Work out what a customer is worth over their lifetime, what it costs you to win one, and whether that ratio supports faster growth. Includes CAC, LTV:CAC and payback months.
Customer lifetime value (LTV) is the gross profit an average customer brings in over the whole time they stay. On its own it's a nice number. Next to customer acquisition cost (CAC), it answers the question every growth plan depends on: how much can you afford to spend to win a customer?
If a customer is worth $16,000 in gross profit and costs $3,000 to win, you can spend more on growth with confidence. If they're worth $4,000 and cost $3,000, every new customer barely pays for itself, and faster growth just burns cash faster.
LTV = (Avg revenue per customer per month × Gross margin %) ÷ Monthly churn %
Worked example:
$500 × 80% ÷ 2.5%
= $400 gross profit per month ÷ 0.025
= $16,000 LTV (a 40-month average lifetime)
CAC = Sales and marketing spend ÷ New customers
= $60,000 ÷ 20 = $3,000
LTV:CAC = $16,000 ÷ $3,000 = 5.3
CAC payback = $3,000 ÷ $400 = 7.5 monthsDividing by churn works because 1 ÷ monthly churn gives the average customer lifetime in months. A 2.5% monthly churn means the average customer stays 40 months.
The most widely used benchmarks come from David Skok's SaaS Metrics 2.0, written for subscription businesses:
| Metric | Guideline | What it means |
|---|---|---|
| LTV:CAC ratio | Above 3 | The best SaaS businesses run above 3, sometimes as high as 7 or 8 |
| CAC payback | Under 12 months | Many of the best recover CAC in 5 to 7 months |
A ratio well above 5 can mean you're underinvesting in growth and leaving market share to competitors who spend more.
LTV, or customer lifetime value, is the gross profit you expect to earn from an average customer over the whole time they stay with you. It tells you how much a new customer is worth, which in turn tells you how much you can afford to spend to win one.
For a subscription business, LTV = (average revenue per customer per month × gross margin %) ÷ monthly churn rate. Example: $500 a month × 80% margin ÷ 2.5% monthly churn = $16,000. Dividing by churn is the same as multiplying by the average customer lifetime: 1 ÷ 2.5% = 40 months.
CAC, or customer acquisition cost, is what you spend on sales and marketing to win 1 new customer. Add up sales and marketing costs for a period, including salaries, tools, ads and agencies, and divide by the number of new customers won in that period.
The most cited guideline comes from David Skok's "SaaS Metrics 2.0": the best SaaS businesses have an LTV to CAC ratio higher than 3, and sometimes as high as 7 or 8. Below 3, you may be spending too much to acquire customers. Well above 5, you may be growing slower than you could afford to.
CAC payback is the number of months it takes for a customer's gross profit to cover what you spent to win them. The same Skok guide notes that many of the best SaaS businesses recover CAC in 5 to 7 months, and that profitability looks weak once payback runs beyond 12 months.
Use gross margin. Revenue-based LTV ignores what it costs to serve the customer, such as hosting, support and onboarding. It makes every customer look more valuable than they are and pushes you to overspend on acquisition.
Very low churn makes the formula produce huge lifetimes. A 0.5% monthly churn implies a 200-month, 16-year customer. Many teams cap the lifetime at 3 to 5 years for planning, since products, prices and markets change long before then. Use the lifetime cap field in the calculator to do the same.
We help B2B teams build acquisition channels that get cheaper over time: SEO, content, lifecycle email and account-based programs. Tell us your numbers and we'll show you where the biggest gain is.
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