How effective is your sales and marketing? How much does it cost to bring in new customers — and how does that compare to what you expect to earn from customers over their lifetime? Looking at your CLTV to CAC Ratio can yield insights into how efficiently your company is spending its sales, marketing, and customer retention dollars and, in the long term, how valuable your company is. It can also tell you whether or not you’re in a strong enough position to lure in equity investors.
Following is a simple overview on how to calculate CLTV to CAC Ratio for your SaaS business.
What is the CLTV to CAC Ratio?
The CLTV/CAC Ratio reveals the total average value you anticipate receiving from a new customer compared to the average cost to acquire a new customer.
CLTV = Customer Lifetime Value
CAC = Customer Acquisition Cost
How to calculate CLTV to CAC Ratio
There are several ways to calculate CLTV. One way is with this formula:
CLTV = Average Revenue per Account (ARPA) / Customer Churn
Or you can calculate CLTV using this formula:
CLTV = Average Revenue per Account (ARPA) × Average Customer Lifetime
For example, SaaSy Co. offers three different pricing options for its CRM software: basic, professional, and enterprise. SaaSy Co. has 100 basic customers, 250 professional customers, and 75 enterprise customers. Its average customer lifetime varies by pricing plan.Pricing PlansPricingAverage Customer LifetimeBasic$50/month12 monthsProfessional$100/month18 monthsEnterprise$500/month24 months
With this data, we can calculate the CLTV of the company’s average customer:
CLTV = [($50 × 100 × 12) + ($100 × 250 × 18) + ($500 × 75 × 24)] / 425 = $3,318
This means that, on average, SaaSy Co. can expect to generate $3,318 in revenue per customer.
CAC is simply: Total Sales and Marketing expense / # of new customers
For example, if SaaSy Co. spends $200k to acquire 160 new customers, their CAC would be $1,250 / customer.
So, putting it all together, SaaSy Co.’s CLTV/CAC ratio is $3,318 / $1,250 = 2.65
Note: Sometimes a gross margin adjustment is made to CLTV in order to compare gross profit to customer acquisition cost, rather than comparing revenue to acquisition cost. For high margin businesses, this adjustment is often ignored.
Want More SaaS Metrics?
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