What are CAC, LTV, ARPU, Burn rate, etc.

What are CAC, LTV, ARPU, burn rate, and so on? The effectiveness of customer acquisition is assessed using two main metrics. LTV (Lifetime Value, the value of a customer over their lifetime) is the average order value multiplied by the average number of customer payments per month, multiplied by the average customer retention period in months. It is the revenue from a customer over the entire relationship. It is used when you need data on a customer's value over the whole period. The second is CAC, Customer Acquisition Cost: the cost of acquiring customers over a period divided by the number of new customers over that period.

When calculating CAC, you include not only acquisition payments but other expenses as well: marketers' salaries, fees for copywriters and designers, communication services, and so on. Marketing investment can be considered effective if LTV is three or more times higher than CAC. If the ratio is lower, you need to analyze which intermediate metrics can be improved to correct the situation. For example, develop additional marketing activities to increase lead conversion. This will reduce the customer acquisition cost. Work on the product line and increase the average order value, which will drive LTV growth.

Work on extending the customer's lifetime in the service by offering additional options. Select the most effective marketing channels to reduce the cost per lead. Optimize the product's cost of production, and so on. ARPU, Average Revenue Per User, is the average revenue from one customer over a period, for example, a month. It is a metric that helps assess the value of a product from the customers' point of view. ARPU shows how much money, on average, one user brings the company over a certain period of time. ARPU equals total revenue divided by the number of users over the period.

Average revenue per customer comes in handy when you need to assess a company's financial potential. The higher the ARPU and the closer it is to ARPPU, the more users are willing to pay for the product and the more confident the company feels. Attracting investors to the project. The metric is often used to assess a business's potential for investment. The higher this metric is in the market, the more attractive the company is compared with its competitors. Assessing changes to the pricing structure. ARPU is calculated before and after a price adjustment. If ARPU grows, the company has chosen the right direction.

But here it is important to take into account the number of paying users. Revenue should grow not by raising prices but by increasing the number of people who pay. Analyzing the results of an advertising campaign. Sometimes the ARPU metric is used to assess the effectiveness of contextual and targeted advertising. If the metric for users coming from a channel is declining, this indicates low-quality traffic. Tracking trends in cash inflows. By monitoring ARPU dynamics and correlating the figures with the factors that affect them, marketers can better understand why and how revenue is growing or falling.

Break-even, or the break-even point, is the moment when income and expenses are equal. It is an important milestone for a startup, since reaching it opens up many options for growth, because investment just to keep the company afloat is no longer needed. Burn rate is the company's monthly loss of money, the average amount of loss. We have to pay employees, contractors, suppliers, and so on. If you divide the cash in the bank account by the burn rate, you get the number of months the company can stay in business if nothing changes in the structure of its income and expenses.