LTV to CAC Ratio
Growth MetricsThe LTV-to-CAC ratio is the most-quoted SaaS unit-economics metric. It compares the gross profit a company expects to earn from a customer over their lifetime against the cost of acquiring that customer.
It was popularized by venture capital as a single-number test for whether a subscription business model is fundamentally healthy. A ratio above 3 means the customer produces three times the gross profit it cost to acquire; below 1 means the company loses money on every customer it brings in.
Contents
Key takeaways
- LTV:CAC Ratio = Customer Lifetime Value ÷ Customer Acquisition Cost. Healthy SaaS targets 3 to 5; below 1 is unsustainable; above 5 often signals underinvestment in growth.
- Always use gross-margin-adjusted LTV. Using revenue-based LTV inflates the ratio by 20 to 80% depending on cost structure.
- The ratio assumes both LTV and CAC are calculated consistently across periods. Comparing this quarter's CAC against a multi-year LTV requires care.
What is the LTV to CAC ratio?
The LTV-to-CAC ratio compares customer lifetime value to customer acquisition cost as a single ratio. It answers the unit-economics question: for every dollar spent acquiring a customer, how many dollars of gross profit will that customer produce over their lifetime?
The calculation rests on two assumptions: that LTV is calculated correctly (using gross margin and a realistic churn assumption), and that CAC is fully loaded (including salaries, tools, and overhead, not just paid media). Errors in either input distort the ratio.
How do you calculate the LTV to CAC ratio?
The formula:
LTV:CAC Ratio = Customer Lifetime Value ÷ Customer Acquisition Cost
LTV itself is typically calculated as:
LTV = Average Revenue per Account × Gross Margin × (1 ÷ Churn Rate)
Worked example: A SaaS customer pays 1,200 EUR per year, the company runs at 80% gross margin, and annual churn is 8%. LTV = 1,200 × 0.80 × (1 ÷ 0.08) = 960 × 12.5 = 12,000 EUR. With a fully loaded CAC of 4,000 EUR, the LTV:CAC ratio is 12,000 ÷ 4,000 = 3.0.
What the ratios mean:
- Below 1: the customer costs more than they will produce. Unsustainable.
- 1 to 2: marginal. The business runs near breakeven on every customer; little headroom for delivery cost shocks.
- 3: the standard target. Three dollars of gross profit per dollar of acquisition.
- Above 5: often a signal of underinvestment in growth. The company could likely spend more on acquisition before efficiency degrades.
LTV to CAC ratio vs CAC payback period
Both measure unit economics but capture different dimensions:
- LTV:CAC ratio measures lifetime efficiency: total return per dollar of acquisition.
- CAC payback period measures cash efficiency: how long until the dollar is recovered.
A SaaS can have a strong LTV:CAC ratio (4) and a weak payback period (24 months) at the same time, because long-term retention pays back eventually but slowly. The board cares about both: the ratio answers whether the business model works; the payback answers how much cash is required to fund it at scale.
Use the ratio to argue model viability, the payback to argue funding requirement.
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Frequently asked questions
Why is 3 the standard LTV to CAC target?
It comes from venture capital practice. Below 3, the unit economics leave too little room for retention shocks or rising costs. Above 3, the business reliably produces more gross profit than it spent. Five and above is sometimes argued to indicate underspending on growth.
Should I use revenue or gross profit in LTV?
Gross profit, always. Revenue-based LTV ignores the cost of delivering the service (hosting, success, support) and overstates the ratio by the gross-margin gap. The standard SaaS formula multiplies revenue by gross margin to convert to gross profit.
How does churn affect LTV to CAC?
Significantly. LTV is roughly 1 ÷ churn rate (in periods), so cutting churn from 10% to 5% doubles LTV. A small change in churn produces a large swing in the LTV:CAC ratio, which is why retention investments often produce more efficiency gain than acquisition optimization.