Today, Lauren Bahorich, Venture Partner with GST shares with us how she and the GST team advise Growing B2B SaaS Companies to have regard for the Quality of Revenue sought.
Quality Revenue: Unit Economics
We have been discussing the importance of a company pursuing growth in quality revenue rather than simply growth at any cost. In the wake of the We Work IPO meltdown, this conversation takes on new urgency. VCs and other institutional funders are refreshed in their pursuit of profitability and strong financials.
One of the metrics VC and PE firms examine closely to determine a company’s long-term health and profitability is its unit economics. A company’s unit economics indicates its ability to grow and become profitable in the future, even if that company is currently not turning much of a profit. And a company that focuses on producing strong unit economics is one that is increasingly becoming more efficient with its spending and resource allocation over time.
LTV (Customer Lifetime Value) and CAC (Customer Acquisition Cost) are the two main components of Unit Economics. LTV expresses the total amount of revenue generated from one customer over the lifetime of that customer with your company. CAC expresses the amount of Sales & Marketing lift required to acquire one customer.
These numbers can be combined in the ratio, LTV : CAC, to compare the expected revenue from a customer with the cost to acquire him. The industry benchmark is an LTV:CAC ratio of 3:1. Additionally, you want to see this ratio decreasing over time as your company becomes more efficient with its go-to-market strategy.
Over the next few weeks, we will be discussing factors to consider in your pursuit of high-quality revenue.
As always, we love hearing from you as to what you're experiencing as you drive growth for your company; please reach out below.
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