SaaS Metrics
The LTV/CAC ratio is the most important metric for knowing whether your business is viable. Learn to calculate it well and interpret it.
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Create a free accountThere is a single question that determines whether your business is viable long term: how much do you earn from each customer versus how much it costs to acquire them? That is the LTV/CAC ratio, and if you do not understand it, you are flying blind.
In this guide we explain what LTV and CAC are, how to calculate them with real numbers, what ratio is healthy depending on your stage, and the most common mistakes that lead founders to fool themselves with pretty but false numbers.
LTV, or Customer Lifetime Value, is the total profit you expect to receive from a customer over their entire relationship with your company. It is the average revenue a customer generates before they leave, multiplied by how long they stay.
ARPU = Average Revenue Per User (average revenue per customer per month)
If your customers pay $50/month on average and stay for 20 months, your LTV is $50 × 20 = $1,000. That is the most you can spend to acquire that customer without losing money (although in reality you should spend far less — more on that below).
Customer lifetime is derived from your monthly churn (the percentage of customers who cancel each month). The formula is:
Customer lifetime = 1 / Monthly churn
If your churn is 5% per month, your average lifetime is 1 / 0.05 = 20 months. If it is 2%, it is 50 months. That is why reducing churn is one of the most powerful levers in the business: every point you shave off multiplies your LTV.
CAC is how much it costs you to acquire a new customer. You calculate it by dividing your total investment in sales and marketing by the number of new customers you landed in that same period.
If you spent $10,000 on ads, content and sales salaries last month, and landed 50 new customers, your CAC is $10,000 ÷ 50 = $200 per customer.
CAC should include EVERYTHING that goes directly into acquiring customers:
Do not include: product development, post-sale customer support, or general office overhead. Those belong to other line items.
Divide LTV by CAC and you get the metric that matters:
You lose money on every customer. Your business is not viable. Change something NOW.
Barely profitable. Look at how to lower CAC or raise LTV (retention, price).
You have a healthy business. You can invest more in acquisition with confidence.
The standard SaaS benchmark is LTV/CAC ≥ 3. Below that, your business depends on subsidies (your own or investors'). Above 3, you have real room to scale.
LTV/CAC tells you whether your business is profitable, but CAC Payback tells you when you recover the money you invested. You calculate it as:
A healthy CAC Payback is less than 12 months. If it takes you 24 months to recover the cost of acquiring a customer, your cash flow suffers — even if the final LTV/CAC is good, you need a lot of capital to get there.
LTV should be calculated on gross margin, not on revenue. If you charge $100/month but have $30 of direct costs per customer (servers, support, licenses), your real LTV uses the $70 of margin. Many founders inflate LTV by using gross revenue.
If your product is new, you do not have real churn data yet. Do not assume 1% per month because "other SaaS companies have it." Use your real data, however bad, or mark it as an estimate with a range (optimistic/pessimistic).
If you do not include your sales/marketing team salaries in CAC, your number is understated. Real CAC includes people, not just ads.
LTV takes time to validate. If you calculate LTV from customers you landed 2 months ago, you have no real idea how long they will last. Be conservative and update it quarterly.
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LTV/CAC is not a metric for investors: it is your compass as a founder. Every decision you make (raising prices, hiring salespeople, launching a campaign, changing onboarding) should pass through the filter of "does this improve my LTV/CAC?"
Measuring it by hand once a month is a starting point. But the ideal is to keep it up to date, integrated with your real transactions. That is exactly what the CFO Advisory module of Hayes Strategic does: LTV, CAC, Runway and all your critical metrics calculated in real time from your operations.