CAC Payback Period vs. LTV/CAC
This post came off the back of a question that was posted on Quora that asks which of CAC Payback Period and LTV/CAC is more important? Both are important within an SaaS business, but it's difficult to know whether or not you should emphasize one metric over another. If one get better, does the other improve also?
Formula Review
Below you will see how each of these metric are calculated. There are 8 inputs altogether needed to work out both metrics. They're not difficult to calculate, but some of the inputs like ACS and CAC need side calculations.
CLTV Formula :
(annual recurring revenue- average cost of service)/(% churn + WACC- subscription increase)
CAC Payback Period Formula:
CAC/(MMR-ACS)
4 Scenarios - from not good to great
Four scenarios have been modeled in the spreadsheet by changing CAC to work out the effect on the LTV/CAC and the CAC Payback Period. The other inputs were held constant like ACS, MRR, and the inputs into the LTV formula.
Both the LTV/CAC ratio and the CAC Payback Period are SaaS metrics that should be monitored. The metrics demonstrate the equivalent signal when you're in a really bad or a really good unit economic position.
If you find yourself in the unit economic bubble, which is around three times for LTV/CAC payback periods, you are going to have to dive into the input of each formula to work out what levers can be pulled to better your economics.
In conclusion, you should measure both. Each metric tells you something different in the way that one does not mean or say more than the other.
