What is the difference?

LTV:CAC Ratio vs Magic Number

Lifetime Value to Cost of Acquisition Ratio

SaaS Magic Number

What is it?

The LTV/CAC ratio measures the lifetime revenue a customer generates relative to the cost of acquiring that customer. A ratio of 3 or higher is the standard benchmark for sustainable SaaS growth.

The SaaS Magic Number is a ratio showing yearly recurring revenue growth gained for every sales and marketing dollar spent. It indicates the level of operational efficiency of a company, as well as the sustainability of sales and marketing expenditure.

Who is it for?

Chief Financial Officer

Chief Revenue Officer

Chief Marketing Officer

Chief Financial Officer

Chief Revenue Officer

Financial Analyst

Chief Marketing Officer

Formula

ƒ Customer Lifetime Value / Customer Acquisition Cost

ƒ (ARPA x Gross Margin / Churn Rate) / Customer Acquisition Cost

ƒ ((current quarter’s recurring revenue – previous quarter’s recurring revenue) x 4) / (previous quarter’s sales and marketing spend)

Example

Suppose a SaaS company has the following metrics:

ARPA: $500/month
Gross margin: 75%
Monthly churn rate: 2.5%
CAC: $6,000

Step 1 — Calculate LTV: LTV = ($500 × 0.75) / 0.025 = $375 / 0.025 = $15,000

Step 2 — Calculate LTV/CAC: LTV/CAC = $15,000 / $6,000 = 2.5

A ratio of 2.5 means the company earns $2.50 in lifetime value for every $1 spent acquiring a customer. That's below the 3.0 threshold, which signals the business should focus on reducing churn, improving margins, or lowering acquisition costs before scaling spend.

A company’s recurring revenue in Q2 is 700K, and their recurring revenue in Q1 was 500K. Their Sales & Marketing investment in Q1 was 600K.

When calculating the SaaS Magic Number in Q2, the company will subtract 500K, the previous period recurring revenue, from 700K, to get Q2’s recurring revenue growth of 200K. This quarterly figure is annualized by multiplying by 4 to get 800K.

Finally, this number is divided by Q1 Sales & Marketing investment of 600K to get a SaaS Magic Number of 1.3.

((700K - 500K) x 4)/600K = 1.3

Published and updated dates

Date created: Oct 12, 2022

Latest update: Jun 19, 2026