CAC vs LTV
Customer Acquisition Cost (CAC) and Customer Lifetime Value (CLV or LTV) measure different aspects of customer economics in SaaS businesses. CAC calculates how much a company spends to acquire a new customer, including all sales and marketing expenses divided by the number of new customers gained during a specific period, essentially measuring the investment required to grow the customer base. CLV, on the other hand, estimates the total revenue a business can reasonably expect from a single customer throughout their relationship, typically calculated by multiplying the average revenue per customer by the average customer lifespan, representing the return on that acquisition investment.
A SaaS company should focus on CAC when evaluating the efficiency of specific marketing channels or sales strategies. For example, if a company discovers their CAC has increased significantly for customers acquired through paid search while remaining stable for referral customers, they might reallocate their marketing budget toward referral programs. Conversely, the same company would emphasize CLV when making strategic decisions about customer segments or product development. If analysis reveals that enterprise customers have a CLV five times higher than small business customers despite a CAC only twice as high, this would justify investing more resources in enterprise sales and features that serve larger clients. These metrics are most powerful when used together—comparing the CLV:CAC ratio across different customer segments helps identify which customer types deliver the best long-term value relative to their acquisition cost.
Customer Acquisition Cost
Customer Lifetime Value
What is it?
Customer Acquisition Cost (CAC) is the cost a business incurs to acquire a new customer. This includes the fully loaded costs associated with sales and marketing to attract a potential customer and to convince them to purchase, divided across all new customers.
Customer Lifetime Value (LTV) represents the total net revenue a business can reasonably expect to generate from a single customer account throughout the entire duration of their relationship. This metric goes beyond simple transaction analysis by incorporating customer retention patterns, purchasing frequency, and profit margins to provide a comprehensive view of customer economic value. LTV serves as a cornerstone metric for strategic decision-making, enabling businesses to optimise acquisition spending, prioritise retention efforts, and identify high-value customer segments that drive sustainable growth.
Who is it for?
Categories
Formula
Example
Say a company has the following breakdown of their sales and marketing expenses in one month: Sales and Marketing Salaries- $15,000 Travel Expenses- $500 Commission paid- $3000 Tech Stack-$500 Ads- $1000 In total, their sales and marketing efforts for the month are $20,000. Now, say for that month those efforts enabled the company to acquire 5 new customers. Dividing that total by 5 shows that the company spent $4,000 per new customer. Their CAC is then $4,000 for that period.
Consider a SaaS company with the following metrics: Average Revenue Per User (ARPU) of $100 per month, gross margin of 80%, and average customer lifespan of 24 months. Using the gross margin-adjusted method: LTV = (Monthly ARPU × Gross Margin %) × Average Customer Lifespan LTV = ($100 × 0.80) × 24 months = $80 × 24 = $1,920 This calculation reveals that each customer generates $1,920 in lifetime value after accounting for direct costs. If the company's CAC is $600, the LTV:CAC ratio would be 3.2:1, indicating healthy unit economics with reasonable payback periods.
Published and updated dates
Date created: Oct 12, 2022
Latest update: Mar 21, 2024
Date created: Oct 12, 2022
Latest update: Jul 8, 2025