--- title: "LTV in SaaS: formula, worked examples and the LTV:CAC ratio" description: "Two ways to calculate customer lifetime value, worked through at 1%, 2% and 5% monthly churn, plus the LTV:CAC ratio and where the formula misleads." canonical: "https://saascron.com/saas-ltv/" language: "en-US" author: "Ricardo Machado" author_url: "https://saascron.com/author/ricardo-machado/" published: "2026-10-17T07:00:00-04:00" updated: "2026-10-17T07:00:00-04:00" category: "Metrics & Pricing" tags: ["Unit economics", "Churn", "Cac", "Ltv"] --- # LTV in SaaS: formula, worked examples and the LTV:CAC ratio > Two ways to calculate customer lifetime value, worked through at 1%, 2% and 5% monthly churn, plus the LTV:CAC ratio and where the formula misleads. An investor, a board member or your finance lead asks for your LTV, and the number you produced last quarter looks too good to defend. You need a formula you can explain and numbers you can redo in front of them. Customer lifetime value (LTV) is the gross profit you expect from an average customer before they leave. The simplest honest version is average monthly revenue per account, times gross margin, divided by monthly churn. LTV matters because it caps what you can afford to spend to win a customer. This guide shows two formulas, works them through at three churn rates, adds the LTV:CAC ratio and then shows the four ways the number misleads. For how recurring revenue, churn and acquisition cost fit together month by month, see [the SaaS business model](https://saascron.com/saas-business-model/). For the basics of SaaS, [What is SaaS?](https://saascron.com/what-is-saas/). ## LTV in plain terms Think of a gym. A member pays every month until one day they stop coming. If you know what a member pays, how much of it the gym keeps after costs, and how many months a member stays on average, you know what a new member is worth. That is the most the gym should spend on the poster that brought them in. Three inputs, each defined once: - **ARPA (average revenue per account):** monthly recurring revenue divided by the number of paying customers. Use ARPA rather than average revenue per user when you sell to companies, because one account may hold many users. - **Gross margin:** revenue minus the cost of delivering the service (hosting, support, third-party fees), as a percentage of revenue. - **Churn:** here, monthly logo churn, the share of customers who leave in a month. ## Two formulas The average customer lifetime, in months, is one divided by monthly churn. At 2% monthly churn, the average customer stays 1 / 0.02 = 50 months. That follows from assuming the same share of customers leaves every month. 1. **Revenue LTV** = ARPA / monthly churn. It counts every dollar the customer pays. 2. **Gross-margin LTV** = ARPA x gross margin / monthly churn. It counts only the dollars you keep after the cost of serving them. Use the second one. Acquisition spend is repaid out of gross profit, not revenue, so comparing revenue LTV with acquisition cost overstates the result by the cost of delivery. ## Worked example at three churn rates **Example:** a SaaS product with ARPA of $100 a month, an 80% gross margin and a customer acquisition cost (CAC) of $1,200. CAC is everything spent on sales and marketing in a period divided by the new customers won in it. Only the churn rate changes between columns. | Input or result | 1% monthly churn | 2% monthly churn | 5% monthly churn | |---|---|---|---| | Average lifetime | 1 / 0.01 = 100 months | 1 / 0.02 = 50 months | 1 / 0.05 = 20 months | | Revenue LTV | $100 / 0.01 = $10,000 | $100 / 0.02 = $5,000 | $100 / 0.05 = $2,000 | | Gross-margin LTV | $80 / 0.01 = $8,000 | $80 / 0.02 = $4,000 | $80 / 0.05 = $1,600 | | LTV:CAC | $8,000 / $1,200 = 6.7 | $4,000 / $1,200 = 3.3 | $1,600 / $1,200 = 1.3 | | CAC payback | $1,200 / $80 = 15 months | 15 months | 15 months | The gross profit per month is $100 x 80% = $80, which is why the margin row divides $80. Read the table from left to right. Moving churn from 1% to 5% cuts LTV by 80%, from $8,000 to $1,600. CAC payback does not move at all: it is 15 months in every column, because it depends only on CAC and monthly gross profit. Payback tells you how long the money is at risk. LTV tells you whether it comes back at all. At 5% churn the average customer stays 20 months, only five months longer than it takes to repay their acquisition cost. ## The LTV:CAC ratio LTV:CAC divides gross-margin LTV by CAC. A ratio of 1 means a customer repays their acquisition cost and nothing more. Below 1, every new customer loses money over their lifetime. Well above 1, you may be spending too little on growth. If someone quotes a target ratio, such as 3, treat it as a convention, not a law. The ratio says nothing about how long the money takes to come back, which is why the payback row sits next to it. In the example, 2% churn gives a ratio of 3.3 with a 15-month payback. The same ratio with a 40-month payback would need far more cash in the bank. ## Where the formula misleads **Blended churn across different customers.** Suppose 80 customers are small businesses with 5% monthly churn and 20 are larger companies with 1% churn, all at the same $80 monthly gross profit. - Blended churn: (80 x 5% + 20 x 1%) / 100 = (4 + 0.2) / 100 = 4.2% a month. - LTV from blended churn: $80 / 0.042 = $1,905. - LTV by segment: small businesses $80 / 0.05 = $1,600; larger companies $80 / 0.01 = $8,000. - Weighted average of the segment LTVs: 0.8 x $1,600 + 0.2 x $8,000 = $1,280 + $1,600 = $2,880. The blended number understates the average by about a third, and it hides that one segment is worth five times the other. Calculate LTV per segment and spend on acquisition per segment. **Very low churn.** At 0.5% monthly churn the formula gives a 200-month lifetime, almost 17 years. Few young companies have data that can support that claim. Cap the lifetime at a period you can defend, such as 60 months, and say so. **Expansion revenue.** Customers who add seats or upgrade raise ARPA over time, which the simple formula ignores. If you include expansion, use your measured net revenue retention, and say which version you report. **Early churn.** Many products lose more customers in the first months than later. An average monthly rate spreads that early loss evenly and makes the first year look better than it is. ## Common mistakes 1. **Reporting revenue LTV against CAC.** It overstates the ratio by the cost of delivery, 25% in the example ($10,000 against $8,000 at 1% churn). Why it happens: revenue is the number on the dashboard. Instead: multiply by gross margin first. 2. **Using annual churn as if it were monthly.** 10% annual churn is not 10% monthly; it is roughly 0.9% a month. Why it happens: reports mix periods. Instead: convert to monthly before dividing, and label the period. 3. **One blended LTV for different segments.** The example shows an understatement of about a third and a hidden five-fold gap. Why it happens: one number is easier to present. Instead: show LTV per segment next to CAC per segment. 4. **CAC that leaves out salaries.** Counting only ad spend makes CAC look small and the ratio look large. Why it happens: salaries sit in a different budget line. Instead: include the sales and marketing team's pay and tools in CAC. For how price structure affects ARPA in the first place, see [SaaS pricing models](https://saascron.com/saas-pricing-models/). ## In three sentences Gross-margin LTV is ARPA times gross margin divided by monthly churn, and it is the version to compare with customer acquisition cost. With $100 ARPA, 80% margin and $1,200 CAC, LTV falls from $8,000 at 1% monthly churn to $1,600 at 5%, while the 15-month payback stays the same. Calculate it per customer segment, cap very long lifetimes and label every churn rate with its period, or the number will mislead the people you show it to. --- Canonical: