What the ratio tells you
LTV:CAC compresses three things — pricing, retention, and acquisition efficiency — into one number. A 3.0× ratio means each customer returns three dollars of gross profit for every dollar of acquisition cost over their lifetime. Below 1.0× you are destroying value on the marginal sale; below 3.0× you typically can't fund growth from operations.
How to read each input
ARPU — use new-logo ARPU, not blended. Blended ARPU rises as expansion lifts existing accounts, which makes new-cohort economics look healthier than they are.
Gross margin — recurring gross margin, not blended. Strip implementation revenue and one-time services from both numerator and denominator.
Churn — logo churn, not revenue churn. Revenue churn nets out expansion, which conflates acquisition health with retention motion.
CAC — fully loaded: paid acquisition + sales comp + sales tooling + the SDR + marketing salaries × allocation %. Headline CAC that excludes salaries flatters the ratio by 30–60%.
What a "good" ratio actually is
- Under 1.5×: stop. Either pricing is wrong, churn is too high, or CAC is undercosted.
- 1.5× – 3.0×: growing but under-margined. Test pricing, fix top-of-funnel waste, lengthen contracts.
- 3.0× – 5.0×: the healthy zone. Scale.
- Above 5.0×: usually a signal you're under-investing in acquisition. Push spend until the ratio compresses to 4×.
The payback companion metric
LTV:CAC tells you whether the deal pays back; CAC payback tells you when. A 4.0× ratio with 30-month payback can still kill a venture-funded company because the cash returns too slowly. Healthy SaaS payback is under 18 months at series B+; under 12 months at scale. D2C payback should be measured against second-order profitability — usually 60–90 days first order, full payback by month 6 if subscription, by month 12 if non-subscription.