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If your dashboard shows an LTV:CAC ratio of 4:1 or higher, there's a good chance it's wrong. The most common mistake is using simple revenue LTV instead of gross-profit-adjusted LTV. At 60% gross margin, this overstates your ratio by 67%. This guide explains the correct formula and provides a free calculator that does it right.
The Correct LTV:CAC Formula
Most people calculate LTV as: ARPU ÷ Monthly Churn Rate
The correct formula is: Gross Profit LTV = (ARPU × Gross Margin %) ÷ Monthly Churn Rate
Then: LTV:CAC Ratio = Gross Profit LTV ÷ CAC
The difference is the gross margin multiplier. If your gross margin is 70%, only 70 cents of every revenue dollar is available to recover acquisition costs. Simple LTV pretends it's a full dollar.
Example: 4.2x vs 2.5x
A SaaS company with:
- ARPU: $99/month
- Gross margin: 72%
- Monthly churn: 3.2%
- CAC: $340
Simple LTV = $99 ÷ 0.032 = $3,094 → Ratio = 9.1x Gross Profit LTV = ($99 × 0.72) ÷ 0.032 = $2,228 → Ratio = 6.6x
The 9.1x number is a fantasy. The 6.6x number is real. Both are healthy, but the gap grows as gross margin declines.
Calculator vs Excel vs Paid Analytics
| Dimension | This Calculator | Excel | ChartMogul / ProfitWell |
|---|---|---|---|
| Setup Time | 30 seconds | 30–60 minutes | 1–2 weeks integration |
| Gross Margin Adjustment | Yes (built-in) | Manual formula | Yes (auto-synced) |
| Industry Benchmarks | 5 industries | None | Limited |
| Data Freshness | Manual input | Manual | Real-time |
| Cost | Free | Free (if you have Excel) | $100–$500/mo |
| Best For | Quick checks, pitches, planning | Custom models | Ongoing tracking |
How to Use the Calculator
- Enter your monthly ARPU
- Enter your gross margin percentage (this is the critical step)
- Enter your monthly churn rate
- Enter your fully-loaded CAC (include sales salaries, not just ad spend)
- Read your gross-profit LTV, LTV:CAC ratio, and CAC payback period
The LTV:CAC ratio calculator runs entirely in your browser. No signup, no data sent to a server.
What's a Good LTV:CAC Ratio?
| Industry | Target Ratio | Notes |
|---|---|---|
| SaaS | 3:1+ | Below 3:1 warrants scrutiny |
| E-commerce | 2.5–3.5:1 | Lower margins, higher churn |
| Subscription Box | 2:1+ | High churn, low ACV |
| Mobile Apps | 2:1+ | Very high churn |
| Agencies | 3:1+ | High-touch, high ACV |
Above 5:1 isn't always good — it may mean you're under-investing in growth. If you can acquire more customers at the same CAC, you should spend more until the ratio approaches 3:1.
The CAC Definition Problem
Most companies understate CAC by excluding sales team salaries. Real CAC includes:
- Ad spend and marketing tools
- Sales team salaries and commissions
- Onboarding and implementation costs
- Marketing overhead allocation
A company reporting $180 CAC (ad spend only) might have actual CAC of $520 when fully loaded. That turns a "4:1 healthy" ratio into 1.4:1 — losing money on every customer.
Limitations to Know
- Uses simple monthly churn (1/churn). Real churn curves decline, so actual LTV may be 20–40% higher
- Uses current ARPU. Doesn't account for expansion revenue or upsells
- Manual input, not real-time. For ongoing tracking, use ChartMogul or ProfitWell
- Best for quick checks and planning, not investor-grade precision
Related Tools
- CAC calculator — break down acquisition costs by channel and compute payback
- Churn rate calculator — annualize churn and see the compounding effect
- SaaS LTV:CAC benchmarks — industry data from 342 companies
FAQ
Why not just use simple LTV? Because it ignores cost of revenue. At 60% gross margin, simple LTV overstates value by 67%. All reputable frameworks (David Skok, OpenView, ProfitWell) use gross margin-adjusted LTV.
What if I don't know my gross margin? Calculate it as (Revenue − Cost of Revenue) ÷ Revenue. Cost of revenue includes hosting, support, infrastructure, and any direct service delivery costs. For most SaaS, this is 60–85%.
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