Do you know how many € of lifetime profit you are generating for every € you’ve spent to acquire a customer?
You need the
- [monthly invoice amount] that you are typically billing to a client,
- deduct the [direct cost you incurred for the services / goods in that invoice]
- and multiply the result with the [number of months a client stays with you].
This gives you your profit-based customer lifetime value (pLTV), the most important number for any B2B business, its owners, and the C-level execs.
Divide it by the cost to acquire a new client, and you will likely see a ratio of about 3 to 5 as your result.
- A ratio of, for example 3.5 would mean that you generate 3.21 € profit for every 1 € you are spending to acquire a customer. Good!
- A ratio of four would be better and gives you plenty of room to built a financially resilient company.
- A ratio of five and above is exceptional! You have room to experiment with all available marketing channels, you can innovate (and you should!) plus you have room to hire the best of the best for expert and management roles!
I know you typically look at earnings before tax (EBT). However, this can be misleading. EBT shows you a current snapshot only. I think your “pLTV : CAC ratio” is at least equally important to look at.
It shows you where your business is headed. It separates the investment aspect from operations (cost). It tells you if your business model is sustainable, even before you reach overall profitability (or when you change your business model). ..
Do you know which single metric is the most important, defining performance indicator for the future of your B2B business?
It’s actually a ratio, and it’s not EBIT or operational efficiency. In fact, it’s a ratio that most B2B owners don’t even know how to calculate. Almost every B2B CEO we’ve consulted can tell you their earnings before tax (EBT), but most of them, especially those in B2B services, don’t know their pLTV-to-CaC ratio (their profit-based customer lifetime value divided by customer acquisition cost). This ratio is by far the most fundamental and meaningful number you can ever have to understand your business’s health and potential, because it tells you how much lifetime profit you generate for every dollar you spend to acquire a customer.What it is
Here’s an example. You run a financial consulting firm and work with twenty clients. You send each of them one invoice per month. When you look at the total billed amount across all clients, you discover that your typical average invoice is about €2,000. This is now your average monthly revenue per client. Next, you subtract the variable cost per client. That’s the direct cost you incur to actually serve them. In a consulting business, this usually means taking your payroll costs (consultant salaries and your own time) and dividing them by the number of clients. Don’t forget to include any other monthly delivery costs, such as project-specific travel, software licenses, or physical materials used for client work (for example training materials). Your revenue minus the direct cost of service gives you your monthly gross profit per client. You just need to multiply that number by the average client lifespan in months. Now you have your profit-based customer lifetime value (pLTV). It tells you exactly how much lifetime profit you generate for one “average” client over the entire time span you are serving this client. The only thing you need to do now is divide this number, the pLTV, by the cost to acquire a new client. Take the last six months and add it all up:- What did you spend for salaries, for sales staff, also part-time?
- Fees for external business development?
- External agency fees or freelancers who directly contribute to sales?
- Marketing spending for paid ads such as Google and LinkedIn?
- Cost for client events, networking dinners, or sponsorships?
- Hours that C-level and owners spent on selling or pitching?
Your business depends on this ratio
Your profit based Lifetime Value per client divided by your Cost to acquire one new client! This shows you the dollar amount that you can make, over the time that you are working with one typical client, for each single dollar that you had to spend to get this very client.Simple Example
If you are reaching 20,000 dollars profit for a typical client (over the entire time of the client relationship), divided by 5,000 dollars cost to acquire one, that would equal four. Which means that you are earning each dollar four times back that you had originally spent on acquiring your client. A very nice ratio!What it is not
1) pLTV-to-CaC ratio is not a measure of your current cash flow or near-term profitability
Business owners often see a strong ratio (e.g., 5:1) and think they’re highly profitable right now. But pLTV is a lifetime projection and does not reflect your bank balance. You could have a fantastic ratio while bleeding cash for 12 or more months waiting to get your acquisition cost back. Or simpler: The ratio tells you nothing about payback period or your short-term liquidity. Your liquidity is the one most critical factor for actual survival, and you must monitor it separately each week.2) You cannot automatically assume your business is scalable at 10x
A high ratio doesn’t mean you can acquire unlimited customers at that same cost. Many B2B owners mistakenly think “our ratio is 6:1, so we should pour money into sales.” No. This ratio is not taking market saturation into account. So check market size, saturation, and test how much your CAC rises if you start to put more money into sales.3) A high pLTV-to-CaC ratio is often mistakenly believed to mean the entire company is extremely healthy
The ratio does not account for massive fixed costs (like R&D, G&A, product development, or general overhead). You could have a 5:1 LTV:CAC, but if your R&D costs are through the roof, the company could still be losing money overall. I have said this in the past and here it is again: Your fixed cost should always be as low as humanly possible. I’m afraid, prestige hungry owners with huge offices and huge rents are not typically the ones who will make it in the long run. Hunger for status gets you killed.When is a single pLTV:CAC ratio not enough?
When your customer base is diverse, one healthy-looking pLTV:CAC ratio can fool you. It can even be dangerous. Why? A single average pLTV:CAC can hide the truth. A few “great clients” with a high pLTV/CAC can cover up many mediocre clients with a low or even negative pLTV:CAC. These clients quietly drain your cash. The solution is simple. Stop using one blended average. Start calculating pLTV:CAC by groups. Many people call this segmentation.Here is how you do it
Your goal is to divide customers into groups based on traits that influence their value and their acquisition cost. What you need to do is calculate one pLTV for each group and one CAC for each group. This will give you one specific pLTV-to-CAC ratio for each group.Option 1: Group clients by acquisition channel
The cost to acquire a client changes a lot depending on where they came from. So we create:- Group 1: Organic or Referral — People who found you through word of mouth, SEO, or direct recommendations.
- Group 2: Paid Ads — People who clicked through a Facebook or Google campaign.
- Group 3: Sales Team or Events — People acquired through a high-touch process like trade shows, cold calls, or product demos.
- Reduce spending in the Sales Team channel and invest more in Paid Ads.
- Or change the offer or bundle your sales team uses so you attract a different kind of customer through that channel.
The Alternative: Group clients by profile or size
This is the fastest way to see your “great clients” and your less profitable ones. How to group them: Focus on traits that have a big impact on profit.- Group A: Small Businesses — One to five employees or spending below a threshold like under 900 dollars per month.
- Group B: Mid-Market — Five to fifty employees or spending in your mid-tier range.
- Group C: Enterprise — Large clients who spend the most and usually drive most of your profit.
