The Famous 3:1 LTV CAC Ratio ... It's Too Low

I’m sure everyone knows about the classic 3:1 LTV CAC ratio that all SaaS folks should strive for. Just a reminder, LTV is the lifetime value of a client (the amount of money a client will pay you in their lifetime). CAC is the customer acquisition cost (the amount of money you spend to acquire a new customer). You can read more about these SaaS metrics and more, here. Let’s use a very simple example to put this ratio into perspective. Take the data below: —– Current LTV: $1000, New customers in the month = 50 Monthly Expenses: Sales & Marketing = $16,650, Support Costs = $6,000, Hosting = $3000, Other Personnel = $3000, Rent = $2000, Supplies = $1000, Total Expenses = $31,650 —– With this data, your CAC is $333 ($16,650 / 50 = $333). This would give you an approximate LTV CAC ratio of 3:1 ($1000:$333 = 3:1). From my experience in SaaS, sales and marketing expenses, which are used to calculate CAC, account for about 20-30% of total operating expenses. If you take into account all other necessary operating costs as per the data above, the LTV to cost ratio would be only 1.58:1 ($1000:633 = 1.58:1). This means that it would cost you $1 for a client to pay you $1.58 in their lifetime. If you ask me, the benchmark 3:1 LTV CAC ratio is too low, and approaches a fine line between growth and staying afloat, especially if you’re bootstrapped. If your intentions are to run a profitable and sustainable business, the unit economics aren’t too great. That doesn’t leave much buffer room to reinvest in your company, pay yourself, leave cash reserves, pay taxes, etc. In general, the LTV CAC ratio is very important, as it helps measure your rate of return on your sales and marketing investments. The ratio establishes a fair gauge on how efficient your sales and marketing activities are, and should not be overlooked by any stretch. I personally like to see bootstrapped SaaS companies with LTV CAC ratio of around 5 or 6 to 1. If you’re only financing source if from your revenue, than you have to operate somewhat conservatively. Having a higher ratio than the benchmark 3:1 is much healthier and sustainable for a bootstrapped company, which will improve your chances for growth in the future. Music by sifer2424