How to Use the LTV:CAC
LTV:CAC is the ratio investors and operators check first to judge whether a business can scale profitably — if you spend more acquiring customers than they're worth over their lifetime, growth just accelerates losses. This calculator computes both sides of the equation and the payback period that tells you how long that spend is tied up.
Step-by-Step Guide
- 1
Enter your average revenue per user (ARPU) per month.
- 2
Enter your gross margin % — LTV should reflect margin, not raw revenue.
- 3
Enter your monthly churn rate to estimate average customer lifespan.
- 4
Enter total sales & marketing spend for a period and the new customers it generated.
- 5
Review CAC, LTV, the LTV:CAC ratio, and CAC payback period.
LTV:CAC Formula
CAC = Sales & Marketing Spend ÷ New Customers Avg. Customer Lifespan = 1 ÷ Monthly Churn Rate LTV = (ARPU × Gross Margin %) × Avg. Customer Lifespan LTV:CAC Ratio = LTV ÷ CAC CAC Payback (months) = CAC ÷ (ARPU × Gross Margin %)
Worked Example
ARPU: $60/mo. Gross margin: 80%. Churn: 4%/mo. S&M spend: $15,000 for 50 new customers. CAC = $15,000 ÷ 50 = $300 Avg. Lifespan = 1 ÷ 4% = 25 months Gross Margin per User = $60 × 80% = $48/mo LTV = $48 × 25 = $1,200 LTV:CAC Ratio = $1,200 ÷ $300 = 4.0x CAC Payback = $300 ÷ $48 = 6.25 months
Understanding your result
Calculator results depend entirely on the information entered. For the most useful estimate, use current and accurate figures and include all costs that apply to your specific situation.
Frequently Asked Questions
What is a good LTV:CAC ratio?
A ratio of 3:1 or higher is the widely cited healthy benchmark — meaning each customer is worth roughly 3x what it costs to acquire them. Below 1:1 means you're losing money on every customer; above 5:1 can sometimes suggest under-investing in growth.
Why use gross margin instead of raw revenue for LTV?
LTV should represent the actual profit a customer contributes, not just top-line revenue — using gross margin ensures the cost of serving that customer (hosting, support, etc.) is already netted out.
What is CAC payback period and why does it matter?
CAC payback is how many months it takes to earn back what you spent acquiring a customer, based on their margin contribution. Shorter payback periods (under 12 months for SaaS) mean less cash is tied up and less risk if the customer churns early.
What should I include in CAC?
All fully-loaded costs of acquiring customers: ad spend, sales team salaries and commissions, marketing tooling, and content/creative production — not just ad spend alone, or CAC will be understated.
How do I improve my LTV:CAC ratio?
Improve LTV by reducing churn and increasing ARPU (upsells, price increases); improve CAC by increasing conversion rates, improving targeting, and leaning into your highest-ROI acquisition channels while cutting underperforming ones.