LTV:CAC Ratio

Metric

The LTV:CAC ratio compares the lifetime gross value of a customer to the cost of acquiring them, indicating long-term business viability.

Layman Explanation & Analogy

LTV:CAC answers: "Are my customers worth significantly more over their lifetime than what it cost me to bring them through the door?" A ratio of 3:1 is standard — meaning for every $1 spent to get a customer, you make $3 in gross value over time.

Mathematical Formula

LTV:CAC = Customer Lifetime Value (LTV) ÷ Customer Acquisition Cost (CAC)

Worked real-world example

A subscription software customer generates $900 in total margin over their lifetime, and costs $300 to acquire. LTV:CAC = $900 ÷ $300 = 3:1.

What people get wrong & common traps

The ratio completely hides the timeline of cash flow. A 5:1 ratio that takes 4 years to recover can bankrupt a company due to cash shortages, whereas a 3:1 ratio that recovers in 2 months provides rapid reinvestment capital. Always pair LTV:CAC with CAC Payback Period.

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