Customer Acquisition Cost (CAC)vsLTV:CAC Ratio

CAC is the total cost of convincing a potential customer to buy your product. This includes all marketing spend, sales team salaries, tools, and overhead directly tied to acquiring new customers. The formula: CAC = Total Sales & Marketing Spend ÷ New Customers Acquired. A company spending $50K/month on marketing and sales and acquiring 100 customers has a $500 CAC. CAC varies dramatically by channel — paid ads might be $300 CAC while organic content is $30. VCs obsess over CAC because it determines unit economics: if CAC exceeds LTV, every customer you acquire destroys value.

The LTV:CAC ratio compares how much a customer is worth over their lifetime to how much it costs to acquire them. It is the single most important ratio for determining whether your business model is fundamentally viable. The golden benchmark is 3:1 — each customer generates 3x what you spent to acquire them. Below 1:1, you're paying more to acquire customers than they'll ever generate. Between 1:1 and 3:1, you're viable but thin. Above 5:1, you may be under-investing in growth — competitors who spend more can outpace you.

The most dangerous mistake is calculating 'blended CAC' by averaging all channels together. This hides the fact that your Google Ads channel might have a $200 CAC while organic has a $5 CAC. Blended CAC at $100 looks fine — but if you scale by doubling ad spend, CAC doesn't stay at $100; it approaches $200 because you're scaling the expensive channel. Always track CAC per channel. The second trap: excluding sales salaries from CAC. If you have 4 sales reps at $10K/month each and they close 40 deals/month, that's $1,000 in 'hidden' CAC per customer on top of marketing spend.

The trap is looking at LTV:CAC in isolation without considering payback period. A 4:1 ratio with 24-month payback is actually worse than a 3:1 ratio with 6-month payback because you tie up cash for 2 years before seeing returns. Also, many companies inflate LTV:CAC by using revenue-based LTV instead of gross-margin-adjusted LTV. If your gross margin is 60%, your true economic LTV is only 60% of revenue LTV — cut your ratio by 40%.

Calculate CAC by channel: Paid CAC, Organic CAC, Referral CAC, Outbound CAC. For each: total spend on that channel ÷ customers from that channel. Kill channels where CAC > LTV/3 (not LTV/1 — you need margin for overhead). Track CAC trend monthly — increasing CAC often means market saturation or competitive pressure and requires immediate investigation.

Calculate gross-margin-adjusted LTV:CAC ratio: (LTV × Gross Margin) ÷ CAC. If the result is below 3:1, you have two levers: increase LTV (reduce churn, add upsells) or decrease CAC (better targeting, organic channels). Also calculate by segment and channel — your enterprise LTV:CAC might be 5:1 while SMB is 1.5:1, meaning you should focus enterprise acquisition.