- What is customer lifetime value (LTV)?
- LTV is the total revenue a business expects to earn from a single customer over the entire duration of the relationship. It is used to determine how much you can afford to spend acquiring a customer (CAC) while remaining profitable.
- What is the simple LTV formula?
- For subscription businesses: LTV = Monthly ARPU / Monthly Churn Rate. For example, with $79 ARPU and 3% monthly churn: LTV = $79 / 0.03 = approximately $2,633. This assumes constant ARPU and a constant churn probability each month.
- What is a good LTV:CAC ratio?
- The benchmark for a healthy SaaS business is 3:1 or higher (LTV at least three times CAC). Below 3:1 usually means the business is spending too much to acquire customers relative to what they generate. Above 5:1 may indicate underinvestment in growth.
- What is the payback period and why does it matter?
- Payback period = CAC / Monthly ARPU. It shows how many months of revenue are needed to recoup the cost of acquiring a customer. Shorter payback periods (under 12 months) mean faster cash recovery and less dependence on outside capital for growth.
