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A Summary of

Determining LTV:CAC in the age of land & expand

by
Geoff Byron
Benchmark HQ
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Bottom Line

  • Original LTV:CAC formula doesn’t hold up for companies with land & expand motions
  • Calculate it at the $1 of ARR unit economic level and tack on one-time gross profit / loss from professional services.

Traditional LTV:CAC in SaaS

  • LTV = ARR per customer X subscription gross margin % / annualized customer gross churn %
  • Determine LTV:CAC ratio and if you're over 3x that indicates a successful ready to scale business, below 3x means you're paying too much to win customers
  • Formula breaks down because the ARR per customer can transform throughout their lifetime with additional services (land and expand)

Alternative LTV:CAC in SaaS

  • Shift the view of unit economics from the customer to $1 of ARR
  • Will need to use CAC:ARR ratio to determine CAC
  • CAC:ARR Ratio = sales & marketing expense / ARR acquired
  • LTV will also need to include any professional services included which is typical with SaaS
  • LTV = ($1 of ARR X subscription gross margin % / annualized customer gross churn %) + (PS gross profit / loss / ARR acquired)
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