Get customer lifetime value, the LTV:CAC ratio, and how many months until you recover acquisition cost.
LTV = ARPU × gross margin ÷ monthly churn (churn sets the average customer lifetime). The LTV:CAC ratio is the classic SaaS health check — 3:1 or higher is generally healthy; below 1:1 you lose money on every customer. Payback is how many months of margin it takes to earn back what you spent acquiring the customer; under 12 months is a common target.
| Input | What it should contain |
|---|---|
| ARPU | Recurring revenue per customer per month. Exclude one-time fees — they do not repeat over the lifetime you are about to multiply by. |
| Gross margin | Revenue minus the cost of serving that customer: hosting, third-party APIs, payment fees, support. Not company-wide profit. |
| Monthly churn | The share of customers, or of revenue, lost each month. Average lifetime is one divided by this number. |
| CAC | All sales and marketing spend in a period, divided by the customers it produced — including salaries, not just ad spend. |
Leaving margin out is the most common distortion. A product with 80% gross margin and one with 30% can show identical revenue and wildly different LTV, and only one of them can afford the same acquisition cost.
Below 1:1 each customer costs more than they will ever contribute. Between 1:1 and 3:1 the business works only if overheads are thin. Above 3:1 there is room for the rest of the company — engineering, support, everything that never appears in CAC.
A very high ratio is not automatically good news. Ratios of 5:1 or more often mean acquisition is underfunded: there is profitable demand being left unbought. The ratio answers "can I afford to grow", not "am I growing".
LTV is a projection over years; payback is a fact about the next few months. A 4:1 ratio with a 20-month payback still means every new customer is a hole in the bank balance for most of two years, which caps how fast growth can be funded without raising money. When the two metrics disagree, payback is the one that decides what you can actually do this quarter.
Lifetime is calculated as one divided by churn, so a churn rate near zero implies a customer who never leaves and an LTV approaching infinity. That is arithmetic, not insight. With very low churn — annual enterprise contracts, for example — cap the horizon at three or five years instead, and treat anything beyond that as unforecastable.
Revenue churn is the more honest input here, because customers are not worth the same amount. Losing ten customers on the cheapest plan and losing one enterprise account can be the same revenue event with very different customer counts. If small accounts churn fastest, customer churn will overstate the damage.
Related: MRR / ARR Calculator