated with the following inputs:
- Receita média por conta (ARPA): A receita média anual por conta no ano inicial de uma coorte. (As empresas de consumidores usam ARPU, ou receita média por usuário.)
- Margem bruta: The margin based on the revenue left over after accounting for the cost of serving customers—for example, the cost of operations, support, or customer success programs.
- Retention: The annual revenue retained from current subscriptions; the inverse of churn.
- Expansão: Any additional annual revenue earned from the current customer base through volume growth, cross-selling, or upselling.
Customer acquisition cost is a more straightforward metric. It represents the average marketing and sales costs incurred in acquiring a new account.
There are many variations of the LTV/CAC ratio, primarily because of the complexity of calculating LTV. (For more on LTV’s complexities and variations, see the sidebar, “The Science and Art of Defining Lifetime Customer Value.”)
The Science and Art of Defining Lifetime Customer Value
Through our client work and research, we’ve discovered that some of the most common methods for calculating LTV don’t accurately reflect a company’s business performance. In our view, defining lifetime customer value is part science and part art.
Primeiro, a ciência. Um cálculo preciso de LTV - e um que fornece informações acionáveis - depende de dados reais e específicos. Uma empresa deve examinar de perto sua base de clientes, começando com a receita ao longo do tempo de clientes individuais nas coortes existentes. Os fluxos de receita individuais fornecerão ARPA, bem como taxas de retenção e expansão, de uma coorte - e, juntamente com a margem bruta, permitirão um cálculo preciso de LTV. Nossa variação torna repetível o processo de determinação de uma relação LTV/CAC precisa. Para fazer isso, eles devem olhar para os fluxos de receita individuais por segmento. (Veja a exposição abaixo.) As empresas também devem adotar a mesma abordagem de segmento por segmento ao projetar seu modelo de entrada no mercado e definir os custos apropriados de aquisição de clientes. Com as empresas que são novas e crescentes, que não possuem dados detalhados ou que estão no meio da mudança para um modelo de assinatura, estimar o valor da vida útil pode ser realmente difícil. Mas, em nossa experiência, o desenvolvimento de uma estimativa educada ou a declaração pro forma fornece informações que são inestimáveis para a tomada de decisão. E estabelecer uma adivinhação bem fundamentada é sempre preferível a esperar os dados perfeitos ou para que a empresa atinja algum nível de maturidade. Além disso, o próprio processo de calcular o valor da vida útil pode ter um efeito positivo: faz com que as equipes se concentrem nos fatores de um negócio de assinatura saudável
In our practice, we developed an LTV calculation that is different from the most commonly used ones. Our variation makes the process of determining an accurate LTV/CAC ratio repeatable.
To identify the most effective levers for optimizing results, companies should determine LTV by customer segment. To do this, they must look at the individual revenue streams by segment. (See the exhibit below.) Companies should also take the same segment-by-segment approach in designing their go-to-market model and defining appropriate customer acquisition costs.
Now, the art. With businesses that are new and growing, that lack detailed data, or that are in the midst of shifting to a subscription model, estimating lifetime value can be difficult indeed. But in our experience, developing an educated estimate or pro forma statement provides insights that are invaluable for decision making. And establishing a well-founded guesstimate is always preferable to waiting for the perfect data or for the business to hit some level of maturity. Moreover, the very process of calculating lifetime value can have a positive effect: it gets teams to focus on the drivers of a healthy subscription business
Acreditamos que LTV/CAC é a principal métrica para qualquer subscription business. In our view, it provides clear answers to the most consequential questions that a subscription business faces.
LTV/CAC revela a verdadeira saúde de um negócio de assinatura. At its core, a growing subscription business is investing in acquiring customers in return for the promise of long-term profits. The LTV/CAC ratio answers the question, Is the return worth the investment? As a rule of thumb, venture capitalists see a ratio of 3 or higher as indicative of a healthy business. Some vendors consider a ratio of below 3 as a signal that a business needs fixing, whether in the offering itself, in how customers are onboarded, in how the offering is sold or supported, or in some other aspect. Many capabilities along the entire customer journey can promote high LTV/CAC.
For a growing business, LTV/CAC helps pinpoint weak spots and prioritize operational improvements. LTV/CAC serves as a diagnostic tool that helps vendors understand where to focus their attention to optimize their businesses. The metric allows leaders to drill down, looking at the component measures and determining which ones lag their peers and which ones represent advantages worth building on. In addition to benchmarking the business against other high-performing, externally owned subscription businesses, leaders can gain important insights by comparing the LTV/CAC of different segments within their company—defined, for example, by product, customer size, industry, or marketing channel. Then, when it’s time to assess operational improvements, leaders can estimate their impact on the LTV/CAC ratio. This exercise thus helps leaders prioritize the actions that will have the greatest impact on long-term business health.
For a mature business, LTV/CAC guides the decision about whether to invest in growth or run the business for profit. We’ve modeled discounted cash flows to test venture capitalists’ “3 plus” rule of thumb. Assuming typical nonoperating expenses and discount rates, we found that it is indeed reliable. In most scenarios with an LTV/CAC ratio of 3 or higher, investing an incremental dollar in acquiring new customers has a greater expected return than retaining that dollar as profit. With a ratio of below 3, retaining the profit is the better use of that dollar.
For a vendor, that means a business with a ratio of 3 or higher is healthy and worth scaling with sales and marketing investment. With a ratio of below 3, the business needs fixing or should be run for profit rather than growth. For the investor, the LTV/CAC ratio offers a clear insight: businesses with some of the highest LTV/CAC ratios also have the highest price-to-revenue ratios.
LTV/CAC helps prioritize investment across a portfolio. LTV/CAC is a normalized metric that allows comparisons between any subscription businesses, whether online businesses selling to consumers or enterprise SaaS businesses selling to corporate clients. For investors and for companies with portfolios of subscription businesses—no matter how diverse—a higher LTV/CAC ratio indicates which businesses are most deserving of incremental investment.
How One Industry Leader Uses LTV/CAC
Consider the experience of
According to Mark Roberge, a coauthor of this article and at the time senior vice president of worldwide sales and services for HubSpot, the ratio also helped pinpoint the areas of the business that were most in need of improvement. Leaders discovered that the company’s go-to-market approach was uneconomical and that HubSpot was suffering from a high churn rate. Drilling down further, leaders determined that the churn rate was caused by sales force activities and incentives, rather than by postsales activities, such as customer success programs. That, claims Roberge, was quite a surprise.
Os resultados das iniciativas guiadas por LTV/CAC do HubSpot foram impressionantes. Em menos de 18 meses, a empresa reduziu sua taxa mensal de rotatividade em mais da metade (de 3,5% para 1,5%), reduziu os custos de entrada no mercado e quase triplicou sua relação LTV/CAC. Isso preparou o terreno para o forte período de crescimento que se seguiu. A partir desse ponto, de acordo com Roberge, os líderes estavam constantemente procurando maneiras diferentes de otimizar LTV e CAC. A proporção dupla de serviço, ajudando a orientar as opções estratégicas e as decisões operacionais. Ele não apenas fornece uma visão clara da saúde financeira e da criação de valor de um produto ou empresa, mas também pode orientar a tomada de decisões. Ele mudou a maneira como muitas empresas líderes avaliam e desenvolvem suas ofertas, levam -as ao mercado e gerenciam todo o seu portfólio. Para aqueles que estão em execução - ou investindo em - um negócio de assinatura, LTV/CAC é a medida mais crítica a rastrear. Líder global, parcerias e alianças BCG
Today, in his new roles, Roberge relies on LTV/CAC as his go-to metric for tracking and evaluating subscription businesses. The ratio does double duty, helping to guide strategic choices as well as operational decisions.
In short, the LTV/CAC ratio is a powerful and versatile diagnostic tool. It not only provides a clear view of a product’s or business’s financial health and value creation, but it also can guide decision making. It has changed the way many leading companies evaluate and develop their offerings, take them to market, and manage their entire portfolio. For those running—or investing in—a subscription business, LTV/CAC is the most critical measure to track.
