Key SaaS Metrics for Investors: Customer Acquisition Cost (CAC) & Customer Lifetime Value (CLTV)

To grow customer base or to grab market share Customer Acquisition Cost (CAC) & Customer Lifetime Value (CLTV) are the two important metrics for investors to judge a company based on profitability.
Customer Acquisition Cost (CAC) is associated with Total sales and marketing expenses associated with gaining a new customer and making incremental gross profit from new customer.
CAC matters in,
The path to profitability for Equity investor(VCs) and retail investors is that how quickly a new customer can increase profits and the growth potential is that how quickly a start-up can grow after an inflow of funds after considering CAC.
Also it provides downside protection to traditional lenders and lighter capital who want to know how much spending are done on acquiring new customer.
CAC Ratio = Annualized Gross Profit for period Q
Sales and Marketing Expenses for period Q

Customer Lifetime Value (CLTV) is an estimate of the total amount revenue one can expect of an average customer. As the name implies, CLTV measures the value over the entire lifetime of a customer.
CLTV matters in,
The path to profitability for Equity investor(VCs) and retail investors who want to know the value of newly acquired customer. It also helps in pricing mechanism like Loan to value how long it will take to repay additional loan taken for increase revenue from customers.
CLTV = Average Revenue Per Account (ARPC) x Average Customer lifetime
Lets take example of Netflix,
Netflix has four different types of pricing option for subscribers. Lets take basic and premium one. The basic user charges are ₹199 and premium user charges are ₹799. And they have 1000 subscribers in both cases for example. Average customer lifetime varies by pricing plan.
Average Customer Lifetime
Basic: 6 months
Premium: 12 months
CLTV = Average Revenue Per Account (ARPC) x Average Customer lifetime
= [( ₹199 x 1,000 x 6/12) + ( ₹799 x 1,000 x 12/12)]
2000
= ₹450
This means that, on average, Netflix Company can expect to generate ₹5,391 in revenue per customer.
What is CLTV to CAC Ratio?
The CLTV to CAC Ratio is the total average value you expect to receive from a new customer compared to the average cost to acquire a new customer.
CLTV: Customer Lifetime Value
CAC: Customer Acquisition Cost
In case of start-ups CLTV below CAC is manageable but after certain point in time it has to be above CAC to sustain or become profitable business.
CLTV to CAC Ratio matters in,
The main purpose of this ratio is to check that company is not spending more on acquiring new customer than they are worth of bottom line. A low ratio means company is spending more on acquiring customer and not efficient to make enough revenue from customer. And a high ratio means company can grow with low spending on customer acquisition.
CLTV to CAC Ratio = CLTV / CAC
Source,
https://www.lightercapital.com/blog/how-to-chart-a-path-to-profitability/