Lifetime value compared with customer acquisition cost is a classic way to judge whether growth is creating value. It is also one of the easiest metrics to inflate, because the lifetime assumption can be stretched until the ratio looks good. Built carefully, it is still a useful check.
The formulas
- LTV = average ARR per customer × subscription gross margin ÷ annual revenue churn rate
- CAC = fully loaded sales and marketing spend ÷ new customers acquired
- LTV:CAC = LTV ÷ CAC
Using gross revenue churn in the denominator gives a conservative lifetime; using net revenue churn assumes expansion continues for the customer's whole life, which young companies cannot yet prove.
A worked example
| Input | Value |
|---|---|
| Average ARR per new customer | $24,000 |
| Subscription gross margin | 78% |
| Annual gross revenue churn | 15% |
| Fully loaded CAC per new customer | $28,000 |
- Annual gross profit per customer: $24,000 × 78% = $18,720
- Lifetime (1 ÷ 15%): about 6.7 years
- LTV: $18,720 × 6.7 = about $124,800
- LTV:CAC: $124,800 ÷ $28,000 = about 4.5
- CAC payback: $28,000 ÷ ($18,720 ÷ 12) = about 18 months
The ratio looks strong; the payback period shows the cash it takes to get there.
Ways LTV gets inflated
- Revenue instead of gross profit.
- Net churn (including expansion) when expansion history is short.
- A lifetime longer than the company has existed.
- CAC that excludes salaries or uses only paid media.
- Blending segments with very different retention.
Capping the lifetime
A common discipline is to cap the lifetime used in LTV (for example at five years) regardless of what the churn rate implies. It keeps the metric grounded until the company has the history to support longer lives.
When to use payback instead
Fully loading CAC
CAC is only as honest as its numerator. A fully loaded figure for a period includes:
- Sales and marketing salaries, commissions, bonuses, employer taxes and benefits
- Paid media, events, content and agency fees
- Sales and marketing software
- A fair share of overhead, if you allocate it consistently
Divide by new customers (or new ARR) from the same period, or lag spend by your typical sales cycle if deals take a quarter or more to close.
By segment
| Segment | LTV:CAC | CAC payback |
|---|---|---|
| Self-serve | often higher ratio, short payback | months |
| Mid-market | moderate | a year or more |
| Enterprise | can be strong, with long payback | often the longest |
Report each segment separately; a blended ratio can look healthy while one segment loses money on every customer.
For early-stage companies, CAC payback and burn multiple are more defensible because they rely less on long-run assumptions. We report LTV:CAC by segment where retention history supports it, always next to payback, with the assumptions shown on the page.
Sources
Questions founders ask
What LTV to CAC ratio is good?
A ratio around 3 to 1 is a commonly cited benchmark, but it depends heavily on the lifetime assumption. Present it alongside CAC payback, which needs fewer assumptions.
Should LTV use revenue or gross profit?
Gross profit. Revenue-based LTV overstates the value of a customer by ignoring the cost to serve them.
