Sales

Two Business Ratios For Hyper Growth and Wealth

Sales Guy

Sales Guy

— 2 min read

What if I told you there are two key ratios that, when understood and optimized, can transform your business from a steady performer into a wealth-generating machine?

We're not just talking about incremental gains here. We're talking about a fundamental shift in how you view your sales and marketing spend, and how that spend directly translates into enterprise value.

Ratio 1: The Classic - LTV to CAC

Customer Lifetime Value to Customer Acquisition Cost

LTV to CAC is the bedrock of sustainable growth. It tells you how much revenue you can expect from a customer over their entire relationship with your company, compared to the cost of acquiring them.

A healthy LTV to CAC ratio (typically 3:1 or higher) indicates that your customer acquisition efforts are profitable. For every dollar you spend to get a customer, you're getting at least three dollars back over time. This ratio helps you:

  • Determine marketing budget effectiveness: Are your campaigns bringing in valuable customers?
  • Optimize sales processes: Are your sales team converting leads efficiently?
  • Understand customer retention: Are customers staying long enough to generate significant value?

While critical, LTV to CAC focuses on the profitability of individual customers. But what happens when you zoom out and look at the bigger picture – your company's overall value?

Ratio 2: The Game Changer - CAC to Enterprise Value

Customer Acquisition Cost to Enterprise Value

This is where the magic truly happens, and it's a concept that can fundamentally alter your perspective on sales and marketing investment.

Let's break it down with a powerful example:

Imagine you spend $10 to acquire a new customer (your CAC). This customer, through their purchases, generates $30 in annual EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) for your company.

If your company trades at a 10x EBITDA multiple. This means for every dollar of EBITDA your company generates, the market values your company at $10.

That $10 you spent to acquire a customer instantly adds $300 to your company's value ($30 annual EBITDA x 10x EBITDA multiple). You're not just making 2x or 3x your money back on that sales and marketing spend. You're making 30x your money.

You now have two powerful choices with that $30 in annual profit generated by your new customer:

  1. Take it out: You could extract that profit and pay taxes on it.
  2. Reinvest it: This is where the exponential growth occurs. Reinvest that $30 into acquiring more customers. At a CAC of $10 per customer, that $30 allows you to acquire 3 more customers. Each of those new customers, in turn, adds another $300 to your company's value, leading to an additional $900 in enterprise value.

This is why the ultra-wealthy seem to accumulate wealth so rapidly. They're not getting modest annual returns. They're achieving a 30x return (or more, depending on their multiples) on every marketing and sales dollar, and then strategically reinvesting those profits for another explosive 30x return.

You can add as many zeros as you want to the numbers in our example – the underlying principle remains the same. The power of this reinvestment cycle, driven by a strong CAC to Enterprise Value ratio, is what creates significant and rapid wealth.

The Caveat: A Sellable Company

It's important to note that this exponential growth and valuation only works if you have a company that "checks the boxes" of what makes a company sellable. This includes factors like:

  • Recurring revenue streams: Predictable income makes your business more valuable.
  • Strong unit economics: Profitable customers are key.
  • Scalability: The ability to grow without a proportional increase in costs.
  • Defensible competitive advantage: What makes your business unique and hard to replicate?

Conclusion

While LTV to CAC remains a crucial metric for understanding customer profitability, don't overlook the immense power of the CAC to Enterprise Value ratio.

By focusing on efficient customer acquisition that directly contributes to your company's valuation and by strategically reinvesting profits, you can unlock a level of growth and wealth creation that goes far beyond traditional returns.

Keep Crushing!
- Sales Guy

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