LTV to CAC compares how much gross profit a customer brings over their whole relationship with you (lifetime value, LTV) with what it cost to acquire them (customer acquisition cost, CAC). A ratio of 3 means each customer returns three dollars of gross profit for every dollar spent winning them.
It is the quickest test of whether a business model works: below 1, every new customer loses money; well above 1, growth pays for itself.
The LTV to CAC formula
LTV = ARPA × gross margin % / monthly customer churn rate
ARPA = average monthly revenue per account
1 / churn rate = average customer lifetime in months
CAC = sales and marketing spend / new paying customers
LTV to CAC ratio = LTV / CACUse the same customer group on both sides. If CAC is for self-serve customers from paid channels, LTV should be for those customers too, not the company average that includes enterprise deals.
A worked LTV to CAC calculation
A subscription product has:
| Input | Value |
|---|---|
| ARPA | $100 a month |
| Gross margin | 80% |
| Monthly customer churn | 2% |
| Sales and marketing spend last quarter | $180,000 |
| New paying customers last quarter | 150 |
LTV = 100 × 0.80 / 0.02 = $4,000 CAC = 180,000 / 150 = $1,200 Ratio = 4,000 / 1,200 = 3.3
A customer is worth $80 of gross profit a month and stays 50 months on average (1 divided by 2%), for $4,000. Winning them costs $1,200, so the ratio is about 3.3. Now suppose churn rises to 3%: LTV falls to about $2,667 and the ratio to 2.2, with no change in acquisition at all. Churn moves this ratio more than most teams expect.
What counts as a good LTV to CAC ratio
David Skok's "SaaS Metrics 2.0" guide (forEntrepreneurs, first published 2014) gives the guideline most investors still quote: LTV should be more than 3 times CAC. He pairs it with a second test, recovering CAC in under 12 months, because a high ratio that takes four years to earn back still drains cash. He set the 3x guideline for a simple LTV without a gross-margin adjustment, in businesses with gross margins of 80% or more. The gross-margin version above is stricter, so a 3 on it is a comfortable result, and it keeps lower-margin businesses honest.
Read the ratio as a range, not a pass mark:
- Below 1: each customer loses money. Fix pricing, churn or acquisition before spending more.
- Around 1 to 3: the model works, but thinly. Small changes in churn or CAC tip it.
- Above 3: healthy by Skok's guideline.
- Far above 3: you may be underinvesting in growth.
Common LTV to CAC mistakes
- Using revenue instead of gross profit in LTV. It inflates the ratio by the inverse of your margin.
- Trusting churn from a young customer base. Six months of history with almost no cancellations gives an LTV that won't hold.
- Uncapped lifetimes. Cap at three to five years.
- Paid CAC against blended LTV. Use the same group on both sides.
- Ignoring time. A ratio of 4 that takes 40 months to reach is worse for cash than a ratio of 3 reached in 12. Check CAC payback next to it.
Related metrics
- CAC: what goes into acquisition cost, and blended vs paid.
- CAC payback period: how fast the CAC comes back.
- Churn: the input that moves LTV the most.
- ARPU: ARPA, the revenue starting point of LTV.
Get the inputs automatically every month
The inputs live in three places. The Stripe monthly churn report posts customer churn on the 1st, and the Stripe weekly MRR report gives MRR and active subscriptions for ARPA. On the spend side, Google Ads CPA by campaign and QuickBooks expenses by category cover paid media and the rest of sales and marketing. Have your agent combine them on the 1st with your gross margin and post one ratio card, so a slow rise in churn shows up as a falling ratio months before it shows up in revenue.
Questions
What is a good LTV to CAC ratio?
David Skok's widely used SaaS Metrics 2.0 guideline is above 3, meaning a customer's lifetime value is more than three times what it cost to acquire them. He set it for a simple LTV without a gross-margin adjustment, in businesses with gross margins of 80% or more.
Can the LTV to CAC ratio be too high?
Yes, in a sense. A ratio of 8 or 10 often means you could spend more on acquisition and grow faster while still making money on each customer.
Should LTV use revenue or gross profit?
Gross profit. A customer who pays $100 a month but costs $40 a month to serve is worth $60 a month to you, and that is what has to pay back the acquisition cost.
How do I calculate LTV with very low churn?
Cap the lifetime. With 0.5% monthly churn the formula implies a 200-month customer life, which nobody can check. Many teams cap lifetime at three to five years so the ratio stays honest.