Why the LTV:CAC ratio is the lifeblood of a SaaS Company

There is no single metric more important than the LTV/CAC ratio or – Customer Lifetime Value/Customer Acquisition Cost ratio – to bring into clear focus the future prospects of a SaaS business.

The LTV/CAC Ratio summarises a lot of great information for a SaaS business. It collapses the anticipated average lifetime revenue of a customer, customer churn, and sales and marketing costs into one number that can answer the fundamental question: on average, do we earn more revenue per customer than to spend to acquire them?

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Good SAAS businesses have a LTV to CAC ratio that is higher than 3. According to an article by David Skok, most successful large public SaaS companies, such as Salesforce.com and ConstantContact, have LTV/CAC ratios that are close to 4-5 times. If you are a top 10% SaaS business your ratio may be higher than 5. But, in some rare fleeting instances, truly world-class SaaS businesses have a ratio as high as 7 or 8.

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To calculate the LTV/CAC ratio we first have to start with lifetime value. The LTV measures dollar value over the entire lifetime of a customer or the total amount of revenue, on average, you expect to earn per customer. It is calculated as follows:

• LTV = Average Revenue Per Account (ARPC) x Average Customer Lifetime.
• Where; Average Customer Lifetime = 1/ Churn Rate
• For 1ST Group, the ARPC across FY19 was c.$308 annually (c.$3.01m in subscription revenue / 9,782 sites)
• For 1ST Group, the Average Customer Lifetime is = 1/ (1-95%) = 20 years
• Thus, the LTV for 1ST = $308 x 20 years = $6,160

Secondly, we need to look at CAC. Customer Acquisition Cost (CAC) is the investment you make in sales, marketing and other expenses geared towards acquiring and converting new customers. The total sales and marketing cost includes all program and marketing spend, salaries, commissions, bonuses, and overhead associated with attracting new leads and converting them into customers. It is calculated as follows:

• CAC = Total Sales and Marketing expense/ number of new customers
• For 1ST Group, the CAC across FY19 was c.$860 ($2,159,181 in total sales and marketing expenses / 2,511 new customers)
• The $2,159,181 is made up of $984,307 in "advertising and marketing expenses" plus $1,174,874 in "employee benefits" (I have assumed 1/3 of total employee benefits is CAC related (i.e. sales/customer retention based roles)

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So, how does 1ST Group stack up on the metric that measures the lifeblood of a SaaS company and dictates future profitability? 1ST Group has a LTV/CAC ratio of an incredible 7 times. 1ST Group is one of these "world-class" SaaS businesses, with a LTV:CAC ratio of c.7.

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