The LTV:CAC ratio compares the gross profit you expect from a customer over their lifetime (LTV) with what it cost to acquire them (CAC). A ratio of 3 means every dollar of acquisition spend returns three dollars of gross profit; David Skok notes that the best SaaS businesses run above 3.
What is the LTV:CAC ratio?
a16z defines lifetime value as the present value of the future net profit from a customer over the relationship, not the revenue they pay, and computes it on contribution margin.2Source 2 · Andreessen Horowitz (a16z), 201516 Startup Metricsa16z.com Most SaaS teams use subscription gross margin as a practical proxy, which is what the formula below does; the stricter the margin you use, the more conservative the ratio. Dividing it by customer acquisition cost shows whether acquisition is creating or destroying value. Below 1, every new customer loses money; far above 3, you may be under-investing in growth.
LTV:CAC=[ARPA × Gross margin % ÷ Monthly revenue churn %] ÷ CAC
- ARPA
- Average monthly recurring revenue per account
- Gross margin %
- Subscription gross margin
- Monthly revenue churn %
- Share of MRR lost to churn and contraction each month
- CAC
- Fully loaded acquisition cost per new customer
Stripe’s billing analytics use the simpler revenue version, ARPU ÷ subscriber churn rate (for example $500 ÷ 9% ≈ $5,555).3Source 3 · Stripe DocsBilling analytics: metric definitions (subscriber lifetime value)docs.stripe.com Multiplying by gross margin converts it into the profit-based LTV that the ratio needs.
Worked example
| Input | Value |
|---|---|
| ARPA | $500 / month |
| Gross margin | 80% |
| Monthly revenue churn | 2% |
| LTV = 500 × 0.80 ÷ 0.02 | $20,000 |
| CAC | $5,000 |
| LTV:CAC | 4.0 |
What is a good LTV:CAC ratio?
Skok writes that the best SaaS businesses have an LTV:CAC ratio above 3, with some reaching 7 or 8, and pairs it with a second test: recovering CAC within 12 months.1Source 1 · David Skok, For EntrepreneursSaaS Metrics 2.0 – A Guide to Measuring and Improving What Mattersforentrepreneurs.com That second test matters because a high ratio built on a 40-month CAC payback still demands a lot of cash up front.
Common mistakes
- Revenue instead of profit in LTV, the error a16z calls out explicitly; it warns that even gross-margin LTV overstates what you can afford to spend.2Source 2 · Andreessen Horowitz (a16z), 201516 Startup Metricsa16z.com
- Extrapolating churn from a few months of data. With limited history, a16z suggests measuring 12- and 24-month LTV rather than predicting a full lifetime.2Source 2 · Andreessen Horowitz (a16z), 201516 Startup Metricsa16z.com
- Blended CAC with paid-channel LTV, or the reverse. Match the population on both sides.
- Ignoring expansion. With strong expansion, the simple formula understates LTV; model it with cohort analysis instead.
How to track LTV:CAC in Kimo
Kimo’s SaaS metrics template defines ARPA, churn, gross margin and CAC as reusable measures, so LTV:CAC can be sliced by channel, plan or signup cohort in Explore without rewriting SQL. Spend comes from your ad platforms and finance system, revenue from Stripe.
Frequently asked questions
Is a very high LTV:CAC always good?
What churn rate should I use in LTV?
Should LTV be discounted?
Sources
3 references- SaaS Metrics 2.0 – A Guide to Measuring and Improving What Matters (opens in a new tab)David Skok, For Entrepreneursforentrepreneurs.com
Best SaaS businesses have LTV:CAC above 3; recover CAC within 12 months.
- 16 Startup Metrics (opens in a new tab)Andreessen Horowitz (a16z)2015a16z.com
LTV as present value of future net profit; revenue-based LTV as a common mistake; 12- and 24-month LTV.
- Billing analytics: metric definitions (subscriber lifetime value) (opens in a new tab)Stripe Docsdocs.stripe.com
LTV = ARPU ÷ subscriber churn rate, with a worked example.
External sources were accessed at the time of writing. Kimo product details, customers and figures in examples are illustrative unless a source is cited.
