top of page

How to Calculate LTV to CAC Ratio for Your SaaS Business


CLV to CAC Ratio - How efficient are your customer acquisition and retention efforts?

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 LTV 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 startup 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 the LTV to CAC Ratio for your SaaS business.


What is the LTV to CAC Ratio?

The LTV/CAC Ratio reveals the total average value you anticipate receiving from a new customer compared to the average cost to acquire a new customer.

  1. LTV = Lifetime Value of a Customer

  2. CAC = Customer Acquisition Cost

How to calculate SaaS LTV to CAC Ratio

There are several ways to calculate customer lifetime value. One way is with this formula:


LTV = Average Revenue per Account (ARPA) / Customer Churn


Or you can calculate customer LTV using this formula:


LTV = Average Revenue per Account (ARPA) × Average Customer Lifetime


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 Plans

​Pricing

​Average Customer Lifetime

Basic

$50/month

12 months

Professional

$100/month

18 months

Enterprise

$500/month

24 months

With this data, we can calculate the LTV of the company’s average customer:


LTV = [($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


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 LTV/CAC ratio is $3,318 / $1,250 = 2.65


Note: Sometimes a gross margin adjustment is made to LTV in order to compare gross profit to customer acquisition cost, rather than comparing revenue to acquisition cost. For high margin businesses, this adjustment often isn't necessary.

 
8 KPIs to Show Investors Your SaaS Startup is Primed for Success

Get the Founder's Guide to SaaS Growth Metrics


Our guide, SaaS Startup Growth Metrics: 8 KPIs to Show Investors Your Business is Primed for Success, explains the core metrics used to measure SaaS company success. Using simple examples, we’ll show you how to calculate each metric, and describe why specific indicators are important to investors. It's our most popular founder resource!

Get the guide ➔
bottom of page