Continuing with The Magic Number for SaaS, there’s another phrase that’s bandied around quite a bit: CAC to LTV. Here’s a quick definition of CAC and LTV:
- CAC – Cost of customer acquisition (how much it costs to get a customer, on average)
- LTV – Lifetime value of the customer (how much the customer pays, on average, over the period of time they’re a customer)
When people talk about CAC to LTV, they mean the ratio of the cost to acquire a customer relative to how much a customer pays over time. Generally, the question is whether or not the company can profitably acquire customers. For several years, often when the startup is sub-scale or investing in growth ahead of profitability, the cost to acquire a customer exceeds the value of the customer. CAC to LTV is an important measure of the efficiency of the business model, especially as it pertains to the repeatable customer acquisition model stage in a startup.
CAC to LTV is one of the most important metrics for SaaS entrepreneurs and should be well understood.
What else? What are some more thoughts on the SaaS CAC to LTV metric?