The LTV to CAC ratio compares the gross profit a customer brings in over their whole relationship with you (lifetime value) with what you spent to win them (customer acquisition cost). It's the quickest single check on whether a SaaS company's growth is profitable, and one of the first numbers investors ask for.
How it works
LTV = monthly revenue per customer × gross margin ÷ monthly churn. Dividing by churn gives the average customer lifetime: at 3% monthly churn, the average customer stays about 33 months.
Use gross margin, not revenue. A customer paying $100 a month who costs you $20 to serve contributes $80 toward paying back CAC. Using revenue makes the ratio look far better than it is.
LTV:CAC = LTV ÷ CAC. A ratio of 3:1 is the common benchmark: each dollar spent on acquisition returns three in gross profit over the customer's life.
CAC payback is CAC ÷ monthly gross profit per customer. It shows how many months it takes to earn back the cost of winning a customer, which matters for cash flow even when the ratio looks healthy.
A worked example
Customers pay $100 a month on average, your gross margin is 80% and 3% of customers cancel each month. Each customer brings $80 of gross profit a month for about 33.3 months, so LTV is $2,666.67. With a CAC of $800, the ratio is 3.33:1, and you earn the $800 back in 10 months.
Questions people ask
What is a good LTV to CAC ratio?
Around 3:1 is the usual target. Below 1:1 you lose money on every customer. Well above 5:1 often means you could spend more on marketing and grow faster without hurting unit economics.
Should LTV use revenue or gross margin?
Gross margin. LTV should measure the profit a customer contributes, after the direct costs of serving them. Revenue-based LTV overstates the ratio, sometimes by a third or more.
What is a good CAC payback period?
Under 12 months is widely seen as healthy for small and mid-market SaaS, and many early-stage companies aim for under 6. Enterprise SaaS with large contracts often accepts 18 to 24 months.
Why does churn have such a big effect on LTV?
Because lifetime is 1 ÷ churn. Cutting monthly churn from 3% to 2% raises the average lifetime from 33 to 50 months, which increases LTV by half with no change in price.
How is this different from the SaaS Unit Economics Calculator?
It uses the same formulas and focuses on the one ratio. Use the Unit Economics Calculator when you also want annual churn and a fuller breakdown.