The LTV formula
LTV = average monthly revenue per customer × gross margin ÷ monthly churn rate. A customer paying $99 a month at 80% gross margin with 3% monthly churn is worth $99 × 0.8 ÷ 0.03 = $2,640 in gross profit.
Use gross margin, not revenue. Revenue-based LTV ignores hosting, support and payment costs and overstates what you can afford to spend on acquisition. And use churn you have actually measured over a few months: one great month of retention can double the result.
How to calculate CAC
CAC = (sales spend + marketing spend) ÷ new customers in the same period. Include salaries, tools and agency fees, not just ad spend. Blended CAC counts every new customer, including ones from word of mouth, so also look at paid CAC when you judge a single channel.
What is a good LTV:CAC ratio?
The common SaaS benchmark is 3:1: each customer should return three times what they cost to acquire. Below 1:1 you lose money on every customer. Far above 5:1 often means you are underinvesting in growth. Payback period matters just as much for cash: under 12 months is healthy for most self-serve SaaS.
Frequently asked questions
How do I calculate customer lifetime value?
Multiply average monthly revenue per customer by gross margin, then divide by monthly churn. $99 × 80% ÷ 3% = $2,640.
What is a good LTV to CAC ratio?
3:1 is the usual benchmark for SaaS. Under 1:1 loses money on each customer; well above 5:1 can mean you should spend more on growth.
What is CAC payback period?
The months of gross profit it takes to recover what you spent to win a customer: CAC ÷ (monthly revenue × gross margin).
Should LTV use revenue or gross margin?
Gross margin. It reflects the profit a customer generates, which is what you can afford to spend acquiring them.