LTV:CAC Ratio

1. Definition

• The LTV:CAC ratio compares the value of a customer over their lifetime (LTV) to the cost of acquiring them (CAC).
• It shows whether acquiring customers is profitable and scalable.

It answers: “For every $1 spent acquiring a customer, how many dollars in lifetime value do we get back?”

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2. Formula

$\text{LTV:CAC Ratio} = \frac{\text{Customer Lifetime Value (LTV)}}{\text{Customer Acquisition Cost (CAC)}}$

Where:

• LTV → usually Net LTV (after gross margin).
• CAC → can be Blended CAC, Paid CAC, or Fully Loaded CAC depending on context.

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3. Example

• ARPU = \$50/month
• Monthly churn = 5% → Customer lifetime = 20 months
• Gross Margin = 70%
• CAC (blended) = $200

Step 1: Gross LTV

$50 \times 20 = 1,000$

Step 2: Net LTV

$1,000 \times 0.7 = 700$

Step 3: LTV:CAC Ratio

$\frac{700}{200} = 3.5$

Interpretation: For every \$1 spent acquiring a customer, the company earns \$3.50 in profit contribution.

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4. How to Interpret

• < 1 → Losing money (LTV less than CAC). Unsustainable.
• ≈ 1–2 → Barely breaking even. Not scalable.
• ≈ 3–4 → Healthy, efficient growth.
• > 5 → Very strong, but could also signal under-investment in growth (spending too little on acquisition).

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5. Why It’s Important

• Core KPI for SaaS, subscription, and D2C businesses.
• Used by investors to gauge scalability & profitability.
• Works together with Payback Period (how fast CAC is recovered).

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Summary:
LTV:CAC ratio = LTV ÷ CAC.
It tells you how much lifetime value you get per dollar spent on acquisition. A ratio of 3:1 is the classic benchmark for sustainable growth.