Tip: Track CAC and LTV by channel to optimize your growth

For some bootstrappers the Customer Acquisition Cost (CAC) and Customer Lifetime Value (LTV) metrics can be confusing so I want to share some tips that can help avoid costly mistakes. The info below can help you plan your spending on acquisitions and optimize your growth overtime.

When you are ready to spend some $$ and start testing new acquisition channels you typically decide what you want to spend per acquisition - your target CAC. The common formula you will see referenced is somewhere between 1/3 (conservative) and 1/2 (aggressive) of your LTV.

There are 2 things to consider when analyzing existing CAC and setting a target:

1. Payback time - how long will it take for you to recover the CAC. 1-3 months on subscription products is great, 3-6 is good, 6-12 can be dangerous, and over 12 months is typically for well-funded businesses that throw money on top line growth and aren't sensitive about profit margin.
2. Setting target CAC based on LTV can cause issues, especially in businesses with a big range in pricing. A few customers on your most expensive product or subscription plan can result in a high LTV overall, while only responsible for a fraction of your customer base. You need to have an understanding of what kind of customers each channel brings and CAC per channel.

Let's touch on conversion tracking as well. If you are only tracking conversions with Google Analytics and have a free trial or a long sale cycle you may not know what kind of revenue each channel produces eventually. Your search engine traffic to some freebie (ebook, templates) may result in a lot of account signups or trials, but may not result in actual sales. While PPC channel like Google Search Ads may have the highest CAC it may bring higher value customers with a very efficient CAC. Just make sure to use a separate landing page for each keyword group to help you track conversions and revenue.

To track your revenue by channel/source with a free trial and/or long sale cycle you need to implement a custom tracking solution, unless you can afford some expensive off-the-shelf analytics product. Here is how:

1. Capture both http_referer AND all utm_ parameters on 1st site visit into a cookie
2. At account creation step record the values in the cookie into your database
3. Analyze your revenue/CAC by channel/source. If you have a long sales cycle you may want to ignore most recent accounts since they may not have had a chance to convert to paying customers or upgrade for real use outside initial testing.

TLDR: Metrics like LTV and CAC can be misleading and lead you to spend $ where you shouldn't.