2025 Planning: Why CCAC is the Metric You Need to Watch
How Tracking Cohort-Level Metrics Beats LTV:CAC for Early-Stage Startups
DEAR STAGE 2: We’re digging in on our annual planning and trying to set the right efficiency benchmarks for 2025. What metrics should we be looking at at our stage (<1M ARR)? ~Planning for Efficiency
DEAR PLANNING FOR EFFICIENCY: We’re in planning season folks! A few weeks ago we shared advice with our portfolio on running a timely and thorough planning process with Zach, CEO and Co-founder at Order and that sparked a whole bunch of questions (you are not alone!). As founders dove into the bottoms-up model, I started getting questions about the right way to think about sales efficiency - how to calculate payback, what to include in S&M spend, how to think about LTV in the first few years of operating, etc…One theme that came up over and over again was the concept of “LTV:CAC.” Lucky for us, my Partner, Jay Po, has written extensively on this topic and holds the belief that LTV:CAC is the wrong metric to look at and instead introduces the concept of a “CCAC model” to use instead. You can dive into the full article here or read on the for the TL;DR
Here’s his view: LTV:CAC is based on a point-in-time calculation using three variables (Average Revenue Per Customer, Churn, and CAC). The problem? It doesn't account for how customer behavior changes over time. As Jay puts it:
"At the early-stage, almost nothing is fixed (ie. Ideal customer profile (ICP), pricing and packaging, GTM motion, retention, the product, average contract size, etc) and so the notion of quantifying 'lifetime value of a customer' at a single point in time just doesn't make sense and can over- or under-estimate what happens at scale."
In other words, when you're still figuring out your product-market fit, your ICP, and your go-to-market strategy, how can you possibly predict a customer's lifetime value? It's like trying to predict the final score of a game in the first quarter.
So, what's the alternative? Jay suggests looking at monthly customer cohorts to track sales efficiency and assess customer value accretion over time. This approach gives you a more nuanced view of how your customers behave over time and how your business is performing.
The key metric Jay proposes is the Cohort Customer Acquisition Cost Payback (CCAC Payback). Here's how it works:
Calculate the CAC for each cohort of customers.
Measure how long it takes each cohort to break even on CAC.
Assess if the time to break even gets shorter or longer over time.
This approach allows you to see if your sales efficiency is improving over time. Are newer cohorts paying back their CAC faster than older ones? If so, you're on the right track.
Jay also recommends running a Customer Value Analysis (CVA) to track revenue per cohort over time. This gives you insight into your Net Dollar Retention (NDR) at a cohort level, which is far more informative than averages or year-over-year calculations.
Here's why this matters: "Since 'land and expand' and consumption-based pricing are becoming more and more common, it's even more important to track revenue contribution over time vs use ARPC (average revenue per customer) at a single point in time."
By looking at how cohorts perform over time, you can see if your customers are expanding their usage (and thus, their value to your business) or if they're churning out. This information is crucial to drive learnings and inform decisions about product development, customer success strategies, and overall business growth.
Standard best in class payback periods are as follows:
6 months for SMB
12 months for MM
18 months for Enterprise
Jay believes we should be going past the time to return 1x payback and instead measure how long it takes to pay back 2x the CAC as a calculation of ROI for for every CAC dollar. As for NDR, the gold standard is achieving 120-150% annual NDR consistently across all cohorts. Even better if you see NDR improving across cohorts.
The beauty of this approach is that it gives you actionable insights. If you see CCAC Payback times getting longer, you know your sales efficiency is declining and you need to figure out why. If you see month 6 NDR for example dropping in newer cohorts, it's a signal that something in your product or customer success strategy might need adjustment.
Jay sums it up nicely: "To assess sales efficiency and customer health, early stage founders should use these frameworks rather than LTV:CAC. CCAC Payback and CVA offer more granular insight that can be used to monitor performance at the cohort level and, ultimately, help you make better decisions in building your company for the long run."
Ahead of 2025 planning, ditch the overly simplistic LTV:CAC ratio and embrace the learnings that can come from the CCAC approach.
Until next week!