How long does it take for your customers to become profitable? Once they are, just how profitable are they?
LTV ÷ CAC
Why It Matters
The LTV:CAC ratio gives you insight at a high level into what investment is required to acquire a new customer, and, of that cost, what can be expected as a return over the lifetime of your engagement with that customer. For example, if $1 is invested to acquire that customer, $3 should be generated over the course of its lifetime, assuming a target 3:1 ratio. [1]
When To Measure It
In the expansion/growth stage of the business, this ratio becomes important. As the company scales and CAC decreases it's important to continue to monitor and increase LTV while driving down CAC to ensure sustainable growth. This also helps identify inefficiencies in sales and marketing or pricing structure.
Industry Benchmarks
The best SaaS businesses have an LTV:CAC ratio that is at least 3:1 with some unicorns achieving ratios as high as 7 or 8. [2] This means that many of the best SaaS businesses aim to recover CAC within 12–15 months of acquisition, [3] while outliers are able to recover their CAC in 5–7 months. [4]
Works Cited:
[1] 4 SaaS Customer Acquisition Best Practices from David Skok
[2] SaaS Metrics – A Guide to Measuring and Improving What Matters
[3] Benchmarking SaaS Start-Ups? How am I Doing? Really?
[4] SaaS Metrics 2.0 – A Guide to Measuring and Improving what Matters