From an accounting perspective, you can evaluate your capital efficiency on re:cap with two metrics: CLTV to CAC ratio and Rule of 40. Those metrics are particularly relevant for Software-as-a-Service businesses (SaaS).

But first, let’s take a step back and explore capital efficiency from a broader perspective.

What is it?

Capital efficiency measures of how effectively a business uses its capital (money or assets) to generate revenue and growth. It answers the question: “How much output do I get for every euro invested?”

• High capital efficiency: when you get a lot of revenue from a relatively small amount of capital. This is desirable because it means the company is making the most of its resources.
• Low capital efficiency: when you need a lot of capital to produce only little revenue. This can signal wasteful spending or inefficient operations.

Capital efficiency is about maximizing returns while minimizing the capital needed, leading to better profitability and sustainable growth.

CLTV to CAC ratio

The CLV to CAC ratio compares the value of a customer over their lifetime to the cost of acquiring them.

How is it calculated?

To understand the CLV to CAC ratio, first break down the two components: Customer Lifetime Value (CLV) is calculated by dividing the average revenue per customer (ARPA) by the average monthly churn rate. Customer Acquisition Cost (CAC) is the sum of all marketing, sales staff, and other related expenses, divided by the number of new customers acquired.

The CLV to CAC ratio is a crucial metric for assessing how efficiently your company is acquiring and retaining customers to support long-term, profitable growth.

What data sources are needed?

The customer lifetime value is based on your revenue & customer data. The CAC is based on your accounting data.

What the ratio tells you:

1. Profitability of acquisition: a high ratio indicates that the value a customer generates over their lifetime far exceeds the cost to acquire them, signaling profitable customer acquisition.
2. Sustainability of growth: a ratio of 3:1 or higher is often a good benchmark, suggesting sustainable customer acquisition. A lower ratio may mean you're spending too much on customer acquisition or not generating enough value from them.
3. Marketing and sales efficiency: the ratio helps assess the effectiveness of your marketing and sales efforts. If CAC is too high compared to CLV, it may be time to refine your acquisition strategies or focus on increasing the lifetime value of existing customers.
4. Resource allocation: the ratio can guide decisions on where to allocate resources—whether to invest more in acquiring new customers or enhancing the value derived from current ones. A low ratio may point to the need for better marketing optimization or stronger retention efforts.

Rule of 40

The rule of 40 measures if the operating profit margin when added to the YoY revenue growth rate equals 40% or higher.

How is it calculated?

The Rule of 40 is calculated by adding your year-over-year (YoY) revenue growth rate to your operating profit margin. The YoY growth rate is the percentage change in revenue over the past 12 months, calculated by dividing the difference between current and prior-year revenue by last year’s revenue. The operating profit margin is derived by dividing operating profit by revenue. Operating expenses (OPEX) include personnel, rent, insurance, marketing and sales, depreciation, and other operating costs.

In short, the Rule of 40 helps assess whether your company is on track for sustainable growth by balancing revenue growth with profitability. A score under 40% suggests you may need to adjust strategies – whether to improve efficiency, cut costs, or accelerate growth.

What data sources are needed?

The YoY growth rate is based on your revenue and customer data. The operating profit margin and operating profit are based on your accounting data.

What does it tell me about my company?

• Capital efficiency: Both ratios give you an understanding of how efficiently you're deploying capital. If your CLTV to CAC ratio is healthy and your Rule of 40 is above 40%, it suggests you're effectively using your capital to fuel growth and profitability.
• Sustainability: The Rule of 40 is an indicator of long-term financial sustainability. If your company is not meeting this benchmark, it could imply that growth is unsustainable or profitability is being sacrificed for expansion.
• Growth vs. profitability: If you're achieving a good CLTV to CAC ratio but falling short of the Rule of 40, it might mean you're acquiring customers efficiently but not scaling your operations to maintain profitability. Conversely, if your Rule of 40 is solid but CLTV to CAC is low, you might be over-relying on high acquisition costs or inefficient sales channels.

What are the underlying data sources?

The capital efficiency is based on your revenue, customer, and accounting data.