Quick answer
Calculate and interpret LTV:CAC ratio for SaaS using gross margin, churn, average revenue per account and acquisition cost.
Core formulas
LTV = ARPA * gross margin / monthly churn rate
This simplified version assumes churn is stable and revenue per account does not change.CAC = acquisition spend / new customers
Use the acquisition cost for the same customer segment whenever possible.LTV:CAC = LTV / CAC
The ratio compares estimated lifetime gross profit with acquisition cost.Worked example
LTV:CAC ratio example
- ARPA is $60 per month.
- Gross margin is 80%.
- Monthly churn is 4% and CAC is $400.
What the ratio tells you
LTV:CAC is a unit economics check. It helps answer whether the expected value of a customer is large enough to justify the acquisition cost. A ratio above 1 means estimated gross profit exceeds CAC. A higher ratio creates more room for overhead, mistakes and reinvestment.
The ratio should not be read alone. A high LTV:CAC with a very long payback period can still strain cash. A good ratio built on optimistic churn can disappear when real cohort data arrives.
Why churn drives the model
The simplified SaaS LTV formula divides monthly gross profit by churn. That means small churn changes create large LTV changes. Before using LTV:CAC to scale acquisition, run multiple churn scenarios and compare them with actual retention data.
- Lower churn increases estimated customer lifetime.
- Higher gross margin increases the profit available to recover CAC.
- Higher CAC lowers the ratio unless customer value grows too.
How to use it with calculators
Use the LTV calculator to model customer value, the CAC calculator to estimate acquisition cost, and the payback calculator to understand how long cash is tied up. If all three look healthy under conservative assumptions, the growth channel deserves more attention.
Use the calculators
FAQ
What is a good LTV:CAC ratio?
There is no universal number, but many SaaS teams look for a ratio comfortably above 1 with a payback period the business can afford.
Why not use revenue LTV?
Revenue LTV ignores delivery cost. Gross-margin LTV is more useful for acquisition decisions because it estimates profit available after direct costs.
Can LTV:CAC be too high?
Sometimes. A very high ratio can mean acquisition is underfunded, pricing is too conservative, or CAC is measured too narrowly.