The LTV to CAC ratio compares what a customer is worth to what they cost to acquire. Divide lifetime value by acquisition cost. Three to one is the accepted floor for a healthy subscription business: below it you are buying revenue at a loss, and far above it you are being so careful that you are leaving growth on the table.
LTV = (monthly ARPU × gross margin %) ÷ monthly churn % · Ratio = LTV ÷ CAC
Plug in your CAC, monthly ARPU, gross margin, and churn to see whether each customer makes you money or costs you money. Best run once you have 10+ paying customers and a real churn number, before you pour another dollar into paid acquisition. The ratio is the SaaS investor's first diligence question; this is the answer.
Your numbers
Total acquisition spend / customers acquired. Include salaries, not just ad spend.
Average revenue per user per month. Subscription + usage.
ARPU minus COGS, as a %. SaaS averages 70-85%; AI-heavy SaaS often lower.
% of customers lost per month. 5%/mo is high; 1-2%/mo is good for SaaS.
The verdict
LTV $800 on $200 CAC
The range the industry settled on for good reason: enough margin to survive a bad quarter and still fund the next one. Now go and spend more on acquisition.
What the number means
| LTV / CAC ratio | Reading | What to do about it |
|---|---|---|
| Under 1× | Act now | You are paying more for customers than they will ever pay you. This does not improve with scale. It is the one business problem that volume makes strictly worse. |
| 1× to 3× | Fragile | Technically profitable, practically fragile. It works while nothing goes wrong, and something always goes wrong. One bad month of churn erases the margin. |
| 3× to 5× | Healthy | The range the industry settled on for good reason: enough margin to survive a bad quarter and still fund the next one. Now go and spend more on acquisition. |
| Over 5× | Healthy | Suspiciously good. Either you have found an unfairly cheap channel, or you are under-investing in growth out of caution. Usually the second. Spend more, deliberately. |
Worked examples
| Situation | Numbers in | Answer out | Verdict |
|---|---|---|---|
| Consumer app, high churn | CAC $40 · ARPU $10 · Margin 85% · Churn 12% | 1.8× | Fragile. Retention is the problem, not the ad spend. |
| SMB SaaS | CAC $200 · ARPU $50 · Margin 80% · Churn 5% | 4.0× | Healthy. The economics scale. Payback lands at five months. |
| Paid ads outrunning the product | CAC $600 · ARPU $29 · Margin 75% · Churn 8% | 0.5× | Broken. Every new customer costs twice what they return. |
| Word of mouth, sticky product | CAC $60 · ARPU $80 · Margin 82% · Churn 1.5% | 72.9× | Wildly under-spending. There is a growth budget here going unused. |
How this is calculated
LTV = (monthly_ARPU × gross_margin / 100) / (monthly_churn / 100).
Ratio = LTV / CAC.
CAC payback = CAC / (monthly_ARPU × gross_margin / 100). The months it takes a customer to pay back the cost of acquiring them.
This is the SaaS LTV formula from David Skok's 2008 essay "Startup Killer: the Cost of Customer Acquisition." The 3× LTV/CAC benchmark and 12-month payback target are standard across modern SaaS. Bessemer's State of the Cloud reports use the same thresholds.
What this doesn't tell you
- Whether buyers want the product. A 5× ratio with 100 customers means nothing if there's no demand at scale. Unit economics work at one stage and break at another.
- Why your CAC is what it is. The ratio doesn't pull apart channel mix. $200 blended CAC can hide a $40 organic channel and a $1,200 paid channel, and you should be killing the paid one.
- Whether your churn is the right shape. 5% monthly churn evenly distributed is different from 30% in month 1 and 0% after. The fix is different in each case (onboarding vs value vs saturation).
What is a good LTV to CAC ratio?
Three to one is the working standard, popularised by David Skok and adopted across SaaS because it survives contact with reality. Below three, the margin is too thin to absorb a bad quarter of churn. Above five, you are almost certainly under-spending on acquisition and a better-funded competitor will simply outbid you for the same customers. Aim for three to five and treat anything outside that band as a question rather than a verdict.
How do you calculate customer lifetime value?
Take monthly revenue per customer, multiply by gross margin so you are counting profit rather than turnover, then divide by monthly churn. Dividing by churn is the step people find odd: a five percent monthly churn rate implies an average customer life of twenty months, so dividing by 0.05 is the same as multiplying by twenty. Use gross margin, not raw revenue, or you will value customers at the price of the goods you sell them.
Why is my LTV to CAC ratio so sensitive to churn?
Because churn sits in the denominator, and denominators are where small changes become large ones. Moving monthly churn from five percent to three percent stretches the average customer life from twenty months to thirty-three, lifting LTV by two thirds without a single new customer or a penny more in advertising. This is why retention work outperforms acquisition work at almost every early stage, and why almost nobody does it first.
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Frequently asked questions
Is LTV / CAC ≥ 3 really the rule?
Why monthly ARPU and monthly churn, not annual?
What do I do if my ratio is below 1?
Does this account for gross margin?
Good unit economics start upstream.
The ratio is downstream of who you sell to and what you charge them. ShipFit settles both before you spend anything finding out.