## What is LTV/CAC?

The **LTV/CAC Ratio** measures the relationship between the lifetime value of a customer and the cost incurred to acquire that customer.

The customer lifetime value (LTV) refers to the profit attributable to a particular customer, while the customer acquisition cost (CAC) is the expense incurred in convincing the customer to purchase the product (i.e., convert into a paying customer).

## How to Calculate LTV/CAC Ratio

The LTV/CAC ratio stands for “Lifetime Value to Customer Acquisition Cost” and is perhaps the most important metric for evaluating software-as-a-service (SaaS) companies.

In practice, the LTV/CAC ratio is most often used to gauge a SaaS company’s cost efficiency in terms of its sales and marketing (S&M) spending, which ultimately determines its long-term feasibility of its current business model.

Simply put, the [LTV](/content/knowledge/lifetime-value-ltv/index.html) to CAC ratio answers, _“Are the current customer acquisition strategies of the SaaS business sustainable?”_

The LTV/CAC ratio is computed by dividing the total sales (or [gross margin](/content/knowledge/gross-margin/index.html)) attributable to a customer over their entire lifetime (LTV) by the total cost incurred to initially convince that same customer or customer group to make their first purchase (CAC).

- Step 1 ➝ Estimate Customer Lifetime Value (LTV)
- Step 2 ➝ Calculate Customer Acquisition Cost (CAC)
- Step 3 ➝ Divide Customer Lifetime Value (LTV) by Customer Acquisition Cost (CAC)

## LTV/CAC Ratio Formula

The formula to calculate the LTV/CAC ratio divides the customer lifetime value (LTV) by the customer acquisition cost (CAC).

**LTV/CAC Ratio =** Lifetime Value (LTV) **÷** Customer Acquisition Cost (CAC)

Where:
- Customer Lifetime Value (CLV) = ( [ARPA](/content/knowledge/average-revenue-per-account-arpa/index.html) × Gross Margin) ÷ [Churn Rate](/content/knowledge/churn-rate/index.html)
- Customer Acquisition Cost (CAC) = Σ Sales and Marketing (S&M) Expenses ÷ Number of New Customers Acquired

## What is Good LTV:CAC Ratio in the SaaS Industry?

For early-stage SaaS companies, the general guidelines for a “good” LTV/CAC ratio are as follows.

| LTV:CAC Ratio | Interpretation |
| --- | --- |
| **LTV/CAC ➝ ~3.0x** | - Often cited as the ideal target range for the majority of software companies as the pace is sustainable (and reasonably profitable)<br>- Intuitively, an LTV/CAC of 3.0x means the company receives $3.00 per $1.00 spent to acquire the customer |
| **LTV/CAC ➝ <1.0x** | - Considered unsustainable and implies the company is facing difficulty monetizing its newly acquired customers<br>- Either the wrong strategies are being used or the customer base is too difficult to monetize (i.e., no spending power, unwillingness to pay) |
| **LTV/CAC ➝ >5.0x** | - The value received on a per-dollar basis might be high, yet the context of the situation makes the ratio not ideal (i.e., for an early-stage company, revenue/user growth is more important than cost reduction)<br>- For instance, an early-stage company attempting to disrupt an industry is facing (or soon will) face pushback from incumbents and other competitors<br>- Therefore, management likely needs to spend more on new customer acquisitions as it may be missing out on growth opportunities<br>- Or, the conservative spending may be due to diminished growth opportunities |

## How to Improve LTV to CAC Ratio

A sign of progress in the right direction is reflected in the LTV/CAC ratio converging towards 3.0x – which represents a more normalized, sustainable rate.

## What Factors Cause Low LTV-CAC Ratio (<1.0x)?

An LTV/CAC ratio of 1.0x means the company is right at the [break-even point](/content/knowledge/break-even-point/index.html) – but note, CAC excludes expenses unrelated to acquiring customers.