The lifetime value to cost of customer acquisition ration provides an instant view of the economics of a SaaS company. It's a simplified marketing efficiency calculation which speaks volumes about the health of a company – any business which is acquiring customers for significantly less than the money it takes from them over their lifetime with the business should be in rude health!
It's important to note that LTV:CAC has pitfalls. A 5:1 ratio sounds great on paper but if the numbers are impossibly large or small, the business may not be as healthy as it seems. Similarly, a healthy LTV:CAC ratio says nothing about the company's ability to invest in the acquisition activity in the first place – if the LTV part doesn't see payback for a long period of time, cashflow may prevent acquisition entirely, rendering the ratio useless.
Most SaaS experts would say that the ideal LTV:CAC ratio should be 3:1 – that is, you're getting approximately three times in value from what you put into acquiring each customer. However, this is nuanced – it's perfectly possible to grow a great SaaS business with a lower or higher LTV:CAC.
If your LTV:CAC is greater than 3:1, you may be able to expand your acquisition efforts profitably.
It's worth digging into LTV:CAC in more detail, especially if you're trying to use it as a benchmark in your own business or fundraising efforts. Try the following: