Breakdown
How it works
CAC = sales and marketing spend ÷ new customers. LTV = monthly gross profit per customer × average lifetime (1 ÷ monthly churn). The ratio tells you whether growth creates value; payback tells you how much cash growth consumes.
Formula
CAC = S&M spend ÷ new customers
LTV = ARPU × gross margin ÷ monthly churn
Payback = CAC ÷ (ARPU × gross margin)
Worked example
120k spend, 300 customers → CAC 400. ARPU 80 × 70% margin ÷ 3% churn → LTV 1,867. Ratio 4.7, payback 7 months.
Frequently asked questions
Is 3:1 really the benchmark?
A useful rule of thumb for SaaS. Below 1 you lose money on every customer; above 5 you may be under-investing in growth.
Should CAC include salaries?
Fully loaded CAC includes sales and marketing salaries, tools and commissions, not just ad spend. Report both if they differ a lot.
How do I treat annual churn?
Convert: monthly churn ≈ 1 − (1 − annual churn)^(1/12). 30% annual ≈ 2.9% monthly.