SaaS Metrics

Calculating LTV, CAC Payback, and the LTV:CAC Ratio

A subscription business’s health comes down to whether a customer is worth more than it costs to acquire them — the LTV:CAC ratio is the single number that answers that. Enter your average revenue per customer, monthly churn rate, gross margin, and customer acquisition cost, and this calculator shows your Monthly and Annual Recurring Revenue, Customer Lifetime Value, and how long it takes to earn back what you spent acquiring a customer.

Two subscription businesses can have identical revenue and still be in very different financial shape — one might be acquiring customers cheaply relative to what they’re worth, while the other is spending more to acquire a customer than that customer will ever generate. The metrics here are the standard way investors, operators, and finance teams at subscription businesses actually measure that difference.

The Formula

$$\vE{\text{Customer Lifetime (months)}} = \frac{1}{\vA{\text{Monthly Churn Rate}}}$$ $$\vF{\text{LTV}} = \vB{\text{ARPU}} \times \vC{\text{Gross Margin}} \times \vE{\text{Customer Lifetime}}$$ $$\text{LTV : CAC Ratio} = \frac{\vF{\text{LTV}}}{\vD{\text{CAC}}}$$

Customer lifetime assumes a roughly constant monthly churn rate over time — a standard simplification, not a guarantee of any individual customer’s actual tenure. LTV is calculated on gross margin, not raw revenue, since margin is the money genuinely available to have funded acquiring the customer.

Worked Example

$100/month average revenue per customer, 500 customers, 2% monthly churn, 80% gross margin, and a $1,200 customer acquisition cost:

1. Customer lifetime: $\frac{1}{\vA{0.02}} = \vE{50} \text{ months}$.
2. LTV: $\vB{100} \times \vC{0.8} \times \vE{50} = \vF{\$4,000}$.
3. LTV : CAC ratio: $\frac{\vF{4,000}}{\vD{1,200}} \approx 3.3 : 1$.
4. CAC payback period: $\frac{\vD{1,200}}{\vB{100} \times \vC{0.8}} = 15 \text{ months}$.

A 3.3:1 ratio clears the commonly-cited 3:1 healthy benchmark, though the 15-month payback period runs a bit longer than the commonly-cited 12-month benchmark — worth watching if cash flow is tight even though the long-run economics look solid.

Key Factors to Consider

• A strong LTV:CAC ratio and a fast CAC payback period aren’t always both present at once, and the tension between them matters. A business can have excellent long-run unit economics (a high LTV:CAC ratio) while still straining cash flow if the payback period is long — both figures answer genuinely different questions (long-run profitability versus near-term cash needs) and are worth tracking together, not as substitutes for each other.
• Reducing churn has an outsized, compounding effect on lifetime value. Because customer lifetime is the mathematical inverse of the monthly churn rate, even a small reduction in churn meaningfully extends expected customer lifetime and therefore LTV — this is exactly why many SaaS businesses prioritize retention efforts as highly as new-customer acquisition.
• CAC should include the FULLY LOADED cost of acquiring a customer, not just ad spend alone. Sales team salaries, marketing overhead, and other costs directly tied to acquisition are commonly included in a rigorous CAC figure — using an incomplete CAC that only counts direct ad spend understates the real cost and overstates the LTV:CAC ratio.
• This model assumes a constant churn rate over a customer’s entire lifetime, which isn’t always realistic. Real churn often varies by customer tenure (newer customers frequently churn at a higher rate than long-tenured ones) — this simplification is a standard, widely-used approximation for planning purposes, not a precise prediction for any individual customer cohort.

Common Mistakes

• Using an incomplete CAC that only counts ad spend. Leaving out sales salaries, marketing overhead, and other acquisition-related costs understates CAC and makes the LTV:CAC ratio look healthier than it really is.
• Treating the LTV:CAC ratio and CAC payback period as interchangeable. As the worked example shows, a business can clear the 3:1 LTV:CAC benchmark while still having a payback period long enough to strain cash flow — track both, not just one.
• Assuming churn stays constant over a customer’s entire lifetime. Real churn usually varies by tenure — this model’s constant-rate assumption is a standard simplification for planning, not a guarantee for any individual cohort.

Useful to Know

• Need to compute your churn rate from raw customer counts before plugging it in here? SaaS Churn Calculator calculates that churn rate directly.
• Want to break down customer acquisition cost by channel or campaign? Customer Acquisition Cost (CAC) Calculator computes CAC on its own.
• Wondering how these unit economics affect when the business turns profitable overall? Break-Even Point Calculator finds that break-even point.