1:1 to 3:1 covers acquisition cost but leaves no margin for product, support, or growth. Most investors flag this.
The simplest correct formula for SaaS lifetime value is monthly ARPU times gross margin, divided by your monthly churn rate. It assumes a constant churn and ignores expansion revenue — both simplifications, both fine for back-of-the-napkin work.
Gross margin matters — the dollar that pays for hosting, support, and processing fees never makes it to growth. A SaaS with 75% gross margin and a SaaS with 35% gross margin look identical on ARPU but have completely different LTV.
Average customer lifetime is the inverse of churn. 3% monthly churn means the average customer stays ~33 months (1 / 0.03). That's why dropping monthly churn from 5% to 3% lifts LTV much more than dropping it from 1% to 0.5%.
Gross-margin LTV. Revenue LTV inflates the number by counting dollars that will be spent on hosting, support, and processing fees. The LTV:CAC test only makes sense in gross-margin dollars.
Monthly customer churn for SMB SaaS (logo churn). Net revenue churn for expansion-heavy mid-market and enterprise SaaS, where existing customers grow into more revenue. Don't mix logo and revenue churn in the same calc.
SMB SaaS: 3-5% monthly is typical, 1-2% is excellent. Mid-market: 1-2% monthly. Enterprise: <1% monthly, often measured annually. Consumer subscription: 5-10% monthly is normal.
Simplicity. The simple formula assumes ARPU is constant. If you have meaningful net negative churn (existing customers grow more than they churn), divide ARPU × margin by (churn − expansion rate) instead. We left that out to keep the inputs short.
3:1 is the canonical SaaS target. 4-5:1 is great. Below 3:1 is usually unsustainable. Above 5:1 often means you're underspending on growth and leaving market share for competitors.
Distribution that reaches the right buyer doesn't just lower CAC — better-fit customers churn less. Napkin runs UGC, Reddit, and GEO as one motion for AI companies.