Growth & SaaS
LTV to CAC ratio (LTV:CAC)
The LTV to CAC ratio compares the gross profit a customer is expected to bring in over their lifetime with the cost of acquiring them.
LTV:CAC = Customer lifetime value ÷ Customer acquisition cost
Worked example
| Customer lifetime value | $20,000 |
| Customer acquisition cost | $6,000 |
$20,000 ÷ $6,000 = 3.3×
Why it matters
The ratio shows whether growth pays. A common rule of thumb is about 3 to 1: much lower and acquisition is too expensive, much higher and the business may be underinvesting in growth.
Common mistakes
Where it misleads
Building LTV on revenue while CAC includes full costs, which inflates the ratio.
Ignoring how long it takes to earn CAC back: a good ratio with a slow payback can still run out of cash.
Calculating the ratio across all customers when channels differ widely, hiding a channel that loses money.
Related terms
Keep reading
- Customer lifetime value (LTV)Customer lifetime value is the gross profit a business expects to earn from an average customer over the whole time they stay.
- Customer acquisition cost (CAC)Customer acquisition cost is the average sales and marketing spend needed to win one new customer.
- CAC payback periodThe CAC payback period is the number of months it takes for a new customer’s gross profit to repay what it cost to acquire them.
Stop calculating it by hand.
Dear CFO keeps your statements, forecasts and metrics current from the systems you already run.