~2 min read
LTV:CAC is the central metric of SaaS unit economics. It measures whether you earn more from a customer over their lifetime than it costs to acquire them, and by how much. A ratio below 1 means you're losing money on every customer. A ratio of 3:1 or higher is generally considered healthy and sustainable.
Definitions
Customer Lifetime Value (LTV) The total gross profit you expect to earn from a customer over their entire relationship with your product.
LTV = (Average Revenue Per User × Gross Margin %) ÷ Monthly Churn Rate
Customer Acquisition Cost (CAC) The fully loaded cost to acquire one new customer — including ad spend, sales salaries, and any tools or events used for marketing.
CAC = Total Sales & Marketing Spend ÷ New Customers Acquired (same period)
Payback Period How many months of gross profit are needed to recover CAC: Payback = CAC ÷ (ARPU × Gross Margin %)
How to use the LTV/CAC calculator
- Enter your Average Revenue Per User (monthly), gross margin %, and monthly churn rate.
- Enter your total sales and marketing spend and new customers acquired for the same period.
- The calculator shows LTV, CAC, the ratio, and the payback period.
Frequently asked questions
What LTV:CAC ratio should I target? 3:1 is the commonly cited minimum for a sustainable SaaS — you earn three times what you spend to acquire a customer. Below 3:1 typically indicates a growth or margin problem. Above 5:1 often indicates you're underinvesting in growth.
What's a good CAC payback period? Under 12 months is healthy for most SaaS businesses. Under 6 months is excellent — it means the business quickly recoups its customer acquisition investment and can reinvest faster.
Why does gross margin matter in the LTV calculation? LTV represents profit, not revenue. A 70% gross margin on $100 ARPU means you actually retain $70 per month after cost of goods sold — that's what gets compared against CAC, not the full $100.