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Customer Lifetime Value (CLTV) & Customer Acquisition Cost (CAC)

Have you heard the saying, "We all fear what we don't understand"? This holds true when it comes to SaaS metrics. In this post, we will focus on two key metrics that Customer Success Managers (CSMs) should understand and their impact on the business: Customer Lifetime Value (CLTV) and Customer Acquisition Cost (CAC).


Why these? because, I have seen my friends getting scared of these,


Customer Lifetime Value (CLTV):

CLTV represents the total revenue expected from a customer over their lifetime. It is a crucial metric for forecasting and understanding the future viability of the company. Let's explore why companies and investors pay close attention to CLTV performance.


  1. Product-Market Fit and Brand Loyalty: A high CLTV indicates strong product-market fit and brand loyalty, which are vital for long-term success in the SaaS industry. Having these factors in your favor signifies higher profit margins and the potential for a long business tenure.

  2. Revenue Potential: CLTV helps determine the revenue potential of a client, client segment or product. By understanding CLTV, you can strategically focus your efforts on retention, expansion, marketing, sales, and even consider modifying your Ideal Customer Profile (ICP).

    For example:  You have a client segment with very low CLTV (USD 500) because of high churn.  In comparison to this, you have another segment, where you get a client every other month but, once these clients are onboard their CLTV is comparatively huge (USD 15000).  CLTV helps you understand

    • Where to focus your Retention and expansion efforts

    • Where to invest in marketing and sales efforts

    • Do you need to change your ICP?

    • Why in a particular segment clients churn so easily, what can we fix there?

  3. Company Potential and Valuation: CLTV is an essential metric for financial forecasting and valuation of any SaaS business. When combined with metrics like Net Retention Rate (NRR), Gross Retention Rate (GRR), and churn rate, CLTV provides the basis for financial models and projections. A strong CLTV confirms a steady cash flow and enables you to invest more in your business for faster growth.

  4. Performance Benchmarking: Monitoring trends in CLTV performance helps evaluate the effectiveness of new strategies and policies implemented to improve performance. Similar to other revenue metrics, CLTV can be used to compare your performance with competitors and identify areas for improvement.


Calculating CLTV

CLTV can be calculated in 4 different ways but, the most commonly used method is 


Average Revenue per Customer (ARPC) * Average Customer Lifespan (ACL). 


Although some models may include the retention rate, the crucial aspect to understand as a CSM is that CLTV reflects the total dollar value of a client to the company throughout their lifetime, rather than their current or past payments. This perspective allows you to focus on the account's potential, not just their current dollar value.


Customer Acquisition Cost (CAC)

CAC represents the money spent on acquiring a customer. Understanding CAC is equally important for CSMs, as it impacts the company's financial health and growth. CLTV is the total value of a customer to a company and CAC is the cost paid to get that customer.  It makes perfect sense to compare the 2 and understand if you are investing in the right place. 


Let's explore a few reasons of high CAC :


  1. Poor Onboarding Processes: Ineffective onboarding processes can contribute to a high CAC. Products with lengthy onboarding cycles or pre-sales trials often experience high churn rates, which negatively impact CLTV. By optimising onboarding, sales, and customer success processes, businesses can reduce CAC and enhance CLTV.

  2. Lack of Product-Market Fit: A high CAC may indicate a lack of product-market fit. When significant investments are required to acquire customers consistently, it suggests targeting the wrong market or operating in an overly competitive space. Regular evaluation of CAC trends helps companies make necessary adjustments to improve market positioning.

  3. Targeting the Wrong Audience: As companies grow, the goal is to reduce CAC and increase organic business, ROI on events, referrals, and client introductions. Accurate market research and identifying the right customer audience are crucial for generating success stories and automating customer acquisition. Targeting the wrong audience will result in increased CAC.

  4. Inefficient Marketing and Sales Strategies: A high CAC is a clear indication of the need for better understanding of the Ideal Customer Profile (ICP), go-to-market strategies, and acquisition channels. Regular evaluation and refinement of marketing and sales approaches can optimise CAC and enhance overall business performance.



The evaluation of Customer Lifetime Value (CLTV) and Customer Acquisition Cost (CAC) should be approached in a comparative context. Analysing the CLTV:CAC ratio offers a more holistic perspective on customer acquisition endeavours. A desirable CLTV to CAC ratio is typically 3:1, with a higher ratio signifying improved profitability. However, it is crucial to consider factors such as the company's or product's age, as this ratio generally enhances as the company grows. It's worth noting that even well-established and highly profitable companies may encounter higher CAC when launching new products until they establish market awareness.


Feel free to reach out to us for assistance in addressing CLTV:CAC issues without increasing your workload or diverting focus from clients.

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