Blog · Finance metrics and formulas · SaaS
The LTV to CAC ratio divides a customer's lifetime gross profit by the cost of winning them. This page gives the formula, works three segments with CAC payback in months, shows why a blended ratio hides the segment below 3:1, and caps the lifetime so a low churn rate cannot turn into a ten-year customer.
LTV:CAC, the LTV to CAC ratio, divides a customer's lifetime gross profit by what it cost to win them. A mid-market account worth $45,000 of lifetime gross profit that cost $15,000 to acquire has a ratio of 3.0, the common SaaS benchmark. Below 1.0 every new customer loses money; above 3.0, check that the lifetime behind the LTV is believable.
LTV = Monthly revenue per account × Gross margin % / Monthly churn rate
CAC = Sales and marketing spend / New customers won
LTV:CAC = LTV / CAC
Each half has its own page: how to calculate LTV covers the lifetime value inputs and customer acquisition cost what belongs in the spend. This page uses their figures and puts the two together.
One row per segment (or channel, or cohort), all for the same period:
| Column | Content | Source |
|---|---|---|
| B | Monthly revenue per account | Billing export |
| C | Gross margin % | P&L: revenue less cost of revenue |
| D | Monthly customer churn | Accounts lost / accounts at the start of the month |
| E | Sales and marketing spend, fully loaded | P&L, by segment |
| F | New customers won | CRM, first contracts only |
One SaaS company, monthly figures in USD. Revenue per account, margin and churn are the three segments from how to calculate LTV; the SMB and mid-market CACs of 4,000 and 15,000 are the ones used there, and enterprise is added at 70,000. Spend and wins are for one quarter.
| Segment | Revenue per account | Gross margin | Monthly churn | LTV | Spend | New customers | CAC | LTV:CAC |
|---|---|---|---|---|---|---|---|---|
| SMB | 400 | 70% | 3.0% | 9,333 | 120,000 | 30 | 4,000 | 2.3 |
| Mid-market | 900 | 75% | 1.5% | 45,000 | 210,000 | 14 | 15,000 | 3.0 |
| Enterprise | 3,500 | 80% | 0.8% | 350,000 | 280,000 | 4 | 70,000 | 5.0 |
Mid-market step by step: 900 × 0.75 = 675 of gross profit a month; 675 / 0.015 = 45,000 of LTV. CAC is 210,000 / 14 = 15,000. The ratio is 45,000 / 15,000 = 3.0. In Excel, with columns as above:
=B2*C2/D2 LTV
=E2/F2 CAC
=(B2*C2/D2)/(E2/F2) LTV:CAC
Put the three segments together and the ratio of totals must equal lifetime value won over spend:
| Segment | New customers | LTV | New customers × LTV | Spend |
|---|---|---|---|---|
| SMB | 30 | 9,333 | 280,000 | 120,000 |
| Mid-market | 14 | 45,000 | 630,000 | 210,000 |
| Enterprise | 4 | 350,000 | 1,400,000 | 280,000 |
| Total | 48 | 2,310,000 | 610,000 |
Blended CAC is 610,000 / 48 = 12,708, a figure that describes no segment. Blended LTV is 2,310,000 / 48 = 48,125, and the blended ratio is 48,125 / 12,708 = 2,310,000 / 610,000 = 3.8. It looks comfortable, and it is carried by four enterprise wins. SMB, with 30 of the 48 new customers, returns 2.3.
CAC payback (months) = CAC / (Monthly revenue per account × Gross margin %)
| Segment | CAC | Gross profit per month | Payback (months) |
|---|---|---|---|
| SMB | 4,000 | 280 | 14.3 |
| Mid-market | 15,000 | 675 | 22.2 |
| Enterprise | 70,000 | 2,800 | 25.0 |
In Excel: =E2/F2/(B2*C2). Enterprise has the best ratio and the slowest payback: two years of gross profit before the account has repaid what it cost. The ratio says whether the money comes back; payback says how long the cash is out.
The 3:1 benchmark comes from SaaS metrics writing, chiefly David Skok's SaaS Metrics 2.0, which says "the best SaaS businesses have a LTV to CAC ratio that is higher than 3, sometimes as high as 7 or 8", and pairs it with recovering CAC in under 12 months. Two caveats from his own definitions page: the 3 was set on an LTV without a gross margin adjustment, assuming margins of 80% or more, so on gross-profit LTV as here it is a stricter bar; and for enterprise and land-and-expand businesses, "Months to recover CAC can be around 20 months, and the model works fine." Treat both as rules of thumb.
The ratio misleads when churn is low. LTV divides by churn, so the implied lifetime is 1 / churn: 33 months for SMB, 67 for mid-market and 125 for enterprise. A 0.8% monthly churn rate claims a ten-year customer, and most of the enterprise LTV sits in years six to ten, which the company has not yet observed.
Count only the gross profit expected in the first 60 months. Two ways to cap:
Simple cap = Monthly gross profit × MIN(60, 1 / churn)
Expected gross profit in 60 months = Monthly gross profit × (1 − (1 − churn)^60) / churn
The second, used in how to calculate LTV, also allows for customers who leave inside the five years. In Excel: =MIN(60,1/D2)*B2*C2 and =B2*C2*(1-(1-D2)^60)/D2.
| Segment | Uncapped LTV | Ratio | Simple cap | Ratio | Expected in 60 months | Ratio |
|---|---|---|---|---|---|---|
| SMB | 9,333 | 2.3 | 9,333 | 2.3 | 7,832 | 2.0 |
| Mid-market | 45,000 | 3.0 | 40,500 | 2.7 | 26,829 | 1.8 |
| Enterprise | 350,000 | 5.0 | 168,000 | 2.4 | 133,843 | 1.9 |
Capped, enterprise falls from 5.0 to 2.4 on the simple cap and 1.9 on expected gross profit, and the ranking of the segments changes. The segment that looked best uncapped is no better than the others once the lifetime is limited to what five years can deliver.
A segment ratio is still an average. Churn measured by signup cohort, from a cohort retention table, shows whether recent customers leave faster than old ones, and CAC split by channel shows which channel buys the short-lived customers. Expansion matters too: an account that grows is worth more than flat revenue per account says, which gross retention and net retention measures.
The ratio is only as good as the churn and margin behind it. Covirage's tools compute churn, retention by cohort and expansion from your billing or invoice export, so LTV rests on observed behavior per segment; the external AI model explains the result and never does the arithmetic. See Covirage for SaaS sales teams. For the per-customer economics behind the ratio, see unit economics, and for the company-level tests, see the Rule of 40 and burn rate.
Around 3:1 is the widely quoted benchmark for SaaS: a customer returns three times what it cost to win. Below 1:1 each new customer destroys value. Read it with CAC payback, because a 3:1 ratio that takes four years to pay back ties up a lot of cash.
Yes, in the sense that a very high ratio can mean the company is under-investing in acquisition and growing more slowly than it could. It can also mean the lifetime assumption is too generous; check it with a cap.
Divide CAC by the monthly gross profit from one customer: monthly revenue per account times gross margin. A CAC of 4,000 on 400 a month at a 70% margin pays back in 4,000 / 280 = 14.3 months.
Gross margin. The cost of delivering the service is not available to repay acquisition cost. Revenue-based LTV overstates the ratio, most of all for low-margin products.