Predictive analytics and AI
SaaS metrics: LTV, CAC, payback and churn explained
The short answer
Customer lifetime value (LTV) is the gross profit a customer brings over their life: monthly revenue per account times gross margin, divided by monthly churn. Customer acquisition cost (CAC) is sales and marketing spend divided by new customers. The widely used rule of thumb is an LTV to CAC ratio of at least 3 and a CAC payback under 12 months, but both depend on getting churn right, and churn is the number most often understated.
Key takeaways
- LTV is monthly revenue per account times gross margin, divided by monthly churn.
- An LTV to CAC ratio of 3 or more and payback under 12 months are common benchmarks.
- Short histories understate churn: cap the lifetime you assume.
On this page 5 sections
The formulas
| Metric | Formula | Example |
|---|---|---|
| Monthly churn | Customers lost in the month / customers at start of month | 12 / 400 = 3% |
| Average lifetime | 1 / monthly churn | 1 / 0.03 = 33 months |
| LTV | ARPA x gross margin / monthly churn | $200 x 80% / 3% = $5,333 |
| CAC | Sales and marketing spend / new customers | $60,000 / 40 = $1,500 |
| LTV to CAC | LTV / CAC | 5,333 / 1,500 = 3.6 |
| CAC payback | CAC / (ARPA x gross margin) | 1,500 / 160 = 9.4 months |
Run your own numbers in the LTV to CAC calculator.
Where these numbers go wrong
- Churn from too short a window. A young company with three months of history has not seen its customers' real churn. One over a short churn rate makes lifetime look very long; cap the lifetime you assume (many investors cap at three to five years).
- Revenue instead of gross profit. LTV built on revenue overstates value by the cost of serving customers.
- Blended CAC. Dividing all spend by all new customers, including word of mouth, hides what a paid customer costs. Report paid CAC by channel as well.
- Ignoring expansion. Upgrades and seat growth offset churn. Net revenue retention (revenue from a cohort a year later, including expansion and churn, divided by its starting revenue) tells that story better than logo churn.
Getting the inputs
Billing systems hold revenue and churn; the CRM holds acquisition source; ad platforms hold spend. Pulling them into one sheet monthly is enough to start. Once you have a year or more of customer history, a predictive model can estimate LTV and churn risk per customer rather than one average, so you can act on accounts before they leave.
Hearing why customers leave
Churn numbers say how many; a short cancellation survey and in-product NPS say why. Read the comments monthly with the churn figure next to them.
Questions
- What is a good LTV to CAC ratio?
- A common benchmark is 3 to 1 or better: each customer returns at least three times what it cost to acquire, in gross profit. Well above 5 can mean you are under-investing in growth. Treat it as a rule of thumb, not a law.
- How do I calculate CAC payback?
- Divide customer acquisition cost by monthly gross profit per customer (monthly revenue per account times gross margin). A CAC of $1,500 and $160 of monthly gross profit pays back in about 9.4 months.
Next step
Try the ltv to cac calculator
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