Been thinking a lot lately about what makes a successful SaaS business, in the long run. I realised that LTV and CAC can tell you almost everything (at least quantitatively) about a business model that is winning. And not just the metrics by themselves, but where the business is focused on putting its capital.
Should you increase LTV or reduce CAC? Well in an ideal world, both. In my experience and research, the best SaaS companies focus on the former, and let the operating leverage borne from the increased LTV drive the latter.
Counter-argument: But tech is a gross profit play, right? I see this sort of narrative all the time. And it kind of makes sense. If a business takes the revenue to the moon with more or less the same COGS (fixed costs), intuitively that should indicate a good business model?
No. Well, maybe. But if that is the case, that would be in spite of gross margin story, not because of it. Post-COVID, I have found VCs to have become a fair bit more sophisticated. Seems as though they have realised that at an early stage, though top-line is important, the seeds of profitability should already be planted in the business model.
A business that investors are excited by is driven by net profit (i.e. EBITDA), not gross. Because fundamentally, increasing revenue is meaningless if it's at the expense of insane opex. The clunkiest business can throw all their revenue into acquiring new customers, and at least on paper, grow their user base. But if it's growing the base by bleeding cash, is that a business that VCs would be running behind to invest in? Probably not.
The main lever SaaS businesses have at their disposal is the LTV one. How can you provide more value to the customers that you already have. Whether its cross-selling or subscription services, the best SaaS businesses have figured out how to squeeze as much juice out of their customers as possible. HubSpot, Adobe, Twilio, Salesforce. These guys have all mastered the LTV game, and acquiring new customers is now just a network effect of offering a best-in-class solution.
Focus on the LTV, the CAC should follow.