How to Calculate LTV:CAC Correctly

Mistake one: using gross revenue instead of gross-margin-adjusted revenue in the LTV formula. If your hosting, support, and payment processing costs eat 30% of revenue, your real lifetime value is 30% lower than the number most spreadsheets show.

Mistake two: under-counting CAC. Ad spend alone isn't customer acquisition cost — fully-loaded CAC includes sales and marketing salaries, tools, content production, and agency fees, divided by new customers acquired in that period. Teams that only count media spend routinely understate CAC by 40-60%.

Mistake three: blending every channel and cohort into one company-wide ratio. A 4:1 blended ratio can hide a paid-social channel running at 1:1 that's quietly subsidized by a highly efficient organic or referral channel. Segment by acquisition channel and signup cohort before you trust the number.

LTV = (Average Revenue Per Account × Gross Margin %) ÷ Monthly Churn Rate. If ARPA is $200/month, gross margin is 80%, and monthly churn is 2%, LTV = ($200 × 0.8) ÷ 0.02 = $8,000.

CAC = Fully-Loaded Sales & Marketing Spend ÷ New Customers Acquired in the same period. If total S&M spend was $50,000 and you acquired 25 new customers, CAC = $2,000.

LTV:CAC in this example = $8,000 ÷ $2,000 = 4:1 — a healthy ratio by most benchmarks, assuming payback period (CAC ÷ monthly gross-margin revenue per account) stays under 12-18 months.

3:1 is the widely-cited floor for a sustainable SaaS business; below that, growth is likely unprofitable once overhead is accounted for. Above 5:1 sometimes signals under-investment in growth, not efficiency — capital that could compound faster is sitting idle.

The ratio matters less as a single number than as a trend by cohort: is LTV:CAC improving or degrading for customers acquired in the last two quarters versus a year ago? That trend line is what actually predicts whether current spend is sustainable.