- With 2025 right around the corner, decisions about growth and where to allocate budget are top of mind.
Should you focus on adding new logos? Double-down on product-development to work out the kinks? Or should target account retention to reduce churn be your top priority?
The only way to know the answers is to know your numbers – what are they telling you? A great starting point is calculating your LTV to CAC ratio for the past 90 days.
Here’s a step-by-step guide to help you calculate and understand this crucial metric:
Step 1: Gather the necessary data for the past 90 days
1. Total sales and marketing expenses
2. Number of new customers acquired
3. Average monthly recurring revenue (MRR) per customer
4. Monthly churn rate
5. Gross margin percentage
Step 2: Calculate Customer Acquisition Cost (CAC)
CAC = Total sales and marketing expenses / Number of new customers acquired
Step 3: Calculate Lifetime Value (LTV)
LTV = (Average MRR per customer / Monthly churn rate) x Gross margin percentage x 0.75
Note: We’re using a 0.75 multiplier as a conservative estimate. This means we only expect to realize about 75% of the calculated lifetime value to help account for various future uncertainties.
Step 4: Calculate LTV to CAC Ratio
LTV:CAC Ratio = LTV / CAC
Step 5: Interpret the results
• A ratio of 3:1 or higher is generally considered good for SaaS companies
• 1:1 or lower means you’re losing money on each customer
• 4:1 or higher indicates a great business model
• 5:1 or higher suggests you might be under-investing in growth
Example calculation:
Let’s say for the past 90 days:
• Total sales and marketing expenses: $50,000
• New customers acquired: 100
• Average MRR per customer: $200
• Monthly churn rate: 2%
• Gross margin: 80%
CAC = $50,000 / 100 = $500
LTV = ($200 / 0.02) x 0.80 x 0.75 = $6,000
LTV:CAC Ratio = $6,000 / $500 = 12:1
In this example, the LTV:CAC ratio of 12:1 is exceptionally high, suggesting that the company could potentially invest more aggressively in customer acquisition to accelerate growth.
Understanding this result will help you decide whether to focus on improving customer retention (to increase LTV), optimizing acquisition costs (to reduce CAC), or scaling up your customer acquisition efforts (if the ratio is very high) for 2025.
For reference, here are some key industry benchmarks for LTV to CAC ratios:
General benchmark:
The standard benchmark for an ideal LTV/CAC ratio in the SaaS industry is around 3:1.
Interpretation of different ratios:
- Below 2:1: Implies challenges in monetizing new customers and a product that is fundamentally flawed
- Around 3:1: Considered good/ideal for SaaS companies
- Above 5:1: May indicate under-investment in growth
Industry-specific benchmarks:
The LTV:CAC ratio can vary significantly by industry.
Some examples:
- Commercial Insurance: 5:1
- Aerospace & Defense: 4.5:1
- Biotech: 4:1
- Business Consulting: 4:1
- Automotive: 3:1
- Aviation: 3.5:1
Considerations for early-stage companies:
- Early-stage SaaS startups may have lower LTV:CAC ratios as they’re still optimizing their customer acquisition strategies.
- A lower ratio can be acceptable for startups aggressively pursuing growth.
Maturity factor:
More mature businesses tend to see higher LTVs and lower CACs compared to startups.
Growth stage peak:
LTV/CAC ratio tends to be highest at the growth stage ($10-15m in revenue).
Minimum viable ratio:
At a minimum, a SaaS business needs to have an LTV of at least 3x CAC to be considered viable.
These benchmarks provide a general guide, but it’s important to consider factors like company stage, industry, and specific business model when evaluating LTV:CAC ratios.
10 Strategies to improve a low LTV/CAC ratio:
1. Improve Customer Experience:
- Focus on user onboarding, intuitive product design, and responsive customer support.
- Invest in customer feedback mechanisms to continuously enhance product and service offerings.
2. Upselling and Cross-Selling:
- Offer customers additional features, higher-tier plans, or relevant add-ons.
- Use data analytics and customer segmentation to identify upselling opportunities.
- Personalize offers based on customer needs and preferences.
3. Reduce Customer Churn:
- Enhance customer satisfaction and continuously improve the product’s value proposition.
- Implement targeted retention strategies and provide exceptional customer support.
4. Optimize Pricing Strategy:
- Consider updating your SaaS pricing strategy.
- Explore changing from a subscription-based to a usage-based model, or adjust pricing tiers.
5. Improve Customer Success Management:
- Ensure marketing and customer success teams work together effectively.
- Monitor product engagement, especially after new feature releases.
- Track retention and renewals by customer success representative.
6. Leverage AI and Machine Learning:
- Use predictive analytics to forecast customer behavior and identify at-risk customers.
- Implement AI-driven personalization for customer experiences and recommendations.
7. Focus on High-Value Customers:
- Identify and prioritize customers with high LTV potential.
- Analyze LTV by customer cohorts to optimize efforts.
8. Improve Marketing Efficiency:
- Optimize marketing strategies to reduce customer acquisition costs.
- Target high-value customer segments more likely to generate long-term revenue.
- Leverage referral programs for cost-effective customer acquisition.
9. Implement Secondary Onboarding:
- Deliver continuous value for existing customers through ongoing education and feature adoption.
10. Collect and Act on Customer Feedback:
- Use in-app surveys (NPS, CSAT, CES) to gather feedback from active users.
- Analyze feedback to prioritize improvements and address customer pain points.
By implementing these strategies, you can work towards improving your LTV/CAC ratio, aiming for the benchmark of 3:1 or higher. If your offering is a hybrid of product and consulting/training, you have an ACV $25,000+, with sales cycles 90 days+, and there are multiple decision-makers involved in the buying process, I highly suggest doubling down on your ABM strategy to improve your LTV/CAC ratio.
Suggested Reading: How Professional Service Companies Can 6X Revenue with ABM
