What is Customer Acquisition Cost (CAC)?
CAC is the total cost of acquiring one new customer, including all sales and marketing spend. It is calculated by dividing total acquisition spend by the number of new customers in a period. A CAC of £500 means you spend £500 on average to win each new customer.
What is Customer Lifetime Value (LTV)?
LTV, or CLV, is the total gross profit you expect to generate from a customer over their entire relationship with your business. It is calculated by multiplying the average monthly gross profit per customer by their expected lifetime in months. LTV depends heavily on churn rate, so reducing churn significantly increases LTV.
What is a good LTV:CAC ratio?
The industry benchmark for a healthy SaaS or subscription business is an LTV:CAC ratio of 3:1 or higher, meaning you generate £3 of lifetime value for every £1 spent on acquisition. Below 1:1 means you are destroying value with every customer you acquire. Between 1:1 and 3:1 is marginal and usually requires improvement in acquisition efficiency or retention.
What is the payback period?
The CAC payback period is how many months it takes to recover the cost of acquiring a customer through gross profit. A payback period of 12 months is generally considered the upper limit for capital-efficient growth. Longer payback periods require more upfront capital and increase risk if the customer churns before you recover CAC.