Payback period is the time, usually in months, that it takes for your firm to break even on your CAC, from revenue.

Why measure it?

This metric tells you whether you are spending too much on acquiring clients, or if you are not attracting the right kind of clients.

If your payback period is longer than you thought it would be—typically, accounting firms should expect around 3-4 months—then you need to think carefully about reducing your sales and marketing costs, or targeting larger prospects who will have greater funds to spend with your firm.

Payback period in action

With CAC of $3,787 and average revenue per client (ARPC) of $1094, your firm’s payback period is 3.45. This would mean that on average, it takes you 3.5 months with a new client to break even on what you spent acquiring them.

Generally, a payback period of 3.45 shows your firm is doing well in this area, but it does indicate that you can afford to invest slightly more in sales and marketing to acquire great new clients, and should explore this option.

Lifetime value of a client (LTV)

What is it?

LTV shows the total financial benefit you can expect from a client over the course of your firm’s entire relationship with them.

Why measure it?

On its own, LTV is a useful estimate of what a client is worth to your firm over the course of their relationship with you. You can segment your clients and assess the LTV of various client types, which will help you to identify your more profitable groups and find out who are the clients you should be aiming to gain more of.

Your findings will become even more useful when you compare your LTV to your CAC.

LTV in action

To calculate your LTV you first need to know how long your clients are staying with your firm. Start with your churn rate and invert that value (1 / Churn rate) to calculate how many months on average your clients stay with you. A 2.8% churn rate works out to 35.7 months.

You will also need to know your Gross Margin percentage (the percentage of profit that remains after your costs have been paid), and your ARPC.

So, with a Gross Margin of 60%, Churn Rate of 2.8%, and ARPC of $1,094, your calculation would look like this, giving you an LTV of $23,433.48.

LTV:CAC ratio

What is it?

Your LTV:CAC ratio compares a client’s lifetime value to your firm, with your costs to acquire them.

Why measure it?

Comparing LTV with CAC shows you if your practice is spending enough on marketing activities to ensure long-term growth, or if you would be better off reducing the total number of clients you are servicing. It also reinforces the importance of building long, mutually beneficial relationships with your best clients, instead of aiming for smaller, more immediate wins.

Common LTV:CAC ratios in the accounting industry are 4:1 and 5:1, which means practices are earning from clients 4 or 5 times the amount they spent acquiring them. If you are seeing a ratio lower than this, you know you are spending too much.

A higher ratio is not necessarily good either—this can indicate you are spending too little on sales and marketing and could be missing out on valuable business.

LTV:CAC ratio in action

If your firm’s LTV is $22,645.80 and your CAC is $3,787, your LTV:CAC ratio is 5.9:1. While this means your cost to acquire new clients is being outweighed significantly by your clients’ LTV, it highlights that you have a lot of scope to grow and should invest more in client acquisition.