The ratio of Customer Lifetime Value to Customer Acquisition Cost is arguably the single most important metric in SaaS finance. It tells you whether your business model works at a fundamental level—whether the revenue you earn from a customer over their lifetime justifies what you spent to acquire them. Get this ratio wrong, and no amount of growth will save the company. Get it right, and you have a clear framework for scaling profitably.

This article breaks down how to calculate both sides of the equation accurately, how to model them together, and how to use the results to drive real business decisions.

Calculating Customer Lifetime Value

LTV represents the total gross profit a company expects to earn from a customer over the entire duration of the relationship. There are several approaches, each with tradeoffs.

The Simple Formula

LTV = ARPA x Gross Margin % / Monthly Churn Rate

If your average revenue per account is $500/month, your gross margin is 80%, and your monthly churn rate is 2%, then:

LTV = $500 x 0.80 / 0.02 = $20,000

This formula assumes a constant churn rate and no expansion revenue, which makes it a useful starting point but an incomplete picture.

The Cohort-Based Approach

A more accurate method uses actual cohort data to project lifetime value. Track how much gross profit each monthly cohort generates over time, then use the observed retention curves to extrapolate future revenue.

This approach captures real-world dynamics that the simple formula misses:

  • Early-life churn spikes: Most SaaS products see higher churn in the first 3-6 months, which stabilizes over time.
  • Expansion revenue: Customers who stay tend to buy more over time, increasing their value.
  • Contraction patterns: Some customers downgrade before they churn, which the simple formula ignores.

Step-by-Step Cohort LTV Calculation

  1. Group customers by the month they were acquired.
  2. For each cohort, track cumulative gross profit per customer month over month.
  3. Plot the cumulative gross profit curves for all cohorts.
  4. Use the most mature cohorts to build a regression model that projects how newer cohorts will behave.
  5. Extrapolate the curve to estimate total lifetime gross profit.

The cohort-based approach is more work, but it produces LTV estimates that stand up to investor scrutiny and reflect your actual business dynamics.

Calculating Customer Acquisition Cost

CAC measures the total cost of acquiring a new customer. The formula seems simple on the surface, but the details matter.

Fully Loaded CAC

CAC = Total Sales and Marketing Spend / Number of New Customers Acquired

The numerator should include everything required to generate and close new business:

  • Marketing program spend (paid ads, events, content)
  • Marketing team salaries and benefits
  • Sales team salaries, commissions, and benefits
  • Sales tools and technology costs
  • Any outsourced lead generation or SDR costs

Blended vs. Segmented CAC

Blended CAC averages across all customer segments, which can mask important differences. Enterprise customers typically cost far more to acquire than self-serve SMB customers. Calculating CAC by segment provides clearer signals:

  • Self-serve CAC: Marketing costs attributed to the self-serve funnel divided by self-serve new customers.
  • Sales-assisted CAC: Sales and marketing costs for the assisted funnel divided by sales-assisted new customers.
  • Enterprise CAC: Full enterprise go-to-market costs divided by enterprise logos closed.

This segmentation directly feeds into segment-level LTV/CAC analysis, which is where the most actionable insights emerge.

Building the LTV/CAC Model

The Ratio Itself

LTV/CAC Ratio = Customer Lifetime Value / Customer Acquisition Cost

Industry benchmarks suggest:

  • Below 1.0: The business is destroying value with every customer acquired. This is unsustainable.
  • 1.0 - 3.0: The model works but may not generate sufficient returns after accounting for other operating costs.
  • 3.0 - 5.0: The healthy range for most SaaS companies. Enough margin to cover operating costs and generate profit.
  • Above 5.0: Either the company is underinvesting in growth, or the CAC calculation is incomplete.

CAC Payback Period

LTV/CAC tells you if the model works. CAC payback period tells you how long it takes:

CAC Payback Period = CAC / (ARPA x Gross Margin %)

If CAC is $15,000 and monthly gross profit per customer is $400, the payback period is 37.5 months. For most SaaS companies, a payback period under 18 months is considered strong, and under 12 months is exceptional.

This metric matters because it directly impacts cash flow. Longer payback periods mean you need more working capital to fund growth, which either requires more fundraising or slower expansion.

A Practical LTV/CAC Modeling Framework

Step 1: Establish Your Data Foundation

Before building the model, ensure you have clean data for:

  • Customer acquisition dates and segments
  • Monthly revenue per customer (including expansions and contractions)
  • Churn dates and reasons
  • Fully allocated sales and marketing costs by channel and segment

Step 2: Build Segment-Level Models

Create separate LTV and CAC calculations for each meaningful customer segment. At minimum, separate SMB from mid-market and enterprise. If you have distinct product lines or go-to-market motions, model those separately too.

Step 3: Incorporate Time-Based Dynamics

Static LTV/CAC snapshots can be misleading. Build your model to track how both metrics trend over time:

  • Is CAC increasing as you saturate your initial target market?
  • Is LTV improving as product maturity drives better retention?
  • Are newer cohorts performing better or worse than older ones?

Step 4: Scenario Analysis

Use the model to test strategic questions:

  • “If we increase sales headcount by 20%, what happens to CAC and payback period?”
  • “If we invest in a customer success program that reduces churn by 1 percentage point, what is the LTV impact?”
  • “What is the maximum CAC we can sustain and still achieve a 3x LTV/CAC ratio?”

Step 5: Connect to Capital Allocation Decisions

The ultimate purpose of LTV/CAC modeling is to guide investment. Channel your spending toward the segments and acquisition channels with the best ratios, and pull back from those where the economics do not support the investment.

Common Modeling Pitfalls

Ignoring the time value of money. A dollar of gross profit received three years from now is worth less than one received today. For more sophisticated models, apply a discount rate to future cash flows when calculating LTV.

Using averages that mask bimodal distributions. If your customer base has a large number of small accounts and a small number of very large accounts, the average will misrepresent both. Model each segment separately.

Not accounting for CAC lag. Marketing spend today generates customers weeks or months later. Aligning spend with the correct acquisition period prevents distortions in your CAC calculation.

Over-extrapolating from limited data. If your oldest cohort is only 18 months old, projecting a five-year LTV requires significant assumptions. Be transparent about the confidence interval of your estimates.

Making LTV/CAC Actionable

The real value of LTV/CAC modeling comes when it informs daily decisions. Share the model outputs with marketing to guide budget allocation, with sales to inform territory and segment prioritization, and with product to quantify the revenue impact of retention improvements.

Review the model quarterly, update it with fresh cohort data, and challenge the assumptions. A well-maintained LTV/CAC model is not just a finance exercise—it is the strategic compass for the entire go-to-market organization.