What is LTV:CAC Ratio?
The ratio of customer lifetime value to acquisition cost. The fundamental measure of whether your business model works.
Key Takeaways
- •LTV:CAC compares what a customer is worth vs. what it costs to acquire them
- •Target ratio of 3:1 or higher for healthy unit economics
- •LTV = customer revenue over lifetime × gross margin
- •CAC = total sales & marketing spend / new customers acquired
LTV:CAC Definition
LTV:CAC (pronounced "LTV to CAC") is the ratio between Customer Lifetime Value and Customer Acquisition Cost. It answers: "For every dollar we spend acquiring customers, how many dollars do we get back?"
The Formula
Calculating Customer Lifetime Value (LTV)
LTV estimates the total value a customer will generate over their entire relationship with your company.
Simple LTV Formula
LTV with Churn Rate
Customer lifespan ≈ 1 / Monthly Churn Rate
Example LTV Calculation
| Average Monthly Revenue | $500 |
| Gross Margin | 80% |
| Monthly Churn Rate | 2% |
| Average Lifespan (1 / 0.02) | 50 months |
| LTV | $20,000 |
Calculating Customer Acquisition Cost (CAC)
CAC measures the total cost to acquire one new customer.
CAC Formula
What to Include in CAC
Include
- Advertising spend
- Sales salaries + commissions
- Marketing team salaries
- Marketing software/tools
- Content creation costs
- Events and sponsorships
Typically Exclude
- Customer success (retention)
- Product development
- General overhead
- Support costs
Example CAC Calculation
| Quarterly Marketing Spend | $150,000 |
| Quarterly Sales Cost | $100,000 |
| New Customers Acquired | 50 |
| CAC | $5,000 |
Interpreting LTV:CAC
Using our examples: LTV = $20,000, CAC = $5,000
LTV:CAC = $20,000 / $5,000 = 4:1
For every $1 spent on acquisition, we generate $4 in customer value. Healthy.
| Ratio | Interpretation | Action |
|---|---|---|
| < 1:1 | Losing money on every customer | Fix immediately—reduce CAC or increase LTV |
| 1:1 - 3:1 | Marginal economics; thin cushion | Improve efficiency before scaling |
| 3:1 - 5:1 | Healthy—good balance of growth and efficiency | Scale acquisition spend |
| > 5:1 | Maybe under-investing in growth | Consider spending more on acquisition |
How to Improve LTV:CAC
Increase LTV
Reduce churn, increase prices, expand accounts, improve gross margin, add upsells/cross-sells.
Reduce CAC
Improve conversion rates, focus on high-converting channels, automate sales process, leverage referrals.
Better Targeting
Focus on ideal customer profile with higher LTV potential and easier (cheaper) acquisition.
Reduce Churn
Churn is often the biggest LTV lever. Improving retention from 95% to 98% can double LTV.
Cohort Analysis Matters
Average LTV and CAC can be misleading. Analyze by customer cohort, acquisition channel, and segment. You may find certain channels have 10:1 LTV:CAC while others are below 1:1.
Frequently Asked Questions
What's a good LTV:CAC ratio?
Generally, 3:1 or higher is considered healthy—each customer generates 3x what it costs to acquire them. Below 1:1 means you're losing money on every customer. Above 5:1 might indicate under-investment in growth. Aim for 3:1 to 5:1 depending on your growth stage and strategy.
How does churn affect LTV?
Churn dramatically impacts LTV. If you have 5% monthly churn, average customer lifetime is ~20 months. At 2% monthly churn, it's ~50 months. Reducing churn from 5% to 2% more than doubles your LTV, making the same CAC much more profitable. Retention is often the biggest LTV lever.
Should I calculate LTV on revenue or gross margin?
Using gross margin (revenue × gross margin %) is more accurate because it excludes the direct costs of serving customers. A customer paying $100/month at 80% gross margin contributes $80/month to covering CAC and other costs. Revenue-based LTV overstates the actual value.
What's CAC payback period?
CAC payback is how many months until customer revenue covers acquisition cost. Formula: CAC / (Monthly Revenue × Gross Margin). If CAC is $1,200 and monthly gross profit is $100, payback is 12 months. Investors typically want payback under 12-18 months.
Related Terms & Resources
ARR (Annual Recurring Revenue)
Revenue metric for subscriptions
Burn Rate
Cash spend vs. LTV:CAC efficiency
Gross Margin
Key input to LTV calculation
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