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.
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.
How to calculate Lifetime Value To Cost Of Acquisition Ratio
ƒ (Customer Lifetime Value) / (Customer Acquisition Cost)
Tell me 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.