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Customer Lifetime Value (LTV) is the total gross profit you expect to earn from a typical customer over their entire relationship with your business. It's the denominator in the most important question in SaaS: is it worth the cost of acquiring this customer?
The LTV formula
LTV = ARPU × Gross Margin % × Average Customer Lifetime (months)
Where: - ARPU = Monthly revenue per customer - Gross Margin % = (Revenue − COGS) / Revenue - Average Lifetime = 1 / Monthly Churn Rate
At $99 ARPU, 75% gross margin, and 2% monthly churn: - Average lifetime = 1 / 0.02 = 50 months - LTV = $99 × 0.75 × 50 = $3,712.50
LTV:CAC — the key unit economics ratio
LTV:CAC = LTV ÷ Customer Acquisition Cost
The benchmark: 3× or higher. At 3× LTV:CAC, you generate $3 in lifetime gross profit for every $1 spent acquiring a customer. Below 1× means you're destroying value with every new customer — a growth problem masquerading as a revenue problem.
| LTV:CAC | Assessment |
|---|---|
| < 1× | Value destruction — fix before scaling |
| 1–2× | Marginal — unsustainable at scale |
| 2–3× | Acceptable — below benchmark |
| 3–5× | Healthy — venture-backable unit economics |
| > 5× | Excellent — room to invest more in growth |
CAC payback period
CAC Payback = CAC ÷ (ARPU × Gross Margin %)
This tells you how many months of gross profit it takes to recover customer acquisition cost. Investors benchmark: - < 12 months: excellent — especially for self-serve SaaS - 12–18 months: acceptable for sales-led SMB SaaS - 18–24 months: challenging — requires more capital to fund growth - > 24 months: difficult to sustain without large funding rounds
Why churn is the biggest lever
Halving your churn rate doubles customer lifetime — and therefore doubles LTV — without changing price, margin, or CAC. This is why churn reduction has a larger financial impact than equivalent increases in acquisition spend.
At 4% monthly churn, average lifetime = 25 months. At 2% monthly churn, lifetime = 50 months. Same ARPU, same margin, twice the LTV.
Frequently asked questions
What does this calculator do? Calculate Customer Lifetime Value (LTV), LTV:CAC ratio, and CAC payback period.