LTV Ratio Explained: A Key Indicator for SaaS Performance

You’ve probably heard it all before…

“Double your ad spend and your Saas business will grow overnight!”
or
“If you’re not getting 1,000 new customers every month, you’re behind!”

So how do you know if the money you spend is well spent?
The key is to understand the Lifetime Value to Customer Acquisition Cost ratio, or LTV Ratio, which shows how what you spend affects what you get back.

Metrics are more than just numbers in the world of SaaS; they’re the road map to success. The LTV Ratio is one of the most important ones for understanding money. It’s easy to use this powerful metric to see if your strategy for getting new customers is long-lasting and scalable. We’ll talk about what the LTV Ratio is, why it’s important, and how you can make it better to help your SaaS business grow.

What does LTV stand for?

The LTV Ratio looks at how much money your customers bring in over the course of their lifetime and compares it to how much it cost to get them (the Customer Acquisition Cost, or CAC).

The formula is: LTV Ratio = CLV (Customer Lifetime Value)Cost to Get a New Customer (CAC)Ratio of LTV to ₹The cost of getting a new customer and their lifetime value (CLV)

Let’s use an example to show what I mean. Let us say you run a project management SaaS that people can subscribe to:

CLV: $1,200 (based on $50 in monthly revenue per user and a customer lifecycle of 24 months).

Including the cost of ads, marketing tools, and the sales team, the CAC is $400.

The LTV Ratio is 3:1 which is equal to 1200/400.

In the SaaS industry, this means that for every $1 you spend on getting a new customer, you make $3 in lifetime revenue.

In what way does the LTV Ratio matter?

1. A Look at Profitability

If your LTV Ratio is high, it means that each customer brings in more value for your SaaS business than it costs to get them. For instance, a cloud storage SaaS with a 4:1 ratio has a lot of room to reinvest profits. On the other hand, a 1:1 ratio means that the business has reached break-even, which means there isn’t much room for growth.

2. How well marketing and sales work

Let’s say you spend $500 on Google Ads to get one customer. If that customer brings in $2,500 over their lifetime, the cost of getting them is well worth it. But if your LTV Ratio is 

1.5:1, you need to think about how you spend your marketing dollars again.

3. Ability to grow

Scaling with confidence is possible if the LTV Ratio is high. For instance, an email marketing SaaS with a 5:1 ratio can spend more on ads to get more customers because it knows it will make enough money to cover its costs and make a profit.

4. Stability over the long term

A LTV Ratio of 3:1 or higher means that you have a good balance between getting new customers and keeping old ones. This keeps your cash flow steady and helps you make money. In the long run, it may be hard for businesses with lower ratios to cover their acquisition costs.

Important Goals for SaaS LTV Ratios

There is no one “ideal” ratio, but most SaaS companies aim for a 3:1 ratio:

Less than 1:1: Each customer costs you money.

3:1 means there will be a lot of money made.

Above 5:1: You might not be putting enough money into acquisition.

For example, a team collaboration SaaS with a 7:1 ratio might miss chances to dominate its niche if it is too careful with its marketing budget.

How You Can Raise Your LTV

1. Raise the lifetime value of a customer

Focus on Retention: Let’s say your SaaS helps small businesses with billing. Increasing CLV by extending the average customer lifetime by improving customer service and offering personalised features can lower churn.

In order to upsell and cross-sell, let’s look at a CRM SaaS like HubSpot. It has advanced sales and analytics tools. Customers are worth more over their lifetime if you can get them to upgrade or buy extra services.

Deliver Consistent Value: Adding new features and educational content on a regular basis (like webinars and guides) can make customers happier and keep them coming back for a long time.

2. Lower the cost of getting a new customer (CAC).

Improve campaigns: If LinkedIn Ads bring in customers for $200 while Google Ads cost $500, you should focus on LinkedIn to lower your cost per acquisition (CAU).

Use Referrals: Tools like Dropbox use referral programs to get new users without having to spend a lot of money on ads. Customers who are happy become brand ambassadors, which lowers CAC.

Simplify the sales process: Using AI-powered chatbots or automating follow-ups can cut down on the time and money needed to close deals.

Example from real life: Slack’s LTV Ratio

Slack’s freemium model is a great example of a good LTV-to-CAC switch. They get free users for very little money by relying on word of mouth. A high CLV means that a lot of free users eventually switch to paid plans. With a focus on upselling and a low cost of acquisition, Slack’s LTV Ratio is well above industry averages. This lets the company grow quickly while still making money.

Different Stages of Growth and the LTV Ratio

Early Stage: Startups may be able to handle a lower LTV Ratio, like 2:1, while they work to build their brand and customer base.

Stage 2: As a SaaS grows, it’s important to make sure the ratio is optimised. It’s possible for a business management SaaS to try to raise CLV by adding new features while keeping CAC the same.

Mature Stage: Well-established SaaS companies with good ratios, like Salesforce, focus on going global and keeping customers to keep making money.

How to Read LTV Ratios Wrong Most of the Time

Low CLV:

A high churn rate reduces CLV, meaning customers leave quickly and generate less revenue over their lifetime. If businesses overestimate CLV by using inaccurate projections, they may spend more on customer acquisition and retention than they can recover. To avoid this, ensure projections are based on accurate churn data and realistic assumptions.

Underestimating CAC: If you don’t count costs like tools or salaries, your ratio will be off. Make sure that all of the costs of acquisition are accounted for.

Using It Alone: The LTV Ratio is very important, but it works best when combined with other metrics such as the Payback Period, Monthly Recurring Revenue (MRR), and Churn Rate.

The LTV Ratio is more than just a number; it’s what will help your SaaS business make money and grow. You can build a business that can grow without going out of business if you balance the costs of getting new customers with the money they bring in over time. Getting good at your LTV Ratio can make the difference between staying in the same place and becoming successful, no matter what kind of business you’re running.

HubSpot has a set of tools that help businesses figure out important numbers like Customer Lifetime Value (CLV) and Customer Acquisition Cost (CAC). These numbers are needed to see how well and how profitable customer acquisition strategies are. This is how HubSpot makes it easier to measure these metrics:

The lifetime value of a customer is [CLV]

HubSpot doesn’t figure out CLV for you automatically, but it gives you all the information and tools you need to do so:

HubSpot’s CRM system keeps detailed records of all interactions with customers, as well as their purchase histories and the amount of money they bring in.

– Custom Properties: HubSpot lets you make custom properties where you can enter and keep track of data that is useful for calculating CLV, like the average purchase value and the number of times a product is bought.

– Tools for Reporting: The reporting tools in HubSpot let you look at patterns in customer behaviour and revenue, which are very important for figuring out CLV.

You can use these tools to apply the CLV formula:

The CLV is calculated by multiplying the Average Purchase Value by the Average Purchase Frequency and then multiplying that number by the Average Customer Lifespan.

With this method, you can guess how much money a customer will bring in over the course of their relationship with your business.

2. The cost of getting a new customer (CAC):

HubSpot helps you figure out your CAC by showing you how much you spend on marketing and sales:

– Marketing Analytics: HubSpot keeps track of the costs of marketing campaigns, such as the money spent on ads and the money used to make content.

– Data on Sales: The platform keeps track of sales activities and the costs that come with them, like commissions and salaries.

Tracking the performance of a campaign: HubSpot’s analytics tools keep an eye on how different marketing campaigns are doing and help you figure out how many customers each one brought in.

You can use the following formula to find CAC:

The cost per acquisition (CAC) is equal to the product of the total marketing and sales costs and the number of new customers.

You can get a good idea of how cost-effective your efforts are to get new customers by combining data from HubSpot’s marketing and sales tools.

3. Integrations and more advanced analytics:

HubSpot works with a number of third-party tools that let you do more in-depth analyses:

Integration of Data: HubSpot can be linked to financial systems or advanced analytics platforms to gather the data needed to figure out CLV and CAC.

– Custom Reporting: Integrations with tools like Arithmix let you make your own dashboards and reports that calculate and show CLV and CAC metrics automatically.

These integrations improve what HubSpot can do on its own, giving you a fuller picture of how much it costs to get new customers and how much they are worth over their lifetime.

4. Making use of HubSpot’s tools:

HubSpot has learning materials and templates that can help you do these math problems:

– Calculator for Customer Service Metrics: You can use this free tool to figure out different customer service metrics, like CLV and CAC, by entering your data into formulas that have already been set up.

– Content for Education: HubSpot’s blogs and guides show you how to figure out and understand CLV and CAC step by step, using real-life examples and the best methods.

Businesses can accurately measure and analyse CLV and CAC by using HubSpot’s tools, integrations, and educational resources. This lets them make data-driven decisions that improve their marketing strategies and overall profits. 
Get in touch with our HubSpot Specialist for a demo so you can understand how this can help your software company. Drop us a line here or book a call here.