CAC per Cohort - the Rationale

The article from Stage2 Capital asserts that LTV:CAC (Lifetime Value to Customer Acquisition Cost) is a suboptimal metric for assessing performance and our customer's health.

We, as founders, recognize that relying solely on LTV:CAC oversimplifies our evaluation of the sales efficiency and customer value.

Here are the reasons the author provides:

Average Revenue per Customer: Ignores changes in revenue per customer over time
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Revenue Churn: Misses out on analyzing customer behavior by using a single point in time
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CAC: Does not account for fluctuating acquisition costs in the early stages of rapid experimentation

Instead of fixating on this metric, Jay, the author, advocates for a shift towards more effective indicators to track the trends in our customer behavior over time.
He emphasizes the significance of calculating the Customer Acquisition Cost Payback (CCAC Payback) and analyzing the customer revenue contribution through a Customer Value Analysis (CVA). In addition to CCAC Payback and CVA, Jay recommends incorporating monthly customer cohorts into the analysis.

This approach involves grouping customers based on when they were acquired and tracking their behaviour over subsequent months. By employing monthly customer cohorts, we can gain a more nuanced understanding of how customer segments contribute to overall performance, allowing for more informed strategic decisions.

This article underlines that these metrics provide a more comprehensive view of the business landscape, enabling us to identify areas for improvement and optimization. By diversifying our approach beyond LTV:CAC, we can foster sustainable growth and assess the health of our customers better.

As founders we see the value of Jay Po's (Co-founder and Managing Partner of Stage 2 Capital) recommendation and also encourage other founders to embrace a more granular evaluation approach that includes CCAC Payback, CVA, and monthly customer cohorts for a more accurate performance assessment.