LTV to CAC ratio (LTV:CAC)
Also known as: LTV:CAC, LTV/CAC
In short
The LTV to CAC ratio compares what a customer is expected to be worth over their lifetime with what it cost to win them. A ratio of 3 to 1 means each dollar spent on acquisition returns about three dollars of lifetime value.
It is a unit-economics check. Where CAC payback period tells you how fast you recover acquisition cost, LTV:CAC tells you how much you earn in total relative to that cost.
How to calculate LTV:CAC
- LTV: Average revenue per account, multiplied by gross margin, divided by the customer churn rate. Using gross margin keeps the figure about profit rather than revenue.
- CAC: Total sales and marketing cost in a period divided by new customers won in that period.
- Example: Say a customer pays 1,000 a month at 80 percent gross margin, and monthly churn is 2 percent. LTV is 1,000 x 0.8 / 0.02, or 40,000. If CAC is 10,000, the ratio is 4 to 1.
How to read the ratio
Teams often cite 3 to 1 as a rule of thumb, but the right level depends on growth goals, margins, and cash.
- Low ratio: Acquisition may cost too much or customers leave too soon. Growth destroys value.
- Very high ratio: You may be under-investing in growth and leaving market share on the table.
- Trend over time: A falling ratio is often more telling than any single number.
How GTM teams improve it
- Raise LTV: Target better-fit accounts, reduce churn, and grow expansion revenue.
- Lower CAC: Improve targeting and conversion rates, and shift effort to channels that close efficiently.
- Segment the numbers: Calculate it by segment, channel, and plan. A blended ratio hides profitable and unprofitable pockets.
Common mistakes
- Using revenue instead of margin: This overstates LTV.
- Ignoring churn uncertainty: Young companies have little churn data, so LTV is an estimate. Use ranges.
- Leaving out costs: CAC should include salaries, tools, and programs, not just ad spend.
- Ignoring payback time: A strong ratio with a long payback can still strain cash.
LTV to CAC ratio FAQs
What is the LTV to CAC ratio?
The LTV to CAC ratio compares the lifetime value of a customer with the cost of acquiring that customer. It shows how much value each acquisition dollar generates and is a common measure of go-to-market efficiency in subscription businesses.
How do you calculate LTV:CAC?
Calculate customer lifetime value, usually average revenue per account times gross margin divided by churn rate. Calculate CAC as total sales and marketing spend divided by new customers. Then divide LTV by CAC to get the ratio.
What is a good LTV to CAC ratio?
A ratio around 3 to 1 is a common rule of thumb, but there is no universal target. The right level depends on gross margin, growth stage, cash position, and payback period, so judge it against your own plan.
What is the difference between LTV:CAC and CAC payback period?
LTV:CAC compares total lifetime value to acquisition cost. CAC payback period measures how many months it takes to earn back the acquisition cost from gross profit. One shows total return, the other shows speed of recovery.
