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Lifetime Value to Cost of Acquisition Ratio (LTV/CAC)

Last updated: Mar 21, 2024

What is Lifetime Value to Cost of Acquisition Ratio? 

The Lifetime Value to Cost of Acquisition (LTV/CAC) Ratio tells you if the theoretical lifetime revenue you get from a customer is higher or lower than the sales and marketing costs needed to acquire that customer.

Alternate names: Customer Lifetime Value over Customer Acquisition Cost Ratio, CLTV/CAC Ratio

Lifetime Value to Cost of Acquisition Ratio Formula

ƒ (Customer Lifetime Value
Description: 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.
) / (Customer Acquisition Cost
Description: 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.
)
ƒ ((ARPA
Description: Average Revenue Per Account (ARPA) represents the mean revenue generated from each customer account over a specific period, typically calculated monthly or annually. Beyond serving as a simple revenue indicator, ARPA functions as a critical strategic metric that reflects your product's value proposition, market positioning, pricing effectiveness, and customer segmentation strategy. It directly influences unit economics, growth sustainability, and competitive positioning while providing actionable insights into customer behaviour, expansion opportunities, and market penetration across different segments and growth stages.
 x Gross Margin
Description: Gross Margin is a profitability ratio that measures Gross Profit as a percentage of total revenue. Typically, it is calculated as Gross Profit divided by Revenue. This metric is a key indicator of a company's financial health and operational efficiency.
) / Churn Rate
Description: Logo Churn (also called Customer Churn or Account Churn) measures the number or percentage of customers who cancel their subscription or stop doing business with a company during a specific time period, regardless of the revenue value of those customers. Unlike revenue-based churn metrics, Logo Churn treats all customer losses equally, making it a critical indicator of product-market fit, customer satisfaction, and business model sustainability.
 ) / Customer Acquisition Cost
Description: 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.

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What is a good Lifetime Value to Cost of Acquisition Ratio benchmark?

For companies at 1-5M in ARR, the median LTV/CAC Ratio is between 3.4 and 4.2. For companies at 5-15M in ARR, the median LTV/CAC Ratio is between 4.6% and 6.2%. Capchase 2022, n=439. According to the Benchmarkit 2023 study, the benchmark for LTV:CAC has increased to a target range between 3.6 and 4.2.

Lifetime Value to Cost of Acquisition Ratio benchmarks

CLTV:CAC Ratio by ACV

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Benchmarkit, 2023

CLTV:CAC Ratio by Revenue

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Benchmarkit, 2023
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How to visualize Lifetime Value to Cost of Acquisition Ratio?

Ratios are usually expressed as single-digit numbers so it would be optimal to visualize Lifetime Value to Cost of Acquisition Ratio with a summary chart. Summary charts compare current values to a previous time period.

Lifetime Value to Cost of Acquisition Ratio visualization example

Lifetime Value to Cost of Acquisition Ratio

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More about Lifetime Value to Cost of Acquisition Ratio

Customer Acquisition Cost is a direct reflection of the future success of your SaaS business. If you’re too cautious about your CAC, you could be missing out on customers and future revenue. Yet, if you spend too freely, you may be less profitable.

To scale your SaaS business, LTV/CAC ratio should be greater than 3. If it’s lower, continue working on your product market fit. If it's too high, above 5, invest more in marketing and sales. If this ratio is less than 1, you are losing money on each new customer.

You need to spend the right amount of CAC to drive new customers to your service without jeopardizing your LTV as well as the CAC Payback Period. The LTV/CAC ratio is an effective way of measuring this balance. Ensure you are calculating a fully burdened CAC that includes all acquisition costs, for example, implementation and support costs. Otherwise you risk over-inflating this metric.

Recommended resources related to Lifetime Value to Cost of Acquisition Ratio

Read more about Unit Economics and the LTV/CAC Ratio here.

Contributor

Eckhard OrtweinEckhard Ortwein
Eckhard OrtweinCEO & Founder, Lean-Case

Metrics related to Lifetime Value to Cost of Acquisition Ratio

Customer Lifetime ValueCustomer Acquisition CostCAC Payback PeriodSaaS Magic Number

Comparisons

CAC vs LTVCAC vs COGSCAC Payback Period vs LTV:CAC Ratio

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