LTV:CAC Ratio Explained: How to Calculate It and What It Tells You
LTV:CAC compares the gross profit a customer brings over their lifetime with the cost of acquiring them. Calculated on gross margin and fully loaded costs, it shows whether growth creates value.
- LTV
- Average gross profit per customer over their lifetime
- CAC
- Total sales and marketing cost ÷ new customers
- Rule of thumb
- Around 3:1 is often quoted, but it depends on payback time and cash
15+ years in finance: 100+ financial models built, €40m+ raised for clients, Forbes contributor and lecturer.
Short answer: LTV:CAC compares the gross profit a customer brings over their lifetime (LTV) with what it costs to acquire them (CAC). If LTV is not comfortably above CAC, growth is likely to burn cash without building value.
The formulas
- LTV = average revenue per customer per period × gross margin % × expected customer lifetime
- CAC = total sales and marketing cost in a period ÷ new customers won in that period
- LTV:CAC = LTV ÷ CAC
Example: a customer pays 100 a month, gross margin is 70%, and the average customer stays 20 months. LTV is 100 × 0.70 × 20 = 1,400. If CAC is 400, the ratio is 3.5:1.
Three mistakes that distort the ratio
- Using revenue instead of gross profit. A customer who brings 1,000 of revenue but 600 of delivery cost is worth 400, not 1,000.
- Leaving costs out of CAC. Include salaries, commissions, tools, agencies and ad spend, not only the ad budget.
- Guessing lifetime. A long assumed lifetime inflates LTV. Use observed retention, and be careful with young businesses that have little history.
The ratio is not enough: add payback
A strong ratio can still hurt cash. If it takes 18 months to earn back CAC, you fund growth for 18 months before it pays. Always read the ratio together with CAC payback: CAC ÷ monthly gross profit per customer. In the example above, payback is 400 ÷ 70 = about 5.7 months.
| Metric | Question it answers |
|---|---|
| LTV:CAC | Is a customer worth more than they cost? |
| CAC payback | How long is cash tied up? |
| Gross margin | How much of each sale is left to cover growth? |
Payback ties directly to your cash conversion cycle and your runway.
How to use it in decisions
- By channel. Calculate the ratio per acquisition channel. A blended number can hide a channel that loses money.
- By segment. Large and small customers often have very different LTV and CAC.
- Before scaling spend. Increase budget only where the ratio and payback both hold up at the current scale.
- In pricing. If the ratio is weak, test price, packaging or retention before cutting marketing. See our SaaS pricing strategy article.
How investors read it
Investors usually look at LTV:CAC, payback and gross margin together, and they check how you calculated them. Clean definitions and consistent data matter more than a flattering number. If you are preparing to raise, our guide on getting investor-ready shows what to prepare.
What to do this week
- Define CAC with all acquisition costs.
- Calculate gross profit per customer, not revenue.
- Measure retention from real cohorts.
- Split the ratio by channel.
- Add payback next to the ratio in your monthly report.
This article is general information, not investment or legal advice, and no ratio guarantees a result.
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Related questions
What is a good LTV:CAC ratio?
A ratio around 3:1 is often quoted as a rule of thumb. The right level depends on your margin, payback period and how much cash you can tie up while growing.
Should LTV use revenue or gross profit?
Use gross profit. Revenue ignores the cost of delivering the product or service, which makes LTV look better than it is.
What should be included in CAC?
All sales and marketing costs that win new customers, including salaries, tools, agency fees and ad spend, divided by the number of new customers.
