What is customer lifetime value (LTV) and LTV:CAC?

Written by Madalena Rugeroni, founder of Mazo · Updated 15 September 2026

Customer lifetime value (LTV) is the total gross profit a SaaS company expects to earn from an average customer before that customer churns. It is usually estimated as average revenue per account, multiplied by gross margin, divided by the churn rate. The LTV:CAC ratio compares that value with what it cost to acquire the customer.

LTV and LTV:CAC formulas

LTV = (ARPA × gross margin %) ÷ customer churn rate

LTV:CAC = LTV ÷ CAC

ARPA is average monthly revenue per account; use a monthly churn rate with monthly ARPA. Dividing by churn is a shortcut for customer lifetime: at 2% monthly churn, the average customer stays 1 ÷ 0.02 = 50 months.

Worked example — and why it's fragile

ARPA €200 a month, gross margin 80%, monthly customer churn 2%.
LTV = (€200 × 0.8) ÷ 0.02 = €8,000.
CAC €2,000, so LTV:CAC = 4:1.

Now suppose that 2% came from four months of data, and the true churn rate is 1% or 3%. LTV becomes €16,000 (8:1) or €5,333 (2.7:1). One decimal point in a churn rate you can't yet measure swings the ratio from "spend aggressively" to "stop".

The 3x LTV:CAC guideline

David Skok's SaaS Metrics 2.0 notes that the best SaaS businesses have an LTV to CAC ratio higher than 3, sometimes as high as 7 or 8.¹ Two details usually get lost: his 3x guideline assumes the simpler LTV formula without a gross margin adjustment, and a gross margin of 80% or higher.² He pairs it with a second test — how quickly CAC is recovered — which is the one early-stage founders can actually measure.

Why it matters from €0 to €1M ARR

Pre-revenue to 10 customers: ignore LTV. Track interviews, willingness-to-pay signals and whether your first customers stay.
Around €10k MRR: you have a churn rate, but not a reliable one. Use CAC payback for spending decisions.
€50k+ MRR with 12+ months of cohorts: LTV:CAC starts to become useful, especially by channel and segment.

Mazo's rule of thumb: LTV:CAC is close to meaningless before about €1M ARR and 12 months of cohort data, because it divides by a churn rate you can't yet estimate. Don't defend spend with an LTV:CAC of 8 built on four months of churn — use CAC payback, which needs no churn assumption.

Common LTV mistakes

Using revenue instead of gross margin — then comparing against a benchmark that assumed something else.
Extrapolating early churn. Your first customers are often your most loyal; later cohorts may churn faster.
Ignoring expansion. Customers who upgrade are worth more than the simple formula says; customers who downgrade, less.
One blended LTV. A €50 and a €2,000 customer don't share a lifetime.

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FAQ

What is a good LTV:CAC ratio?

The widely used guideline from David Skok is above 3:1. It assumes a simple LTV formula and a gross margin of 80% or more, and it is only reliable once you have enough cohort data to trust your churn rate.

How do you calculate LTV for a SaaS company?

Multiply average monthly revenue per account by gross margin, then divide by the monthly customer churn rate. At €200 a month, 80% margin and 2% churn, LTV is €8,000.

Why is LTV unreliable for early-stage startups?

LTV divides by the churn rate, and a few months of data from a small customer base cannot estimate churn precisely. Small changes in churn produce very large changes in LTV.

Who wrote this

Madalena Rugeroni built Mazo. She's an ex-Googler, a startup advisor and investor, and runs a portfolio of internet companies. Before that, as Head of Growth at Amplemarket, she scaled a B2B SaaS to $10M ARR. LinkedIn

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Sources.

Best SaaS businesses have LTV:CAC above 3, sometimes 7 or 8: David Skok, "SaaS Metrics 2.0 – A Guide to Measuring and Improving what Matters", forEntrepreneurs
LTV formulas and the assumptions behind the 3x guideline: David Skok, "SaaS Metrics 2.0 – Detailed Definitions", forEntrepreneurs