What is the LTV:CAC Ratio?
The Lifetime Value to Customer Acquisition Cost (LTV:CAC) ratio is a critical SaaS metric that compares the value of a customer over their lifetime to the cost of acquiring them. It answers a fundamental question: Are you spending your money wisely to acquire customers who will not churn? A healthy ratio is a strong indicator of a company's profitability, scalability, and the effectiveness of its marketing and sales engine.
Why is This Ratio Important for Churn?
Your churn rate directly impacts your LTV. If churn is high, LTV plummets, and your LTV:CAC ratio will suffer. It might mean you are spending too much to acquire customers who do not stick around long enough to become profitable. Monitoring this ratio helps justify investments in retention, as even a small decrease in churn can significantly improve LTV and the overall health of the ratio.
How to Use This Tool
- Customer Lifetime Value (LTV) ($): Enter the total predicted revenue from a single customer. You can use our CLV calculator to find this value.
- Customer Acquisition Cost (CAC) ($): Input your total cost to acquire one new customer (sales and marketing spend / number of new customers). You can calculate this using our Payback Period calculator.
Interpreting the Result
- Less than 1:1: You are losing money with every new customer.
- 1:1: You are breaking even on each customer.
- 3:1: Generally considered a healthy and sustainable ratio for most SaaS businesses.
- 5:1 or higher: You have a very strong business model and could likely afford to invest more in acquisition to grow faster.