In the world of SaaS, e-commerce, and subscription businesses, two metrics reign supreme: Customer Lifetime Value (LTV) and Customer Acquisition Cost (CAC). Together, these numbers tell a powerful story about whether your business can scale profitably or is headed for trouble. Understanding the LTV/CAC ratio is essential for founders, investors, marketers, and business students alike—it's the fundamental equation that determines whether a customer is worth acquiring.

Customer Lifetime Value represents the total profit a business expects to earn from a single customer over the entire duration of their relationship. It's the sum of all future gross profit contributions, condensed into a single number. Customer Acquisition Cost, on the other hand, measures what you spend to win each new customer—marketing dollars, sales commissions, and related overhead. The relationship between these two numbers determines whether your growth engine creates value or destroys it.

The LTV/CAC ratio is often called the "holy grail" of SaaS metrics. A ratio of 3:1 is commonly cited as the benchmark for a healthy business—meaning you generate $3 of value for every $1 spent on acquisition. But the "right" ratio depends on your business model, growth stage, and strategic goals. Too low means you're losing money on each customer; too high might mean you're under-investing in growth.

Our LTV/CAC Ratio Calculator helps you input your average revenue per customer, gross margin, churn rate, and acquisition cost to instantly see your LTV, LTV/CAC ratio, CAC payback period, and churn sensitivity analysis. Whether you're preparing an investor pitch, optimizing marketing spend, or studying customer economics, this tool provides the insights you need.

What is Customer Lifetime Value (LTV)?

Customer Lifetime Value (LTV or CLV) represents the total gross profit a business expects to earn from a single customer over their entire relationship. It's not just revenue—it's the profit after accounting for the direct costs of serving that customer.

LTV answers a crucial business question: "How much is a customer worth to us?" This value determines how much you can afford to spend to acquire customers, which customer segments deserve the most attention, and whether your business model is fundamentally viable.

What is Customer Acquisition Cost (CAC)?

Customer Acquisition Cost (CAC) is the average cost a business incurs to acquire a new paying customer. This includes all marketing and sales expenses divided by the number of new customers acquired during that period.

CAC typically includes: paid advertising, content marketing, sales team salaries and commissions, marketing tools and software, agency fees, event sponsorships, and any other costs directly attributable to customer acquisition.

The LTV/CAC Ratio Explained

The LTV/CAC ratio compares customer value to acquisition cost. It tells you whether your business generates positive returns from customer acquisition and by how much.

CAC Payback Period

The CAC Payback Period measures how many months it takes to recover your customer acquisition investment through gross profit. Shorter payback periods mean faster return on investment and better cash flow.

The Critical Role of Churn

Churn rate has an outsized impact on LTV because it determines customer lifetime. The relationship is exponential, not linear:

• 10% monthly churn → 10-month average lifetime
• 5% monthly churn → 20-month average lifetime (2× improvement)
• 3% monthly churn → 33-month average lifetime (3.3× improvement)
• 2% monthly churn → 50-month average lifetime (5× improvement)

This means even small improvements in retention have dramatic effects on customer economics. Reducing churn from 5% to 4% increases average lifetime by 25%.

Follow these step-by-step instructions to calculate your LTV/CAC ratio:

1. Enter Monthly Revenue per Customer (ARPU): This is your Average Revenue Per User on a monthly basis. For subscription businesses, it's typically your average monthly subscription price. Include any recurring add-ons or expansion revenue averaged across your customer base.
2. Enter Gross Margin Percentage: This is your revenue minus cost of goods sold (COGS), expressed as a percentage. For software companies, gross margin is typically 70-85%. Include hosting costs, customer support, and any direct costs of delivering your service.
3. Enter Monthly Churn Rate: This is the percentage of customers who cancel each month. Use revenue churn if your customer values vary significantly; otherwise, logo churn is fine. Be honest—underestimating churn leads to inflated LTV.
4. Enter Customer Acquisition Cost: This is your fully-loaded cost to acquire one customer. Include marketing spend, sales costs, and allocated overhead. Use your actual CAC from recent periods, not targets or aspirations.
5. Click "Calculate" and Review Results: The calculator displays:
   • Customer Lifetime Value (LTV)
   • LTV/CAC Ratio with interpretation
   • CAC Payback Period in months
   • Churn sensitivity analysis showing impact of ±20% churn variation
   • Visual charts comparing LTV to CAC
6. Experiment with Scenarios: Try different inputs to see how changes affect your unit economics. What if you improved retention by 20%? What if CAC increased due to competition?

LTV Calculation (Simplified Model)

Example: $100 ARPU × 75% margin = $75 monthly GP. At 5% churn, lifetime = 20 months. LTV = $75 × 20 = $1,500.

LTV/CAC Ratio Calculation

CAC Payback Period

Alternative LTV Formula (Including Discount Rate)

Advanced LTV models include a discount rate to account for the time value of money:

Gross CAC vs. Blended CAC

• Gross CAC: Only includes marketing and sales costs directly tied to customer acquisition.
• Blended CAC: Includes all customers (organic + paid), often resulting in a lower CAC figure.
• Fully-Loaded CAC: Includes allocated overhead, tools, and indirect costs—most conservative approach.

This calculator uses whatever CAC you input—be consistent with how you calculate it.

• Using Revenue Instead of Gross Profit for LTV: LTV should reflect profit contribution, not just revenue. A $100 ARPU with 50% margin generates very different unit economics than $100 ARPU with 80% margin. Always apply gross margin to calculate LTV.
• Underestimating or Misreporting Churn: It's tempting to use the best-looking churn number, but this inflates LTV unrealistically. Use actual trailing 6-12 month churn data, and consider whether logo churn or revenue churn is more appropriate for your business.
• Excluding Costs from CAC: A CAC calculation that only includes ad spend ignores sales salaries, marketing tools, agency fees, and allocated overhead. Under-reporting CAC makes your ratio look better than reality.
• Treating LTV/CAC as a Universal Benchmark: The "3:1 rule" is a starting point, not a universal truth. Different industries, business models, and growth stages warrant different ratios. A marketplace might be healthy at 2:1 while enterprise SaaS might target 5:1.
• Ignoring Payback Period: A 5:1 LTV/CAC ratio sounds great, but if payback takes 36 months, you have a severe cash flow challenge. Always consider both ratio and payback together.
• Not Segmenting by Customer Type: Aggregate LTV/CAC can mask important differences. Enterprise customers might have 8:1 ratios while SMB shows 1.5:1. Blended numbers hide these insights.
• Assuming Static Metrics: LTV and CAC change over time. As you scale, CAC often increases (you've exhausted easy customers) while churn patterns evolve. Recalculate regularly with current data.

• Improving LTV is Often More Valuable Than Reducing CAC:A 20% improvement in LTV (through better retention, expansion revenue, or pricing) directly flows to the ratio. Reducing CAC by 20% has the same mathematical effect but may be harder to achieve and can limit growth.
• Calculate Cohort-Based LTV: Instead of using aggregate churn, track how specific customer cohorts retain over time. Recent cohorts may have different characteristics than older ones, affecting true LTV.
• Include Expansion Revenue in LTV: If customers upgrade over time (negative revenue churn), your LTV is higher than the simple model suggests. Account for average expansion revenue in your ARPU calculation.
• Segment LTV/CAC by Channel: Different acquisition channels have different CAC and may attract customers with different retention patterns. Calculate channel-specific ratios to optimize marketing mix.
• Use Predictive LTV for New Customers: Don't wait years to know actual LTV. Build predictive models using early engagement signals to estimate expected LTV for recent cohorts.
• Balance Short-term CAC Payback with Long-term LTV: Some businesses can tolerate longer payback periods if LTV is extremely high and churn is predictable. Match your payback tolerance to your funding situation and cash reserves.
• Consider Gross vs. Net Negative Churn: If expansion revenue exceeds churned revenue, you have "net negative churn"—your existing customer base grows in value over time. This dramatically changes LTV calculations and is the hallmark of best-in-class SaaS businesses.

These are general guidelines. Optimal ratios depend on growth stage, funding, and strategic priorities.

• Simplified LTV Model: The 1/churn formula assumes constant churn rate and constant revenue per customer. Real customer behavior is more complex with varying retention curves and expansion revenue.
• No Discount Rate: This model doesn't discount future cash flows. A dollar received in year 3 is worth less than a dollar today.
• No Cohort Analysis: The model uses aggregate metrics rather than tracking how specific customer cohorts behave over time.
• Zero Churn Edge Case: When churn is 0%, LTV becomes theoretically infinite, which isn't meaningful. The calculator requires positive churn to compute results.
• Educational Purpose Only: This calculator is for educational and planning purposes. Do not use it as the sole basis for business decisions. Consult with financial professionals for important strategic decisions.

The information in this guide is based on established unit economics principles and authoritative sources:

• U.S. Small Business Administration (SBA) - Customer acquisition and retention strategies: sba.gov
• U.S. Securities and Exchange Commission (SEC) - Business metrics disclosure: sec.gov
• Federal Trade Commission (FTC) - Customer acquisition compliance: ftc.gov
• SCORE Association - Customer value and business metrics: score.org