CAC vs LTV: The Ultimate Guide to Unit Economics
Understanding the relationship between Customer Acquisition Cost and Lifetime Value is critical for sustainable SaaS growth.
What is CAC?
Customer Acquisition Cost (CAC) is the total cost to acquire one new customer, including all sales and marketing expenses.
CAC Formula
CAC = (Sales Expenses + Marketing Expenses) / New Customers Acquired
Sales Expenses: Salaries, commissions, tools, travel
Marketing Expenses: Ads, content, events, software, salaries
Period: Typically measured monthly or quarterly
Example Calculation
What is LTV?
Lifetime Value (LTV) is the total revenue you expect from a customer over their entire relationship with your company.
LTV Formula (Simple)
LTV = ARPU × Gross Margin % / Churn Rate
ARPU: Average Revenue Per User (monthly)
Gross Margin: Revenue minus direct costs (COGS)
Churn Rate: % customers lost per month
LTV Formula (Advanced)
LTV = (ARPU × Gross Margin %) / (Monthly Churn Rate + Discount Rate)
This accounts for time value of money
Example Calculation
LTV = ($500 × 0.80) / 0.03
LTV = $13,333
The Golden Ratio: LTV:CAC
The LTV:CAC ratio determines if your business model is sustainable. It shows how much value you generate for each dollar spent on acquisition.
LTV:CAC Ratio = LTV / CAC
Using our examples: $13,333 / $1,900 = 7.0× ratio
| Ratio | Meaning | Action |
|---|---|---|
| < 1:1 | Losing money on every customer | Critical - fix immediately or shut down |
| 1:1 - 3:1 | Breaking even or marginal profit | Reduce CAC or increase LTV urgently |
| 3:1 - 5:1 | Healthy, sustainable growth | Scale confidently, optimize continuously |
| > 5:1 | Excellent economics | Consider increasing CAC to accelerate growth |
💡 Pro Tip
A ratio above 5:1 might mean you're under-investing in growth. If your unit economics are excellent, consider spending more on acquisition to scale faster before competitors do.
CAC Payback Period
Payback period measures how long it takes to recover your customer acquisition investment. Critical for cash flow management.
Payback Formula
Payback Period (months) = CAC / (ARPU × Gross Margin %)
Example
Payback = $1,900 / ($500 × 0.80)
Payback = 4.75 months ≈ 5 months
| Payback Period | Assessment |
|---|---|
| < 6 months | Excellent - rapid cash recovery |
| 6-12 months | Good - industry standard for SaaS |
| 12-18 months | Acceptable for enterprise SaaS |
| > 18 months | Concerning - review unit economics |
How to Improve CAC
Reduce Acquisition Costs
- •Optimize ad spend: Focus on high-converting channels
- •Content marketing: Build SEO traffic (lower CAC than paid)
- •Referral programs: Leverage existing customers
- •Sales efficiency: Automate lead qualification
- •Product-led growth: Free trials convert without sales touch
Increase Conversion Rates
- •Landing page optimization: A/B test constantly
- •Nurture campaigns: Email drip sequences
- •Onboarding improvement: Faster time-to-value
- •Social proof: Case studies, testimonials, reviews
- •Sales training: Improve win rates
How to Improve LTV
1. Reduce Churn
• Proactive support: Reach out before they churn
• Feature adoption: Ensure they use core features
• Health scoring: Monitor usage patterns
• QBRs: Regular business reviews
• Product updates: Continuous value delivery
• Community: Build user network effects
2. Increase ARPU
• Upsells: Move customers to higher tiers
• Cross-sells: Add complementary products
• Usage-based pricing: Grow with customer
• Annual contracts: Upfront payment discount
• Add-ons: Premium features
• Price increases: Annual inflation adjustments
3. Improve Gross Margin
• Infrastructure optimization: Reduce hosting costs
• Support automation: Self-service resources, chatbots
• Economies of scale: Negotiate better vendor rates
Benchmarks by Company Stage
| Stage | CAC | LTV | Ratio | Payback |
|---|---|---|---|---|
| Pre-seed | $200-500 | $1,000-3,000 | 2-5× | 6-12 mo |
| Seed | $500-1,500 | $3,000-8,000 | 3-6× | 8-14 mo |
| Series A | $1,000-3,000 | $5,000-15,000 | 3-5× | 10-16 mo |
| Series B+ | $2,000-5,000 | $10,000-30,000 | 4-6× | 12-18 mo |
⚠️ Note
Benchmarks vary significantly by market (B2B vs B2C), pricing ($50/mo vs $10,000/mo), and go-to-market strategy. Use these as directional guidelines, not strict rules.
Common Mistakes to Avoid
❌ Excluding Costs
Don't forget: sales/marketing salaries, tools, overhead allocation. Many companies only count ad spend.
❌ Using Revenue Instead of Gross Profit
LTV should use gross profit (revenue minus COGS), not total revenue. This is especially important for low-margin businesses.
❌ Ignoring Cohort Differences
CAC and LTV vary by channel, customer segment, and time period. Track by cohort for accurate insights.
❌ Not Accounting for Time
Money received 3 years from now is worth less than money today. Use discounted LTV for accuracy.
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