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.
LTV:CAC Ratio = Customer Lifetime Value ÷ Customer Acquisition Cost
Where LTV = (ARPU × Gross Margin) ÷ Churn Rate
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.