LTV:CAC Ratio
The ratio of customer lifetime value to acquisition cost, measuring the return on each customer acquired.
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Definition
The LTV:CAC ratio is the fundamental unit economics metric that determines whether a business model is viable. It compares the total value a customer generates (LTV) against the cost to acquire them (CAC). A ratio of 3:1 is the widely accepted benchmark for a healthy business.
Ratios below 1:1 mean you lose money on every customer — an unsustainable situation. Ratios between 1:1 and 3:1 indicate a business that is functional but inefficient. Ratios above 5:1 suggest you may be underinvesting in growth and leaving market share to competitors.
This ratio should be calculated for each customer segment, channel, and cohort. Aggregate LTV:CAC can mask important dynamics. Enterprise customers might have 6:1 while SMB customers have 1.5:1, suggesting the company should shift focus to enterprise.
Why It Matters for Founders
LTV:CAC is the single number that tells you whether your business will survive long-term. It answers the fundamental question: does each customer generate more value than the cost to acquire them? VCs use this metric as a primary filter — companies with LTV:CAC below 3:1 struggle to raise growth capital.
Improving LTV:CAC creates a virtuous cycle: better unit economics allow more aggressive investment in growth, which (if done efficiently) can further improve the ratio through scale effects. Product-led growth companies achieve the best ratios (4.8:1 average) because they simultaneously reduce CAC and increase LTV.
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Formula
LTV:CAC = Customer Lifetime Value / Customer Acquisition CostReal-World Example
A SaaS company has LTV of $3,600 and CAC of $900. Their LTV:CAC ratio is 4:1, meaning they earn $4 for every $1 spent on acquisition.
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Frequently Asked Questions
What is a good LTV:CAC ratio?+
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