Understanding the Importance of LTV:CAC Ratio in 2022

As more and more organizations rely on SaaS solutions for various business operations, SaaS becomes one of the fastest-growing segments in the IT world.

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As the adoption of SaaS solutions continues unabated, organizations used an average of 110 SaaS apps in 2021 according to the State of SaaSOps Report by BetterCloud.

Within the past 7 years, the industry has seen a 14x increase. It is currently estimated to be worth nearly $172 billion globally.

If you are a SaaS business owner, these numbers are extremely promising. As more and more organizations adopt hybrid work culture, you too might have experienced a growing demand for your SaaS solution.

But measuring your growth can be challenging if you are not tracking the right metrics.
That’s where the LTV:CAC ratio plays a crucial part. If you haven’t tracked this KPI till now, it’s time to do so.

Let me explain why it is important to measure ratio to determine your SaaS business’ performance and set the road map for future strategies.

What is LTV:CAC Ratio?

LTV CAC, also referred to as CLT:CAC, is an important indicator of your business’s financial health. It stands for Customer Lifetime Value which is the gross margin a customer generates over a lifetime he spends with your brand. CAC is your Customer Acquisition Cost which refers to the amount you spend to acquire a customer.

The formula to calculate LTV is gross margin divided by the total number of customers. And when you divide the average by the average CAC, you get their ratio.

As SaaS businesses offer subscription-based services, choosing the right subscription billing model is vital. The popular models are freemium, tiered fixed fees, overage, hybrid, and so on.

The subscription model you choose directly affects the revenue you generate and in turn, influences the lifetime value of your customers.

4 Reasons Why You Should Measure Ratio

Let’s take a look at 4 good reasons why you should not ignore your B2B.

1. Identify the Efficacy of Different Marketing Channels

As a SaaS business, you always want to optimize your marketing budget with an effective financial planning. Measuring ratio can help you identify the most efficient marketing channels for your business and invest wisely.

When you compare the investment you are making in a particular channel and the business it is generating, you can easily differentiate the high-performing channels from the underperforming ones.

Based on the ratio, you can reallocate resources to channels that are bringing you maximum B2B SaaS leads and ensuring better ROI.

2. Assess Your Financial Performance

As a business leader, it is imperative that you periodically assess the financial health of your SaaS business. A keen evaluation of yourratio can be helpful in comprehensively assessing your company’s financial performance in a given period of time.

Let’s say, you are a SaaS provider offering a live video shopping platform for ecommerce businesses. You can rely on along with other metrics to gain valuable insights into the performance of your marketing strategies.

Based on these insights, you can restructure those strategies and set them up for better performance.

3. Forecast Company’s Profit and Growth

Not only a valuable KPI for your marketing team but for your finance team as well. While it helps measure a company’s financial health, this metric can be used as the basis for forecasting a company’s profit and growth.

Let’s say, your company’s ratio is 1:1. This means that your customer lifetime value justifies your customer acquisition cost. Ideally it should be anything above 3 which means that you are focusing on the most effective methods to attract and retain B2B clients.

Higher percentages indicate that your business has great potential for fast growth and has a higher valuation.

On the contrary, if your number is less than 1, it indicates that CAC is more than the lifetime value of your customers and you are struggling to acquire high-value clients.

4. Attract More Investors

When your SaaS company is in the growth stage, your focus is more on attracting more investors. And the key consideration for investors is how profitable your business is.

A company with an ratio of 5:1 will be evaluated as more profitable compared to a company with an ratio of 1:1.

A higher ratio indicates that your business has better chances of growth and profitability. That’s how you can attract bigger investors or earn big in case of a merger or acquisition.

Concluding Thoughts

It is quite clear that one of the important KPIs for SaaS companies to assess their performance. It not only gives you a clear overview of your company’s present financial health but can be helpful in strategizing for the future.

Go ahead and learn how to calculate and spend time understanding its variables. By knowing where to focus your budget, you can definitely boost your customer profitability and marketing efficacy.

Author Profile

Adam Regan

Deputy Editor

Features and account management. 3 years media experience. Previously covered features for online and print editions.

Email Adam@MarkMeets.com