Lifetime Value - to- Customer Acquisition Cost : Metrics for Privately Held Companies

Below is one of the top universally tracked metrics we have seen in the market that strategic acquirers are focused on for privately held software companies. Prioritize this to have an edge during negotiations.

LTV:CAC Ratio  - Lifetime Value to Customer Acquisition Cost
The standard view on the LTV-to-CAC ratio is that if you can gain a new customer by spending 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. It is important to note that as software businesses evolve, LTVs rise through expanding product offerings and CACs tend to fall.  Of course in many businesses this ratio will vary. What is important is to track your LTV:CAC and use it as a KPI for tracking your company health.

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). 

Calculating LTV:CAC Ratio
Lifetime Value (LTV) = ($) Average Monthly Revenue Per Customer ÷ Monthly Churn
Customer Acquisition Cost (CAC) = ($) Total Sales and Marketing Spend ÷ Number of New Customers Added
LTV ÷ CAC = LTV to CAC

Example: If your company's LTV is $5,000 and the CAC is $1,000, great! Your LTV:CAC is 5:1.

Why Acquirers Care About Your LTV:CAC
LTV:CAC is one of the most critical metrics used in valuing SaaS companies. From an investor’s perspective, a high LTV:CAC ratio (generally greater than 3x) indicates good growth potential with limited marketing investment, while a low ratio (generally under 3x) means the capital required to acquire new customers is not being effectively utilized and the company may need a future influx of capital to generate ARR growth. An extremely high LTV:CAC, may indicate the company is underinvesting in sales and marketing.