Calculating Expected

CAC And LTV

The first thing you need is
your cost per opportunity.
Say you spent $10 million on
sales and marketing (fully
loaded — including salaries)
in the month of June, and
created 2,000 opportunities
that month.

Credit: Tomasz Tunguz - VC at Redpoint Ventures

This assumes a short
opportunity lag time, which
is common in the SaaS
world, but you also could use
the prior and following
months to do the calculation
if your sales cycle is longer.
Next, you want to determine your
“expected” (as in probabilistic
terms) CAC, using your
opportunity win rate and average
deal size, which shouldn’t fluctuate
much.
If, historically, your win rate has
been 20 percent, and your average
annual contract value (ACV) is
$30,000, then your ECAC would
work out as follows:
Expected # of New Customers = 0.2
(opportunity win rate) x 2K (opportunities) =
400Expected CAC = $10 million (fully loaded
growth spend) / 400 (expected new
customers) = $25K

If you divide ECAC by your

average ACV, you will derive the
payback period (in months) —
the time it will take for you to
recoup your growth spend on
acquiring that customer. In this
case:
Expected Payback Period = $25K
(ECAC) / $30K (first-year ACV) x 12
months = 10 months

The customer pays for itself two

months before it’s up for renewal
(assuming an annual contract),
which is not bad.
Related to payback, you can
compute the return on investment
(ROI) over a subscription period.
For example:
Expected first-year ROI = ($30K
(first-year ACV) – $25K (ECAC)) /
$25K (ECAC) = 20 percent

And, if you know (or think) your

ACV will appreciate 15 percent
(so 115 percent of the first year
ACV, or 1.15 in decimal form) if
the customer renews for another
year, then your expected ROI for
two years of subscription works
out as follows:
Expected second-year ACV = $30,000 * 1.15
(renewal increase) = $34,500Expected two-
year ROI = ($30,000 (first-year ACV) +
$34,500 (second-year ACV) – $25K (ECAC))
/ $25K (ECAC) = 158 percent

To compute LTV, you need to

estimate how many years your
typical customer will stay with
you. This can take several years to
find out using actual sales data,
so if you don’t know, then be
conservative based on other
companies in your space (ask
your investors!).
Let’s assume a three-year
average lifetime — then,
based on the assumptions
above and on annual
contracts (versus month-to-
month service), you can
forecast LTV as follows:
 Expected LTV = ( $30K (average ACV) +
$30K (average ACV) * 1.15 (renewal
increase) * (1.15 (renewal increase) ^ (3-
year lifetime – 1) – 1) / (1.15 (renewal
increase) – 1) = $104,175

It will take more than two years to

know your actual renewal
increases if your renewals happen
annually … and you probably won’t
press hard on renewal increases
after just one year with your
earliest customers.
You can try analyzing
industry comps to
determine a good target, or
just be conservative and
remove the appreciation
assumption, which also
reduces the complexity of
the formula
(it would become $30K * 3
[estimated customer
lifetime] = $90,000).
Finally, let’s put it together —
divide ELTV by ECAC. Using
the first ELTV value of
$104,175, and dividing that
by the ECAC of $25K, we get
4.167. From a company
health perspective and what
VCs expect to see for a good
SaaS business (3X or more),
this is very good.