LTV/CAC ratio
el-tee-vee to KAK RAY-shee-oh
Lifetime value divided by customer acquisition cost. The fundamental unit economics equation for any subscription business.
LTV/CAC ratio tells you whether your business model works. Divide the lifetime value of a customer by the cost to acquire them. If LTV is $30k and CAC is $10k, the ratio is 3:1. You earn three dollars for every dollar you spend on acquisition.
A 3:1 ratio is the widely accepted benchmark for a healthy SaaS business. Below 1:1 means you lose money on every customer. Between 1:1 and 3:1 means the economics work but barely. Above 5:1 might mean you are underinvesting in growth and leaving market share on the table.
The ratio is a compass, not a GPS. It tells you direction but not the exact path. A company with 5:1 LTV/CAC might be in a small niche with no room to grow. A company with 2:1 LTV/CAC might be in a massive market where the ratio improves as the product matures and churn declines. Context matters.
Examples
A mid-market SaaS company evaluates unit economics.
Average LTV: $75k (based on $25k ACV and 3-year average lifespan). CAC: $18k. LTV/CAC ratio: 4.2:1. The economics are strong.
A startup realizes its economics are broken.
CAC: $15k. Average ACV: $8k. Annual churn: 30%. Average lifespan: 3.3 years. LTV: $8k x 3.3 x 0.7 gross margin = $18.5k. LTV/CAC: 1.2:1. They need to reduce CAC, increase ACV, or reduce churn.
A PLG company has bifurcated economics.
Self-serve customers: LTV $2k, CAC $200, ratio 10:1. Enterprise customers: LTV $200k, CAC $50k, ratio 4:1. Blended ratio is misleading. The company tracks each segment separately.
In practice
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Frequently asked questions
What is a good LTV/CAC ratio?
3:1 is the standard benchmark. Below 1:1 means you lose money. Between 1:1 and 3:1 is marginal. Above 5:1 may mean you are underinvesting in growth. The right ratio depends on your market size, growth stage, and competitive dynamics.
How do you improve LTV/CAC ratio?
Three levers. Reduce CAC by improving conversion rates or shifting to more efficient channels. Increase LTV by reducing churn, increasing expansion, or raising prices. Improve gross margin by reducing delivery costs. Each lever has different difficulty and impact.
Related terms
The total gross profit expected from a customer over the entire relationship. LTV determines how much you can spend to acquire them.
The total cost of sales and marketing divided by the number of new customers acquired in a period.
The number of months it takes to recoup the cost of acquiring a customer. Shorter is better for cash flow.
The revenue and cost associated with a single customer. Profitable unit economics mean each customer generates more revenue than they cost to acquire and serve.
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