LTV:CAC Ratio and CAC Payback: How to Calculate Both

The LTV:CAC ratio is customer lifetime value divided by customer acquisition cost. A widely used guideline for subscription businesses, from investor David Skok, is a ratio above 3 and a CAC payback under 12 months. A business with a 4:1 ratio and a 10-month payback meets both on paper, but churn and the cost of money can shrink both numbers, as the example below shows.

The Formulas

Where the 3:1 and 12-Month Guidelines Come From

In his "SaaS Metrics 2.0" guide, Skok writes that "the best SaaS businesses have a LTV to CAC ratio that is higher than 3," and that many of the best recover their CAC in 5 to 7 months, with payback beyond 12 months a sign of weak profitability. He presents these as guidelines, noting that healthy businesses often don't meet them early on but can see a path to get there. They are rules of thumb from one experienced investor, not a standard every investor applies.

Why Payback Speed Matters More When Money Costs More

Money spent acquiring a customer comes back a month at a time, so the business has to fund that gap. The cost of funding it moved sharply in recent years. The Federal Reserve's target range for the federal funds rate was 0 to 0.25% before March 2022, reached 5.25 to 5.50% in July 2023, and was set at 3.75 to 4.00% on September 17, 2026. A higher rate makes a dollar of margin arriving in month 30 worth less today, which a discounted LTV captures directly.

The same business reads as a comfortable 4.0 or a borderline 3.0 depending on whether future margin is discounted. Showing the simple ratio, the discounted ratio and the churn-adjusted payback together is more honest than quoting only the best of the three.

Measuring Churn and CAC From Your Own Records

Monthly churn is customers who cancelled during the month divided by customers at the start of the month. With 400 customers on the 1st and 10 cancellations, churn is 10 ÷ 400 = 2.5%. Leave out customers who signed up during the month, and average several months, since one month can swing a lot.

CAC uses the same window for costs and customers. If the quarter's sales and marketing spend was $24,000 and 30 new customers signed up, CAC is $800. Because spending often converts with a delay, some teams compare one month's spend with the next month's new customers. Pick one method and keep it consistent so the trend means something.

Common Mistakes

• Using revenue instead of margin in LTV. At 80% margin that overstates LTV by 25%.
• Counting only ad spend in CAC. Sales salaries, tools and content cost money too.
• Blending channels. A cheap organic channel can hide an unprofitable paid one. Calculate CAC per channel as well as overall.
• Forgetting refunds and failed payments. Customers lost to a declined card are churn too, and refunds reduce the revenue in LTV.
• Trusting early churn. A few months of data from a small group of customers can make lifetime look far longer than it will be. Many teams cap lifetime at 3 to 5 years for this reason.

What This Doesn't Cover

This guide doesn't model expansion revenue (customers who upgrade over time), company valuation, or funding terms. If these numbers are going into financial statements or a funding round, have an accountant or financial adviser review the method.

Sources

• David Skok, SaaS Metrics 2.0 (LTV:CAC and CAC payback guidelines)
• Federal Reserve, Open Market Operations (federal funds target range history)