A Lifecycle Value/Cost of Acquisition (LTV/CAC) calculator is a tool used to calculate the value of a customer over the course of their lifetime with a company. It is an important metric for businesses to understand in order to assess customer profitability and to determine the effectiveness of customer acquisition and retention strategies.
The LTV/CAC calculator can be used to determine the return on investment (ROI) from your go-to-market engine. The typical components of a LTV/CAC calculator for a SaaS business are:
Total annual recurring revenue (ARR)
Total number of customers
Gross margin
Annual churn rate
Sales & Marketing team headcount
Average salary/employee (annual)
Marketing campaign costs
Total new customers (annual)
To calculate the LTV/CAC using these components, the formula is:
LTV = Total Annual Recurring Revenue (ARR) / Total Number of Customers * Gross Margin / Annual churn rate
CAC = (Sales & Marketing team headcount * Average salary/employee (annual) + Marketing campaign costs) / Total new customers (annual)
LTV/CAC = LTV / CAC
The best rule of thumb is to be spending 33% or less of your average customer lifetime value, meaning an LTV/CAC ratio of 3 or higher.
To have a complete picture of one business' profitability, with a specific focus on the medium term, you can pair the LTV analysis with the CAC Payback Period, namely how long a company takes to recover the cost of acquiring a new customer. The CAC Payback Period is usually expressed in months and requires the following components:
MRR = Monthly Recurring Revenue
Gross Margin
CAC
The formula divides the CAC by the MRR multiplied by the Gross Margin, i.e. net of the costs directly associated with delivering the service, and reads:
CAC Payback Period = CAC / (MRR * Gross Margin)