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.
LTV = Lifetime Value of a Customer
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
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.
Average Customer Lifetime
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.
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