Hi Friends,

When I start advising a company, I ask for the scorecard or the current metrics / OKRs.

It's amazing how many companies under $5 million send me complex metrics across so many details.

Then I ask for 2 numbers. What does it cost you to win a client? And how much gross profit does each client generate?

They either give me directional guesses or point me to their finance lead.

Every business has 1 goal: deliver a solution a client can't get anywhere else.

That takes 2 jobs, which I covered in issue 16. Communicate it. Deliver it.

Customer Acquisition Cost (CAC) is what it costs you to win a client. Communicate well, and it drops.

Customer Lifetime Value (LTV) is what a client is worth to you in gross profit. Deliver well, and it rises.

Put the 2 together and you get the true profit per client, the simplest read on any business. What goes out to win them, and what comes back over their lifetime. It's the fastest way investors size up whether a business is sustainable.

These ratios help uncover key areas of your business:

Most companies track metrics that pull teams apart. LTV to CAC is the 1 ratio every team touches.

CAC: a year's cost of winning new clients, divided by clients whose first invoice landed that year. Count owner selling time and the tools you sell with, like your CRM.

Gross profit: revenue minus cost to deliver. Delivery staff in services, cost of goods in distribution and manufacturing, hosting in software.

With little history, don't forecast a lifetime. Alex Wu of CFO Advisors: "with 18 months of cohort data you cannot credibly estimate lifetime."

CAC payback: the months it takes a new client's gross profit, added up, to cover what it cost to win them. Kyle Poyar sets software's bar under 12 months (18 if clients reliably buy more each year). I'd hold any business to it.

If you're short on history, divide CAC by a new client's average monthly gross profit so far. Made-up example: $30,000 / $3,000 = 10 months.

Once a full year's clients reach 24 months, add LTV to CAC. LTV is the gross profit a client produced in their first 24 months, averaged across everyone won that year, including those who left.

Year 1: $36,000.
Year 2: $48,000.
24-month LTV: $84,000, against $30,000 to win. 2.8 to 1.

The number is LTV to CAC. Until you have 24 months, you read it as payback. A 12-month payback means first-year gross profit equals CAC: 1 to 1. Everything after is the ratio climbing.

CJ Gustafson of Mostly Metrics would run the business on payback and save LTV to CAC for investors. I keep both on the scorecard.

His fix is to break it into inputs and give each one an owner. Here's how I run it.

1. Say it in 1 sentence. From the CEO: "Every dollar we spend to win a client has to come back as gross profit within 12 months, and each of you owns 1 piece."

2. Name the owners.

3. Set the rhythm. Owners report inputs monthly. Review the ratio quarterly. 1 question in the room: which input moved, and who moved it?

4. Reward the inputs. Each owner's bonus includes 1 line: did your input beat last year? The sales leader is paid on the gross profit of new clients, not bookings. Then celebrate the bad-fit deal someone walked away from.

Line 1: CAC payback, or 24-month LTV to CAC once you have the history. Name 4 input owners. The CEO owns line 1.

What a client earns you, divided by what it cost to win them. 2 numbers every team can move.

Let's stop sending people to finance.

Til next time,

--Ali

P.S. I'm away next week traveling with family in Mexico. Will be back with a new Moat issue the following Saturday (10/24).

About Me: I'm Ali Mamujee. I run Allenix, where we build AI revenue systems for B2B companies between $5 million and $25 million with complex sales cycles. Fair warning: if I advise you, I'll ask for 2 numbers. Have them ready. If not, I can help you put them together.