CAC to LTV Ratio

May 2, 2020

The best metric to measure your team’s outcome is the CAC versus LTV ratio, where the former indicates how much you have spent to acquire a customer and the latter is the average revenue in a customer’s lifetime.

Now, why is it so important?

It gives growing companies an idea of how long it might take to recoup the cost spent to acquire a customer through advertising and sales activities.  

To understand this in detail, we need to first identify areas where we lose money. This need not necessarily be any losses incurred, but just day to day expenses like running a sales team, hosting an event to generate leads, outsourcing projects etc. Finding out the CAC becomes easy and the formula will look something like,

CAC = Sum of all costs/number of customers acquired

Next comes calculating how much the LTV is, which can be done by finding out the average revenue per account times the average timespan of a customer spent with the product.

What I have depicted over here is a simplified version of calculating CAC:LTV ratio but, it is much more complicated. For example, companies can calculate it every quarter and for the entire fiscal year to judge the team’s improvement.

How to reduce your CAC?

One proven way to increase your CAC is by working on existing customers. It could be as simple as adding more users or building a customized integration for them. Bonus points if you can get referrals and they end up converting into a sale.

Targeting a buyer persona also helps in improving your conversion ratio. Most companies nowadays have started adopting outbound model for sales having a buyer persona is critical. For example, if your product deals with IT services and management, it makes more sense to try and get hold of someone like the IT manager than the Head of Support or Sales in the company being prospected.

Finally, never underestimate the efforts by your Customer Success team. Customers tend to stick to a company for longer if they see proven value within a product. In short, customer retention is the new customer acquisition.  

Written By - Chameli Kuduva, Founder - SaaS Insider