LTV:CAC Ratio
What a customer is worth against what they cost to acquire — the headline test of whether growth creates value.
The ratio divides lifetime value by acquisition cost. Roughly 3:1 is the conventional healthy target: below it, growth consumes more than it returns; well above it, the company is usually under-investing in acquisition and leaving growth on the table. A 10:1 ratio is not excellence, it is a signal that spending more would be profitable.
The ratio inherits every weakness of both inputs, which is why it is quoted far more confidently than it deserves. An LTV built on optimistic churn and a CAC that excludes salaries will produce a comfortable number from two wrong ones. Payback period — how many months of gross profit it takes to recover CAC — is the more robust companion metric, because it uses observed cash rather than a projection. Under 12 months is the usual SaaS benchmark.
In practice
A company reported 3.9:1 to its board. Recomputed with fully loaded CAC and gross-margin LTV it was 1.3:1, and payback was 26 months. The business was not growing profitably; it was funding acquisition from the next round, and the ratio had been the reason nobody looked closer.
Where teams get it wrong
- Reporting the ratio without stating how both inputs were computed.
- Treating a very high ratio as success rather than as under-investment in growth.
- One blended ratio across segments with different economics.
- Ignoring payback period, which uses observed cash instead of a forecast.
- Comparing the ratio to benchmarks from companies using different definitions.
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Related terms
All terms- Customer Acquisition Cost (CAC)The fully loaded cost of winning one new customer — all sales and marketing spend divided by the customers it produced.
- Lifetime Value (LTV)The total gross profit a customer is expected to generate before they leave — the ceiling on what acquiring them can be worth.
- ARPUAverage revenue per user or account over a period — the numerator in most unit-economics calculations, and the one most often averaged badly.
- ChurnThe rate at which customers stop paying or stop using a product over a given period — the mirror image of retention.