Let’s say your startup’s growing and your team is expanding. That’s great news. But here’s a question you might not be asking as you bask in the excitement:
Are you losing money on every customer?
It sounds dramatic, but for many startups it’s a quiet truth.
Let’s say you’ve built a machine. You put in a dollar, and out pops three. Amazing. That’s what a business should do. It should multiply your effort.
But what if your machine’s broken? What if you put in two dollars and only get one back? No matter how fast you run it, you just burn cash faster.
At Stone & Chalk, we help founders fix the machine. Because until you do, scaling only digs the hole deeper. Let’s walk through how to know if your machine’s working and what to do if it’s not.
The two numbers that run you startup
There are two quick numbers that tell you whether your machine is working:
- Customer Acquisition Cost (CAC)
- Lifetime Value (LTV)
Here’s what they are, how to measure them, and how to make them work for you instead of against you.
1. Customer Acquisition Cost
Customer Acquisition Cost is how much it costs you on average to get one paying customer.
Think about all the things you do to attract customers:
- Running Meta or Google Ads
- Paying your sales team
- Writing blog posts
- Hiring a marketing agency
- Sponsoring events
- Offering referral bonuses or discounts
All of that adds up. So to find your CAC, add up what you spent over a period of time, then divide it by how many new paying customers you got in that time.
You can do that with the formula:
CAC = Total spent on acquiring customers ÷ Number of new customers
So what does that look like for a business:
- You spend $5,000 this month on ads, sales tools, and events.
- You gain 50 new customers.
- Your CAC = $5,000 / 50 = $100 per customer
From the formula, we’ve found that each customer costs you $100 to acquire. Simple, but powerful to know.
2. Lifetime Value
Lifetime Value is how much money each customer brings in over their time with you.
For some businesses, this is a one-time purchase. For others – especially subscription startups like SaaS – it grows every month they stick around.
You can work out the average lifetime value of your customers with the formula:
LTV = Average monthly revenue × Customer lifespan (in months)
Here’s how it works in practice:
- A customer spends $50 a month on your subscription service
- They stay with you for 1 year.
- Their LTV is $50 × 12 × 2 = $600.
That $600 is the total revenue one customer brings in.
It’s the number you can compare against CAC to see whether your business is profitable at the customer level.
How CAC and LTV work together
A healthy business operates on the simple rule:
If LTV < CAC, your business is broken.
This means you’re spending more to get a customer than they’re worth. For instance, paying $100 to earn $80. It’s a $20 loss – every time.
It’s easy to miss this in the early days. You’re focused on traction. Growth. Investors. Headlines. That’s fair. But if the foundation is wrong, it’ll collapse. Doesn’t matter if you’re growing. The faster you grow, the faster you go broke.
Let’s look at an example:
You’ve built a subscription tool. It charges $20/month. You’re spending $200 to get each customer. And on average, they stay for 6 months.
Let’s run the numbers:
- LTV = $20 × 6 = $120
- CAC = $200
- You’re losing $80 per customer.
If you get 1,000 customers, that’s an $80,000 hole.
Now imagine doing that at scale. Imagine raising money to pour more fuel into that fire. This is how startups burn through cash, even with a great product and good traction.
So what do you actually want? Well, you want to see a LTV that’s higher than CAC.
A healthy ratio is 3:1. If you’ve got that, you’re in a good place. That means you’re earning $3 for every $1 spent to get a customer. That’s a machine worth scaling.
How to fix a broken machine
If your CAC is too high or your LTV is too low, your machine isn’t working.
To fix it, you need to:
- Spend less to get customers (lower CAC).
- Make each customer worth more (increase LTV).
Here’s how to tackle both.
How to lower CAC
- a. Target better: Get more specific with your audience. If you’re running ads, make sure they’re laser-focused. Avoid spraying money across broad demographics. A well-targeted ad to a tight audience will convert better and cost less.
- b. Spend smarter: Double down on what’s working. If events are low-performing but Google Ads are delivering solid leads, shift your spend. Track performance by channel and kill anything underperforming.
- c. Use what’s free: Referrals. Partnerships. Organic content. A customer sharing your product with a friend is worth more than any paid ad. Build that into your onboarding. Make it easy for people to spread the word.
How to increase LTV
- a. Keep customers longer: It’s almost always cheaper to retain a customer than to get a new one. What’s driving churn? Fix it. Is your onboarding confusing? Are support tickets being ignored? Each friction point reduces lifetime value.
- b. Upsell or cross-sell: Once a customer trusts you, they’re more likely to buy again. Offer premium tiers, additional features, or complementary products. Amazon doesn’t just sell books, they sell everything.
- c. Build loyalty: It doesn’t have to be a fancy points program. Even small gestures like thank-you notes, birthday discounts, and personalised support can build goodwill. Loyal customers not only stay longer but bring others with them.
Case study: How to fix a broken SaaS subscription model
Back to our earlier example. You’re charging $20/month. CAC is $200. Customers stay 6 months. With a LTV of $120, that’s an $80 loss.
Here’s how a few small changes can transform things:
- Improve onboarding and customer experience → customers now stay 12 months
- New LTV = $20 × 12 = $240
- Reduce CAC by focusing ads better → CAC drops to $120
Now, you’re earning $240 per customer and only spending $120 to get them. That’s a 2:1 ratio. Better, but not perfect.
Add in a premium $30/month plan. If even 20% of customers take it, your average revenue jumps, pushing your LTV higher.
Suddenly, you’re near that 3:1 ratio that VCs and seasoned operators love to see.
Final thoughts
At Stone & Chalk, we help startups fine-tune their machines.
If your system doesn’t work at a small scale, scaling will only make things worse. It takes effort, adjustments, and sometimes a bit of elbow grease. But when it’s running smoothly, it can transform your business
When you know your numbers, how much it costs to get a customer and how much they’re worth, you can stop wasting money and start growing confidently.
With Stone & Chalk in your corner, you can have the tools and support to succeed. Find out how you can join us
