LTV:CAC is the ratio of customer lifetime value to customer acquisition cost. It expresses, in a single number, whether your unit economics work. A ratio of 3 or higher is the textbook target, but the textbook target is misleading without context — a 5:1 ratio at 30-month payback is worse than a 3:1 ratio at 12-month payback if you are cash-constrained. Use it alongside CAC payback, not instead of it.
The formula
LTV = (ARR per customer × gross margin) / annual logo churn rate
LTV:CAC = LTV / CACA $20,000 ARR, 75 percent gross margin, 10 percent annual churn:
LTV = ($20,000 × 0.75) / 0.10 = $150,000
LTV:CAC = $150,000 / $10,000 = 15:1The math is sensitive. A churn rate that is wrong by 2 points changes LTV by 20 to 30 percent at typical churn levels. Most companies overstate LTV by underestimating churn or using gross retention when net retention is appropriate (or vice versa).
How to calculate it correctly
- Use logo churn for LTV math, NRR separately. LTV with NRR baked in produces deceptively large numbers because expansion compounds. Report both.
- Use gross margin, not revenue. Same rule as CAC payback — express LTV in profit dollars.
- Cohort-based churn, not blended. Older cohorts skew younger churn down; younger cohorts skew older churn up.
- Match CAC time periods. A 5-year LTV against a 1-quarter CAC is asymmetric and misleading.
- Segment. SMB and enterprise have different ratios — sometimes by 5x.
Benchmarks
For B2B SaaS by stage:
| Stage | Healthy LTV:CAC |
|---|---|
| Series A | 2:1 to 3:1 |
| Series B | 3:1 to 4:1 |
| Series C+ | 4:1 or higher |
| Public SaaS | 4:1 to 8:1 |
A ratio above 8:1 often means you are underinvesting in growth. Below 2:1 means you are buying customers at a loss.
Common pitfalls
- Using revenue LTV. Inflates the ratio by the inverse of your margin. Always use gross-profit LTV.
- Confusing logo churn with revenue churn. They produce different LTVs. Pick one and document.
- Ignoring time-to-value. A 4:1 ratio with 36-month payback is bad cash flow. Always pair with payback.
- Self-serve and enterprise blended. A 6:1 self-serve and 2:1 enterprise blended at 4:1 hides the bleeding enterprise motion.
Related
- CAC payback — the time-axis counterpart
- NRR vs GRR — retention drives LTV