What is the LTV/CAC ratio?
The LTV/CAC ratio compares a company’s customer lifetime value (LTV) to its average customer acquisition cost (CAC). To break each term down a bit further, lifetime value is the average dollar amount a person spends with a business over the course of their customer lifetime. Meanwhile, CAC indicates the amount of money a business spends to acquire customers on average—this includes sales and marketing costs and other expenses. If a company’s marketing and sales expenses and other acquisition costs are greater than its average customer lifetime value, the business cannot be viable.
Subscription businesses & the LTV:CAC ratio
Calculating and monitoring the average lifetime value to customer acquisition cost ratio is particularly important for SaaS companies and other subscription businesses, as they rely on lasting customer relationships to fuel their recurring revenue stream. As markets become increasingly competitive and the average cost of acquiring new customers continues to rise, a focus on customer loyalty has become more important than ever. Other important subscription metrics to track include churn rate, average monthly revenue, average annual recurring revenue, and average order value.