What would a flower business possibly have in common with a car wash business? Well, of course, the importance of the LTV:CAC ratio. “Your most important operation ratio is the LTV:CAC number,” regardless of the type of business you are in, especially when figuring out how to justify and incorporate a subscription service, said John Warrillow, founder of the Value Builder System, during his session, “The Automatic Customer: Creating a Subscription Business.”
So, what is a LTV:CAC ratio? Nothing that meant much to most, until Warrillow finished his session – at which point just about everyone had computed them in their phones’ calculators and were tossing around the acronyms with familiarity and ease.
But, let’s back up. This was a session about subscriptions. Flowers came up as an example of a successful subscription service that helps those in the industry have more predicable revenue. This recurring revenue also helps a company’s valuation. “There is nothing like recurring revenue to jack up the value of your business,” said Warrillow. Also, you subscribers are “much more likely to buy ancillary products… they buy other stuff,” which is called the Trojan Horse Effect.
Before you consider a subscription service, especially an unlimited one, first you need take some guidelines and statistics into account. “You want to stuff 10 times more value into becoming a subscriber,” said Warrillow. There are also a new set of statistics to let you know how well your subscription process is working. And that is where LTV:CAC comes in.
This ratio is the end result of these factors:
CAC: Cost to acquire an average customer
MRR per customer: Whatever you charge to the average customer
Churn rate: Reducing your churn rate can have an enormous impact on your LTV
Margin %: cost to service each new subscriber
Then you can figure out your LTV, lifetime value per customer: LTV=MRR x margin/churn rate. None of these numbers in isolation means a whole lot. The most important number to you is the LTV:CAC ratio – and the higher, the better. It can help guide and support your business decisions related to a subscription service. Then, “If you can nail the onboarding (the first 30 days), they will likely stay with you for a long, long time,” said Warrillow.
“The biggest mistake people make when they go unlimited is they under-invest. They are not looking at the lifetime value per subscriber,” said Warrillow. “Do you have a model that has legs or not?”
Merritt Fore of Racewash in Florida said, “I thought it was good. It is certainly where our industry is heading. We use one in our Ocala car washes. It is working well for us.”
Debra Dawson of Zelo Car Wash in Colorado said, “It was great information. It was very convincing about there being a huge value in subscriptions. I appreciated the examples and the slides. Very helpful.”