LTV: CAC = Customer Lifetime Value / Customer Acquisition Cost
The Customer Lifetime Value to Customer Acquisition (LTV:CAC) ratio measures the relationship between the lifetime value of a customer, and the cost of acquiring that customer. The metric is computed by dividing LTV by CAC. It is a signal of customer profitability, and of sales and marketing efficiency. Add this Klip to your Excel dashboard.
Consider a SaaS company that had a gross margin of 75% and monthly customer churn of 2%, and each customer spent an average of $40 with you every month, the calculation would look like this:
Customer Acquisition Cost (CAC) Benchmarks
There are a number of factors should come into play in determining a target CAC, including Customer Lifetime Value projections, market size, business life cycle stage, level of funding, competitive positioning and marketing strategy. Here’s some expert advice and rules of thumb:
- Strong B2B companies in their growth stage should have an LTV:CAC ratio of 3-5.
- The best rule of thumb is spending 33% or less of your customer’s lifetime value.
Measuring and optimizing the CAC metric can be challenging on a number of fronts, especially if you’re attempting to attribute acquisition costs to individual accounts or customer segments - how much of your monthly ad spend or sales budget should be attributed to a specific win?
Even at the aggregate level, adding up marketing and sales costs over a given period can be misleading from a CAC perspective; in most cases marketing and sales resources are not solely focused on new customer acquisition.
LTV: CAC Best Practices
According to Jordan McBride, to reduce your CAC and optimize profit, SaaS companies need to optimize their funnel by quantifying each step of the process and understanding how many visits to leads, how many leads lead to opportunities, and how many opportunities lead to customers. It’s also important to optimize your pricing because a huge portion of CAC feeds into the recovery period, as well as CAC ratio. McBride points out that if you optimize your pricing to gain cash up front to recover your CAC, in the form of mandatory training, integration costs, etc., you can ensure you start making a profit as a soon as possible.
How to monitor LTV:CAC in Real-time
Once you have established metrics for measuring LTV:CAC, you’ll want to establish processes to monitor this and other SaaS KPIs on a continual basis. Dashboards can be critical in this regard.
Learn more about how to track your LTV:CAC on a SaaS Dashboard.
LTV:CAC: Top Resources
4 SaaS Customer Acquisition Best Practices, David Skok
Quora conversation thread: What is the typical acquisition cost of a SaaS customer by monthly multiple?, (response by) Mike Volpe, former CMO at Hubspot
The 6 Marketing Metrics Your CEO Actually Wants to See, Mike Volpe, former CMO at Hubspot
What’s Your Real Customer Acquisition Cost, Carlos Eduardo Espinal, Seedcamp
The SaaS CAC Myth and Misguided Optimism, Lincoln Murphy
Startup Killer: The Cost of Customer Acquisition, David Skok