LTV:CAC Ratio

Also known as: LTV to CACLTV/CACCustomer Economics RatioAcquisition EfficiencyUnit Economics Ratio

LTV:CAC Ratio = LTV ÷ CAC (target: 3:1)

💡The Concept

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 Trap

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%.

🎯The Action

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.

⚡Pro Tips

LTV:CAC above 5:1 is often a sign of under-investment, not excellence. If you can acquire customers at 5:1 returns, increasing CAC spending usually generates positive ROI until you approach 3:1. Think of it as an investment — you wouldn't leave a 500% return opportunity on the table.

Track LTV:CAC cohort by cohort. If each successive cohort has a lower LTV:CAC, you're experiencing market saturation — you've acquired the most willing buyers and are now reaching less motivated prospects.

Negative LTV:CAC by channel is a feature, not always a bug. If your paid channel has 1.5:1 but organic has 10:1, the blended 4:1 is healthy. Fund the paid channel from organic profits — paid builds brand awareness that feeds organic over time.

🚫Common Myths

✗Myth: “LTV:CAC of 3:1 guarantees profitability”

✓Reality: 3:1 only covers acquisition economics. You still have fixed costs: engineering salaries, office rent, infrastructure, management. A company at 3:1 LTV:CAC can still be deeply unprofitable if fixed costs exceed the gross profit generated. LTV:CAC tells you acquisition is viable; the P&L tells you the business is viable.

✗Myth: “You should optimize for the highest possible LTV:CAC”

✓Reality: LTV:CAC of 10:1 usually means you're spending too little on growth. If you can acquire customers at 10:1 returns, you should invest aggressively until the ratio drops to 3-5:1. Companies that 'optimize' for high ratios grow slowly while competitors with 3:1 ratios and aggressive spending capture the market.