The LTV:CAC ratio is the simplest summary of whether a SaaS business is economically sound. It answers: for every dollar you spend acquiring a customer, how much lifetime value do you get back?
LTV:CAC = Customer Lifetime Value ÷ Customer Acquisition Cost
Calculating LTV
LTV = ARPU × Gross Margin % × Average Customer Lifetime
Average lifetime = 1 ÷ Monthly Churn Rate
At $99 ARPU, 75% gross margin, 2% monthly churn: - Lifetime = 1 ÷ 0.02 = 50 months - LTV = $99 × 0.75 × 50 = $3,712.50
What LTV:CAC ratios mean
| Ratio | Interpretation |
|---|---|
| < 1 | Paying more than you earn. Not sustainable |
| 1–2 | Marginal — barely breaking even on acquisition |
| 3 | The standard "healthy" benchmark |
| 3–5 | Strong unit economics |
| > 5 | Potentially under-investing in growth |
The commonly cited "3:1 is healthy" benchmark comes from the idea that 1/3 of revenue goes to CAC recovery, 1/3 to operations, and 1/3 to profit.
Why > 5 LTV:CAC might be a problem
Counter-intuitively, a very high LTV:CAC can signal under-investment. If you can acquire customers at $500 who are worth $5,000, you should be spending more on acquisition — your constraint isn't economics, it's channel capacity.
Growth-stage investors will flag > 5 LTV:CAC as a sign you're leaving growth on the table.
Using CAC payback period alongside LTV:CAC
LTV:CAC looks good when churn is low and lifetime is long. But LTV is a forecast — most of the value is theoretical. Payback period is concrete: how long until you actually recover the cash you spent?
At 3:1 LTV:CAC with 12-month payback, you need 12 months of cash before the customer pays back. That's a real constraint on growth without capital.
Strong businesses have both: 3+ LTV:CAC AND < 9-month payback.
Use the CAC Calculator + LTV Calculator together to model the full picture.