The SaaS LTV to CAC Ratio
The ratio between Lifetime Value of a Customer (LTV or CLV) and Customer Acquisition Cost (CAC) is well-known among marketing leaders as a way of evaluating the efficiency of your marketing investment.
The traditional view on LTV-to-CAC ratio is that if you can gain a new customer by spending about a third of the gross profit you’ll make from that customer, you’ve done well. In other words, a 3:1 LTV-to-CAC ratio is good.
While those who hold this view would admit that spending an even smaller fraction of your customer lifetime value is, of course, better, they would assert that if your ratio is too high — say, 5:1 or greater — it indicates that you’re sacrificing growth for profit margin. In other words, a higher profit margin should be less important to a SaaS business than increasing top line revenue; and therefore, it’s better to spend more aggressively and likely see a lower LTV-to-CAC ratio, than to spend more cautiously and keep a higher margin (but have lower revenue).
A More Nuanced View on LTV:CAC Ratio
The traditional view on LTV-to-CAC is sensible, but fails to account for three important factors.
- Not all SaaS companies are in a high-growth, start-up mode. If your business is a bit more established and your gross margin is an area of focus, a high LTV-to-CAC ratio is eminently desirable. There is a point in every company’s lifecycle when a profitable business is far more valuable than one that is growing at a breakneck pace.
- As software businesses evolve, LTVs rise and CACs fall. A healthy SaaS company raises its LTV over time through expanding its product’s features, adding other lines of software, and increasing its reputation. And a successful marketing department will eventually settle on the lead generation channels with the lowest CAC, negotiate better deals with vendors, and utilize scale to get better pricing. Thus, the LTV-to-CAC ratio lowers over time.
- Organic channels routinely see higher LTV-to-CAC ratios. The successful SaaS businesses we’ve worked with shoot for higher LTV-to-CAC ratios on organic marketing channels specifically, such as SEO, public speaking, LinkedIn organic, e-mail marketing, and webinars. Unlike paid channels, organic channels reward creativity and thoughtfulness more than dollars.
Taken together, these factors point to a more reasonable LTV:CAC ratio benchmark of 6:1.
LTV to CAC Ratio by SaaS Industry
Let’s look at the LTV-to-CAC ratios for 10 SaaS industries. We calculated a rolling 3-year average LTV and CAC; along with the LTV-to-CAC ratio that produced.
Notes on our dataset: Our team compiled this data between 2016 and 2021. 64% of the data is derived from organic marketing channels, and 76% is from B2B SaaS companies, so the ratios you’ll find here will be higher than you’d get if you’re primarily utilizing paid channels such as advertising and PR, or if you’re a B2C SaaS business.
|SaaS Industry||LTV Benchmark||CAC Benchmark||LTV:CAC Ratio|
Since our dataset skews organic, we thought it would be interesting to separate out data where customers were acquired only through paid campaigns. When we did that, we found an average LTV-to-CAC ratio of 2.5:1.
Improving Your LTV to CAC Ratio
The agency side of our business has achieved exceptional LTV-to-CAC ratios via creative, thought-leadership based SEO campaigns. If you’re interested in exploring our agency services, you can contact us here.
If you found this report helpful, you may also be interested in our other B2B SaaS reports: