The False Confidence Of The LTV/CAC Ratio For Early Stage SaaS Startups

Founders often describe their unit economics in terms of their LTV/CAC ratio – the ratio of the Lifetime Value (LTV) of a customer to the Cost of Customer Acquisition (CAC). The LTV/CAC metric can be a powerful metric to unpack the health of the go-to-market team of a company, as Netsuite has shown. But this figure is often meaningless for early stage startups.

Why? Because a company one or two or even three years into sales can’t yet accurately forecast customer lifetimes. If a business suffers from a very high churn rate, then, yes, it’s possible to calculate LTV in just a few years.

But most software companies will see 10% or less unit churn per year. At 10% unit churn, three years from now, 73% of customers will still be paying, adding to their LTV. How long will those customers stay? You could project a straight line churn, a fixed churn rate per year, but that may not be realistic. How will those businesses’ spend change over time? You won’t know until you see it for yourself.

Comments are closed.

Add a comment

We are in testing

We'd love to get your feedback on how to improve these resources and your suggestions for any articles that you'd like to see featured. Contact us with feedback and suggestions on [email protected]