Churn, CAC and LTV: getting the inputs right

LTV:CAC is the ratio founders quote most and check least. A strong ratio built on incomplete inputs can justify spending that the business can't actually support.

Churn

There are two kinds, and both matter:

Customer (logo) churn = customers lost in the period ÷ customers at the start of the period
Gross revenue churn = MRR lost to cancellations and downgrades ÷ MRR at the start of the period

A related measure, net revenue retention (NRR), adds expansion back in:

NRR = (starting MRR + expansion − contraction − churned MRR) ÷ starting MRR

NRR above 100% means existing customers are growing faster than you're losing revenue from them.

CAC (customer acquisition cost)

CAC = total sales and marketing costs in the period ÷ new customers acquired in the period

"Total" is where most calculations fall short. Fully loaded CAC includes:

advertising and paid acquisition
salaries and contractor costs for sales and marketing, including a founder's time if it's significant
sales and marketing software, events, and agencies

Many companies also track paid CAC (paid channels only) separately from blended CAC (all channels, including organic). Both are useful, as long as you know which one you're looking at.

LTV (customer lifetime value)

A common simple formula:

LTV = ARPA × gross margin % ÷ monthly customer churn rate

where ARPA is average revenue per account per month.

Example: ARPA of $100, gross margin of 80%, and monthly churn of 3% gives LTV = $100 × 0.80 ÷ 0.03 ≈ $2,667. With a CAC of $800, LTV:CAC is about 3.3. A ratio around 3 is a widely quoted rule of thumb, though what's healthy depends on your growth stage and payback period.

Bookkeeping errors that inflate LTV:CAC

Using revenue instead of gross margin in LTV. This alone can overstate LTV by a quarter or more.
Misclassified costs. Hosting, third-party APIs, payment processing, and customer support usually belong in COGS. Recorded as operating expenses, they make gross margin, and therefore LTV, look better than it is.
Salaries left out of CAC. Ad spend alone produces a flattering CAC for most early-stage companies, where people are the biggest acquisition cost.
Churn on a tiny base. Losing one customer out of fifteen is a 6.7% churn rate; losing none the next month is 0%. With small numbers, use longer periods or cohorts.
Annual plans hiding churn. Customers on annual plans can only churn at renewal, so monthly churn looks low until renewal season.
Mismatched periods. Marketing spend in one quarter often acquires customers in the next. Comparing the same period can distort CAC in either direction.

Making the numbers trustworthy

These metrics are only as reliable as the data underneath: MRR that reconciles to revenue, costs classified consistently between COGS and operating expenses, and sales and marketing spend captured in full. Getting the bookkeeping right first is what makes the ratio worth quoting.

This guide is general information about bookkeeping and SaaS metrics, not accounting, tax, or legal advice for your situation. Decisions about accounting policies, tax, and formal financial statements belong with your accountant or CPA.

Ayman Fatima

ACCA Affiliate and founder of The SaaS Ledger, a bookkeeping practice for SaaS and subscription businesses. She works on the connection between subscription data, payment platforms, accounting records, and SaaS metrics.

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