Why is LTV the most important SaaS metric?
Customer Lifetime Value (LTV) predicts the net profit attributed to the entire future relationship with a customer. If your LTV is lower than your cost of acquisition (CAC), your business model is unsustainable, regardless of your growth rate.
A healthy LTV:CAC ratio is generally considered to be 3:1. If your ratio is lower, you are likely not optimizing your marketing or your pricing. If it's significantly higher, you might be under-investing in growth.
How to calculate Customer Lifetime?
Customer Lifetime (in months) is calculated by taking the inverse of the monthly churn rate (1 / Churn Rate). If your monthly churn is 5% (0.05), your average customer stays for 20 months (1 / 0.05 = 20).
What is a good LTV:CAC Ratio?
A ratio of 3:1 is the industry gold standard for healthy SaaS companies. 1:1 means you are losing money on every customer. 5:1 suggests you could be growing faster by increasing your marketing spend, as you are likely being too conservative.