Customer lifetime value and CAC payback for SaaS
How a SaaS business works out customer lifetime value, acquisition cost and the months a new customer takes to repay it, from its own books.
By Achekam · · 4 min read · For Software (SaaS) businesses in South Africa, Nigeria, Kenya
A Lagos software start-up spent heavily on online advertising last quarter and signed more customers than ever. The bank balance went down, not up. The founders are asking the question every growing SaaS business eventually asks: are we buying customers who will make us money, or paying for growth we cannot afford?
Three numbers answer it: what a customer is worth over the whole relationship, what it costs to win one, and how long it takes for a new customer to repay that cost. Each is easy to calculate badly. This article explains how to calculate them well, and how to set up the books so the inputs come from the ledger rather than from guesswork.
Lifetime value is profit, not revenue
Andreessen Horowitz defines lifetime value, or LTV, as the present value of the future net profit from a customer over the duration of the relationship. It warns that estimating LTV from revenue or gross margin overstates it.
That warning matters because the revenue version is so tempting. Stripe Atlas explains that expected customer lifetime is the inverse of churn: a product losing 5% of its customers a month has an expected customer lifetime of 20 months, and at $30 a month, an expected lifetime revenue of $600 per new customer. That illustrates the lifetime arithmetic well. But $600 of revenue is not $600 of value; the hosting, support and payment costs of serving that customer for 20 months come off first.
A worked method in words
Andreessen Horowitz gives a way to calculate LTV: the monthly contribution margin per customer, multiplied by the average customer lifespan in months, where the lifespan is 1 divided by the monthly churn rate.
In practice:
- Monthly revenue per customer. Recurring revenue for the month divided by the number of paying customers.
- Monthly cost to serve per customer. Hosting, third-party software charged per customer, payment fees and the share of customer support that scales with customers, divided by the number of customers.
- Contribution margin per customer. The first figure less the second.
- Lifespan in months. 1 divided by monthly customer churn; the article on the monthly customer churn rate covers how to measure it.
- LTV. Contribution margin per customer multiplied by lifespan in months.
Strictly, Andreessen Horowitz's definition uses present value, which discounts future profit. For a quick internal measure you may choose to skip the discounting; just be clear which version you report.
What belongs in acquisition cost
Andreessen Horowitz states that customer acquisition cost, or CAC, should be the full cost of acquiring users, per user, including referral fees, credits and discounts. It adds that paid CAC, the cost divided by customers acquired through paid marketing, is more informative than blended CAC.
So CAC includes more than the advertising bill:
- paid advertising and marketing campaigns;
- the cost of the sales team, including commission;
- referral and reseller fees;
- free credits, discounted first months and other incentives given to win the customer.
Blended CAC divides all of that by every new customer, including those who found you through word of mouth. Paid CAC divides the paid spend by the customers that spend actually brought in, which tells you whether the campaigns are worth continuing.
Payback and the ratio
Payback is CAC divided by the monthly contribution margin per customer: the number of months a new customer must stay before they have repaid what it cost to win them.
David Skok explains why this matters. SaaS businesses face losses in their early years because they invest heavily upfront to win a customer but recover the profit over a long period, and the faster the business grows, the deeper the profit and cash-flow trough. His model shows that profitability is anaemic if the time to recover CAC extends beyond 12 months. He states that the best SaaS businesses have an LTV to CAC ratio higher than 3, sometimes as high as 7 or 8, and that many of the best recover their CAC in 5 to 7 months.
| Measure | What it tells you | Skok's reference point |
|---|---|---|
| LTV to CAC | Whether customers are worth what they cost | Above 3 for the best businesses |
| Payback months | How long cash is tied up in each new customer | Beyond 12 months, profitability is anaemic |
Those are one expert's benchmarks, not rules. His guide to SaaS metrics explains lifetime value, acquisition cost and the payback period in detail. A long payback is also a cash problem: it is the reason a fast-growing business can run out of money while signing customers, a link explored in runway and burn.
Getting the inputs from the books
The calculation is only as good as its inputs, and the inputs live in the expense accounts. In Achekam, each business has its own double-entry ledger with a standard chart of accounts, and accounts can be added, renamed or switched off. Set up separate accounts so the costs you need are not buried in "general expenses":
- Acquisition costs: advertising, sales salaries and commission, referral fees, promotional credits.
- Cost to serve: hosting, per-customer software, payment fees, customer support.
- Everything else: office, administration, product development.
Management accounts then show an income statement for a chosen period beside the period before, added up from the business's own journals and exportable as PDF or CSV, so each month's acquisition and service costs can be read directly. The year-to-date preset starts on 1 January, not on the business's own year start, so pick the period by hand if your year differs.
A business can also set a budget per account and period and compare it with actual figures from the ledger. Budgeting the acquisition accounts, and watching actual spend against them, turns a target CAC into something the team can manage month by month.
This month, split your expenses into acquisition, cost to serve and everything else, then calculate paid CAC, contribution margin and payback for last quarter before deciding on next quarter's marketing budget.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
