Revenue Efficiency

What is Revenue Efficiency?

Revenue efficiency asks a question growth rate cannot answer: what did that growth cost. Three ratios carry most of the weight. LTV/CAC compares the lifetime gross profit of a customer with the cost of acquiring them, and three times is the conventional floor. CAC payback measures how many months of gross profit are needed to recover acquisition cost, with under twelve considered strong in B2B SaaS. The magic number relates net new recurring revenue in a period to the prior period's sales and marketing spend, and above about 0.75 suggests spending more is justified. The reason this cluster of metrics moved from a finance concern to a board-level one is that capital stopped being free — growth bought at any price is no longer rewarded. The number that most often flatters these ratios dishonestly is churn, because an optimistic churn assumption inflates lifetime value and every ratio built on it.

Why it matters

• Separates growth that compounds from growth that is simply being purchased.
• Determines how much a business can justifiably spend to win a customer.
• Only as honest as the churn assumption underneath it, which is where most models flatter themselves.

Use cases

• Board reporting. LTV/CAC, payback and magic number reported alongside growth rate rather than instead of it.
• Channel rationalisation. Channels ranked on efficiency, with persistently expensive ones reduced.
• Investment case. Efficiency headroom used to justify increasing spend rather than defending it.