CAC & Cash Contribution

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Marketers should calculate SAC by dividing spend by total customers, excluding organic customers. It is crucial to consider the marginal cash contribution rather than discounting revenues to fairly estimate future profitability. Including all variable costs in the calculation is essential. Avoid the mistake of including customers acquired organically in the calculation as it artificially lowers the cost of acquiring paid customers. Focus on cash contribution over revenues to assess the actual profit generated by acquired customers.

Episode 119: LTV, or lifetime value, has become the gold standard for startups, specifically how they measure the effectiveness of their various marketing channels. LTV does have merit, and it is a helpful proxy to prioritize marketing and understand the economics of each customer you acquire, but if relied on entirely, it can be misleading at best and harmful to your business at worst. I’ve found what I believe to be one of the best pieces on the internet about the challenges of this methodology, a 12-year-old essay by investing legend Bill Gurley that is as relevant today as it was then.

The Dangerous Seduction of the Lifetime Value (LTV) Formula: https://abovethecrowd.com/2012/09/04/the-dangerous-seduction-of-the-lifetime-value-ltv-formula/

DTC Metrics, Explained: https://www.nasdaq.com/articles/dtc-metrics-explained-2020-02-12

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