How LTV, CAC and payback are calculated
LTV, customer lifetime value, is the gross profit an average customer brings in before they leave: ARPA times gross margin, divided by monthly churn. Dividing by churn is the same as multiplying by the average lifetime, since a customer stays 1 divided by churn months on average. At 4% churn that is 25 months.
CAC, customer acquisition cost, is your sales and marketing spend divided by the new customers it won in the same period. Include ad spend, tools, agencies and the salaries of people who sell and market.
The LTV to CAC ratio is LTV divided by CAC. CAC payback is CAC divided by the gross profit one customer brings in a month: how many months until a new customer has paid back what they cost.
Reading the result
A common rule of thumb for SaaS is an LTV to CAC ratio of at least 3:1 and a CAC payback within 12 months. Below 1:1, every new customer loses money. Well above 5:1 can mean you are underspending on growth.
These are rules of thumb, not laws. Early numbers are noisy: a few months of churn data or one big ad test can swing the result. Use the ratio to spot a problem, then look at churn, pricing and channels one at a time.
Questions
What is a good LTV to CAC ratio?
A common rule of thumb is 3:1 or better: each customer brings in three times what it cost to win. It is a guide, not a hard line.
Why use gross margin and not revenue?
Revenue overstates what a customer is worth, because hosting, support and payment fees come out of it. Gross margin gives the profit that can pay back acquisition cost.
What if my churn is 0%?
The formula divides by churn, so 0% gives an endless lifetime. Use a realistic churn instead; early SaaS selling to small businesses often loses 3% to 7% of customers a month.
Should CAC include salaries?
For a full picture, yes: the share of salaries spent on sales and marketing, plus ads, tools and agencies. A CAC from ad spend alone, often called paid CAC, flatters the ratio.
Is what I enter stored or sent anywhere?
No. Every number is calculated in your browser and nothing is saved.
Guides for this
- Startup Launch Checklist: Every Step From Four Weeks Out to Week TwoA startup launch checklist for first-time founders: what to do four weeks out, the week before, on launch day and in the two weeks after, with the mistakes that sink most launches.
- After Launch: Onboarding, Feedback, Metrics and the Emails to SendWhat to do after a startup launch: onboarding that gets new users to the first result, how to collect useful feedback, the few metrics worth tracking, and a launch email sequence you can copy.