How to Calculate the LTV:CAC Ratio for Your SaaS Business

Corl
Corl
Jan 8, 2019 · 4 min read
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Photo by Christophe Hautier on Unsplash

There’s a simple question every founder of a SaaS company should ask when looking at their sales and marketing efforts. Is a customer worth more than what it costs to sell to them? The LTV:CAC ratio is a tool to measure the efficiency of the crucial part of the business: the sales and marketing funnel.

What is the LTV:CAC Ratio?

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Customer Lifetime Value indicates how long a the average customer sticks with you before they cancel their service. The longer a customer sticks around, the more valuable they are.

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Customer Acquisition Cost lets you know how much it costs you to acquire a new customer. Most of the time, it costs more to acquire a new customer than to keep an existing one.

How to Calculate LTV:CAC Ratio?

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CAC Calculation:
The cost of acquiring a customer is the sum of all marketing and sales expenses over a given period divided by the number of new customers added during that same period.

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LTV:CAC Ratio Calculation:
Once you have LTV and CAC calculated individually, simply divide LTV by CAC.

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Example:
If your company’s LTV is $3,000 and the total cost of acquiring a customer is $1,000, then your LTV:CAC ratio is 3:1.

What is an Ideal LTV:CAC Ratio?

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When to Use the LTV:CAC Ratio

As with any metric, you should use the LTV:CAC ratio for making business decisions.

1. Which size/type of customer is most efficient to acquire?

2. How much can I spend to acquire a given type of customer?

3. How many sales reps should I hire?

When using the LTV:CAC ratio with investors, use it as a tool to demonstrate your understanding of the underlying unit economics of your business and how that ties into your future plans for growth post-funding.

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Corl

Written by

Corl

Corl is an artificially-intelligent platform that finances businesses in the digital economy and shares in their future revenue. #revenuesharing

Corl

Corl

Corl is an artificially-intelligent platform that finances businesses in the digital economy and shares in their future revenue.

Corl

Written by

Corl

Corl is an artificially-intelligent platform that finances businesses in the digital economy and shares in their future revenue. #revenuesharing

Corl

Corl

Corl is an artificially-intelligent platform that finances businesses in the digital economy and shares in their future revenue.

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