.svg)
LTV:CAC Ratio
The ratio comparing customer lifetime value to acquisition cost, indicating whether your unit economics support sustainable growth.
Formula
LTV:CAC Ratio = Customer Lifetime Value ÷ Customer Acquisition Cost
Where LTV = (ARPU × Gross Margin) ÷ Churn Rate
Definition
What is LTV:CAC Ratio?
LTV:CAC ratio compares how much a customer is worth over their lifetime to how much it costs to acquire them. It's the single most important unit economics metric for subscription businesses.
A ratio of 3:1 means every dollar spent on acquisition generates three dollars in customer value. This is the minimum benchmark for a sustainable SaaS business.
What's a Good LTV:CAC Ratio?
Below 1:1 means you're losing money on every customer. Between 1:1 and 3:1 suggests unsustainable economics. 3:1 to 5:1 is the sweet spot for most companies. Above 5:1 might mean you're underinvesting in growth.
The ideal ratio depends on your stage. Early startups might accept lower ratios to gain market share. Mature companies should optimize toward 3:1 or higher.
Improving LTV:CAC
Two levers: increase LTV or decrease CAC. Reduce churn, raise prices, drive expansion revenue to boost LTV. Improve conversion rates, optimize channels, reduce sales cycle to lower CAC.
Example
Your metrics:
- ARPU: $200/month
- Gross margin: 80%
- Monthly churn: 2%
- CAC: $2,000
LTV = ($200 × 0.80) ÷ 0.02 = $8,000
LTV:CAC = $8,000 ÷ $2,000 = 4:1
Healthy ratio indicating efficient growth. Each acquisition dollar returns four dollars in customer value.
Related Terms
Explore other financial terms and metrics
Get complete financial clarity in under 10 minutes. No more broken spreadsheets, no more QuickBooks chaos—just the insights you need to scale with confidence.
