i) How does churn relate to the VC’s magic number metric? Why are VCs concerned about the
magic number and not focused on customer lifetime value and the LTV/CAC ratio? How do
these metrics differ?
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Following are the two ways CLV/LTV and CAC can relate
CLV = (m * L) – CAC OR CLV = (m/CR) – CAC
m = contribution margin generated from a customer in a year
L= expected purchasing life of a customer
CAC = upfront cost of acquiring a customer
Magic Number = (Change in revenues between this quarter and the prior quarter) * 4
Marketing expenditures in the prior quarter
VC’s usually like to see a magic number of .75 and above preferably more than 1.
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