LTV to CAC is one of the first ratios investors ask about, and one of the easiest to get wrong. The ratio itself is just a division. The mistakes happen in the two numbers that go into it.
The two numbers
Customer acquisition cost (CAC) is what you spend to win one new customer: sales and marketing costs for a period, divided by the customers you won in that period.
Lifetime value (LTV) is the gross profit a customer brings in before they leave. The key word is profit. Using revenue instead of gross margin is the most common way LTV ends up inflated.
Calculating lifetime value
LTV comes from three inputs: average revenue per account (ARPU), gross margin, and monthly churn. Churn tells you how long a typical customer stays. At 3% monthly churn, the average customer stays about 1 ÷ 3%, or 33 months.
Margin per account
$50.00 × 80%equals$40.00/mo
Customer lifespan
1 ÷ 3%equals33.3 mo
Lifetime value
$40.00 × 33.3 moequals$1,333
LTV to CAC
$1,333 ÷ $300equals4.44 : 1
With a $300 CAC, that business earns back about 4.4 times what each customer costs to acquire. It also takes 7.5 months of gross margin to recover the $300, which is the CAC payback period.
What counts as a good ratio
A ratio of 3:1 or higher is the benchmark you will see most often. Below that, growth tends to cost more than it returns. A ratio far above 5:1 is not automatically great news either. It can mean you are underspending on growth that would pay for itself.
Why small changes swing it
Because lifespan is 1 divided by churn, a small change in churn makes a big change in LTV. Keep everything else the same and raise monthly churn from 3% to 5%:
Customer lifespan
1 ÷ 5%equals20 mo
Lifetime value
$40.00 × 20 moequals$800
LTV to CAC
$800 ÷ $300equals2.67 : 1
Two extra points of churn took the ratio from comfortably healthy to below the usual benchmark. Margin has a similar effect. At 50% gross margin instead of 80%, the original business drops to an LTV of $833, a ratio of 2.78:1, and a 12-month payback.
Common mistakes
- Using revenue instead of gross margin, which can overstate LTV a lot.
- Using blended CAC that includes organic customers you did not pay to acquire, which makes CAC look smaller.
- Assuming churn stays flat forever. Early cohorts often churn differently from later ones.
- Reading the ratio on its own. A strong ratio with a 30-month payback can still strain your cash.
Tip: Check LTV:CAC and CAC payback together. The ratio tells you if customers are worth winning. Payback tells you how long your cash is tied up winning them.