Breakeven point by comparing COCA(t) and LTV
Floriano Bonfigli asked 3 years ago
I’m wondering if it makes some sense to apply COCA(t) and LTV principles to work out the minimum number of new customers needed to be successful.
Some math, for SaaS companies:
If LTV > 3 x COCA(t), and COCA(t)=TMSE(t)/NC(t) then
the minimum number of new customers needed to be successful NC-min(t)=(3 x TMSE(t))/LTV.
It may be useful for founders
- to see whether or not they feel comfortable with reaching that sales target, or in other words
- to understand the effort needed to be successful.
Bill Aulet answered 3 years ago
Floriano,
Great to hear from you.
Your thought process is exactly correct. Often in a presentation you will get the question from a smart advisor or investor, “how many customers will it take for your to break even?”
While it is almost impossible to know that number for sure because of the many factors that contribute to it, that is NOT the right answer.
You should absolute make some intelligent assumptions (knowing they are assumptions that could be wrong) and estimate how many customer you would need to get to break even – in this case so that the LTV is 3X the CoCA (knowing that this is a rule with assumptions in it that could be wrong).
This number will be interesting because now you can think about whether it is reasonable or not and what you would have to do to achieve it. It may force you to look even deeper at your model to make other changes.
In any case, knowing the number of new customer you need to have to get to break even is something you should have a number (really an estimate/range) that you can explain and then explain how you are going to get there. Otherwise you don’t have a viable plan to succeed and it is just a dream based on hope not logic.