It’s Time to Say Goodbye to LTV:CAC

LTV:CAC has long been regarded as a standard metric, but recently its usefulness in B2B SaaS has been subject to debate.  Investors, advisors, and executives increasingly favor other measures of sales efficiency.

What’s the problem with LTV:CAC? Is it ever a useful metric anymore? Finally, what other measure of sales efficiency should replace it?

What is the point of LTV:CAC?

Simply put, LTV:CAC was designed to help determine how much to spend on sales and marketing.

LTV is supposed to represent the Lifetime Value of your average customer, and CAC represents how much it costs to acquire that customer.

It’s generally accepted that for a B2B SaaS business, an LTV:CAC ratio of 3:1 is solid.

A ratio of 3:1 indicates that your average customer is worth three times more than what you paid to acquire them. Awesome! You have a healthy go-to-market engine.

A ratio above 3:1 likely indicates you’re underinvesting in your sales and marketing spend.

And a ratio below 3:1 means you should consider reducing sales and marketing spend (or do a deep dive and look for ways to become more efficient).

So, what’s the issue with LTV:CAC?

The issue with LTV:CAC is that it’s nearly impossible to know the true Lifetime Value of your average customer. Your LTV is simply a guess, and it’s risky to make strategic business decisions based on a guess.

The most common method to calculate LTV looks like this:

LTV = (Average Revenue Per Account X Gross Margin) / Customer Churn Rate

That seems reasonable enough, but differences in your Customer Churn can lead to big swings in your LTV.

For example, if your Customer Churn is low, say 1%, your calculations will assume your average customer is going to stay with you for 100 years!

Your business hasn’t even been around that long. In fact, the entire SaaS industry hasn’t been around for that long.

It seems unrealistic to most SaaS leaders to assume your average customer will stay with you for 100 years. This is one of the biggest limitations of LTV:CAC for SaaS businesses.

What should I use instead of LTV:CAC?

Remember, the problem with LTV:CAC has nothing to do with CAC. The issue is that Lifetime Value is often a big guess.

That’s why we recommend using CAC Payback Period instead of LTV:CAC. It gives you all the benefits of CAC without the ambiguity of LTV.

CAC Payback Period represents the time it takes for your business to earn back your customer acquisition costs. So, if you spend $20,000 in sales and marketing costs to acquire a customer, your payback period is the number of months it takes the average customer to give you $20,000 back.

There’s a lot less guesswork with CAC payback period than with LTV:CAC. You don’t need to predict if a customer is going to stay with you for 50 years or 100 years, you simply need to know how much time it takes them to pay you back.

CAC Payback is also gaining traction as the preferred measurement of sales efficiency from some investors.

Kristina Shen of Andreessen Horowitz tells us, “I ignore LTV and just ask what your CAC Payback is. If I know your CAC Payback period, I can make my own judgments about your LTV”.

What’s a good CAC Payback Period?

Faster is almost always better.

You’ll likely hear the advice that 12 months represents a fantastic CAC Payback period. That’s often true.

However, it’s best to benchmark this number against B2B SaaS companies that have a similar go-to-market motion as you do.

For example, CAC Payback will look very different for product-led growth companies that don’t rely on a sales team, vs enterprise-focused companies with a large sales team.

One of the best resources for these benchmarks is the annual report that OpenView creates. You can download their entire report right here.  

In Summary

LTV:CAC is losing popularity as a sales efficiency metric in B2B SaaS. There are plenty of other measurements you can use, including our favorite, CAC Payback Period.

It’s straightforward, difficult to manipulate, and easy to calculate.

Subscript keeps all your B2B SaaS in one user-friendly, intuitive interface, meaning that calculating your CAC Payback Period (and all your other SaaS metrics, for that matter) is easier than ever. Want a demo? Let us show you around.