Lifetime Value to Cost of Acquisition Ratio (LTV/CAC)
Date created: Feb 20, 2019 • Last updated: Oct 13, 2021
What is Lifetime Value to Cost of Acquisition Ratio?
The Lifetime Value to Cost of Acquisition (LTV/CAC) Ratio tells you if the theoretical lifetime revenue you get from a customer is higher or lower than the sales and marketing costs needed to acquire that customer.Alternate names: Customer Lifetime Value over Customer Acquisition Cost Ratio, CLTV/CAC Ratio
Lifetime Value to Cost of Acquisition Ratio
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What is a good Lifetime Value to Cost of Acquisition Ratio benchmark?
To scale your SaaS business, LTV/CAC ratio should be greater than 3. If it’s lower, continue working on your product market fit. If it's too high, above 5, invest more in marketing and sales. If this ratio is less than 1, you are losing money on each new customer.
More about this metric
Customer Acquisition Cost is a direct reflection of the future success of your SaaS business. If you’re too cautious about your CAC, you could be missing out on customers and future revenue. Yet, if you spend too freely, you may be less profitable.
You need to spend the right amount of CAC to drive new customers to your service without jeopardizing your LTV as well as the CAC Payback Period. The LTV/CAC ratio is an effective way of measuring this balance. Ensure you are calculating a fully burdened CAC that includes all acquisition costs, for example, implementation and support costs. Otherwise you risk over-inflating this metric.