Finance glossary
CAC & LTV — Definitions, Formulas and LTV/CAC Ratio
In one sentence
The CAC (Customer Acquisition Cost) and the LTV (Lifetime Value) are the two fundamental metrics of the SaaS and subscription business model. They answer two essential questions: “how much does a new customer cost?” and “how much does a customer earn us over their entire lifetime?” ". The LTV/CAC ratio is the barometer of the economic health of a recurring model.
Full definition
CAC: total cost to acquire a new customer. It includes all marketing and sales investments.
LTV: total revenue that a customer will generate over the entire duration of their relationship with the company.
LTV/CAC ratio: return on investment from customer acquisition. > 3 is healthy. > 5 is excellent. < 1 = unviable model.
Calculation formula
CAC = (Marketing expenses + Sales expenses) / Number of new customers
LTV (simplified formula) = ARPU × Gross Profit × Average Customer Lifespan
LTV (precise formula) = ARPU × (Gross margin %) / Monthly churn rate
CAC Payback Period = CAC / (ARPU × Gross margin). < 12 months = excellent for a B2B SaaS.
Why it matters
Viability of the business model. If LTV/CAC < 1, each customer costs more than it brings in.
Scalability. LTV/CAC > 5 means that you can invest massively in acquisition with positive ROI.
Valuation basis. VCs use LTV/CAC to assess the quality of the business model.
Marketing optimisation. The CAC per channel allows the budget to be reallocated towards efficient channels.
Benchmarks and thresholds
LTV/CAC: < 1 review. 3-5 healthy. > 5 excellent.
CAC payback: > 24 months critical. 12-18 months healthy. < 12 months excellent.
Monthly Churn: > 5% critical. 2-5% to watch. <2% excellent.
Limits and pitfalls
LTV on limited data. An LTV based on 6 months of data is unreliable.
CAC which varies by channel. The overall CAC masks significant disparities.
Churn that evolves. Early adopter churn differs from mainstream churn.
Hidden costs of CAC. Founders' time on sale, discounts granted, onboarding often omitted.
LTV ≠ cash flow. An LTV of €20K over 3 years does not translate into €20K in immediate cash.
FAQ
What is the ideal LTV/CAC ratio? > 3 minimum. 3-5 healthy. > 5 excellent. < 1 = not viable.
How do I reduce my CAC? Optimise paid channels, build SEO/content, referrals, improve trial→paid conversion.
How do I increase my LTV? Reduce churn (customer success), increase ARPU (upsell), increase lifespan (engagement).
Does the CAC include account managers? No, only acquisition costs. AM and CS are in retention costs.
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