LTV:CAC and CAC Payback
When you need this method
You want to know whether your growth machine is healthy before feeding it more money. Revenue growth alone does not answer that: a model can grow while destroying capital on every customer or tying it up for too long. Investors examine exactly these two metrics before funding scale.
Approach
- 1Calculate LTV as (ARPA × 1/churn rate) × gross margin, not on a revenue basis.
- 2Capture CAC fully: media spend, marketing payroll and sales commissions divided by customers won.
- 3Form the LTV:CAC ratio; the target is at least 3.
- 4Calculate CAC payback in months on a gross-margin basis; target under 12 months in SMB, up to 24 in enterprise.
- 5Read both together: below 3 the model needs fixing, well above 3 with short payback suggests underinvestment.
Typical application
A typical case, as an illustrative calculation: a B2B SaaS spends an all-in 10,000 euros to acquire a customer. The customer generates 8,000 euros in annual revenue at 80 percent gross margin, so 6,400 euros of contribution per year, and stays five years on average. LTV is therefore 32,000 euros, the ratio 3.2:1, payback just under 19 months. That works for an enterprise motion; for an SMB business the same payback would be a warning sign, since under 12 months is expected there.
Limits and counter-indications
Averages hide segment differences; calculate by segment and channel, not just in aggregate. For lender and embedded-finance models the SaaS margin logic does not apply; the spread calculation does. The metrics rest on churn assumptions that are still unstable in young companies.
How to measure impact
LTV:CAC ratio (target at least 3) and CAC payback in months on gross margin, reported separately by segment.
Related methods
Sources
- 1.Valuing Customers, Gupta, Lehmann & Stuart, Journal of Marketing Research (opens in a new tab) · American Marketing Association / Columbia Business School (Volltext) · 2004 · academic and scholarly literature · supports the underlying mechanismDefines customer value as the sum of discounted future returns from margin, retention and acquisition cost, and quantifies how strongly these three drive enterprise value.
- 2.Scaling to $100 Million, Bessemer Venture Partners (BVP Atlas) (opens in a new tab) · Bessemer Venture Partners · BVP Atlas, n.d. · investment, consulting and analyst firms, industry bodies and public agencies · provides benchmark figuresStates a ratio of customer value to acquisition cost of at least 3 as a health threshold and ties it to segment-dependent payback periods.
- 3.SaaS Metrics 2.0 · Definitionen, David Skok (forEntrepreneurs) (opens in a new tab) · forEntrepreneurs · n.d. · practitioner source · describes the methodCarries the calculation rule of computing customer value on gross margin rather than revenue, plus the benchmarks of a ratio above 3 and payback under twelve months.
Origin: Skok