LTV:CAC ratio is a unit economics metric that compares the lifetime value (LTV) of a customer to the customer acquisition cost (CAC), showing how much value a business earns for every dollar spent to acquire a customer. It is calculated by dividing LTV by CAC and is used to evaluate growth efficiency and whether acquisition spending is sustainable.
How LTV:CAC Ratio Is Calculated
A common formula is:
- LTV:CAC = Customer LTV ÷ CAC
Where:
- CAC is usually total sales and marketing acquisition costs divided by new customers acquired in the same period.
- LTV is the expected gross profit from a customer over their lifetime, often estimated using subscription metrics.
One common SaaS-style LTV estimate is:
- LTV = (Average revenue per account per period × Gross margin) ÷ Churn rate
Because there are multiple valid LTV and CAC definitions, companies should document inputs and keep them consistent over time.
How to Interpret LTV:CAC Ratio
LTV:CAC helps answer whether growth is efficient:
- Higher ratio generally means the business earns more value per acquired customer relative to acquisition cost.
- Lower ratio can signal high acquisition costs, weak retention, low margins, or poor expansion.
Interpretation depends on context like sales cycle length, payback time, and segment mix. A high ratio can still be unhealthy if it comes from under-investing in growth or if payback takes too long.
Common Pitfalls and Modern Considerations
LTV:CAC can be misleading when inputs are inconsistent or incomplete:
- Using revenue instead of gross profit in LTV can overstate value.
- Ignoring expansion and contraction can understate or overstate LTV for subscription businesses.
- Mismatching time periods for CAC spend and customer counts can distort the ratio.
- Not segmenting by customer size or channel can hide unprofitable motions.
- Data quality issues like duplicate accounts and broken attribution affect CAC and cohort-based LTV.
In AI-assisted RevOps, automated enrichment, routing, and scoring can lower CAC, while lifecycle automation and product guidance can improve retention and expansion that raise LTV, but only if measurement is governed and auditable.
Frequently Asked Questions
What does an LTV:CAC ratio of 3 mean?
It means the business expects to earn about $3 in lifetime gross profit for every $1 spent acquiring a customer.
Should LTV use revenue or gross margin?
LTV is usually more useful when based on gross profit (revenue × gross margin), since CAC is a cost.
How is LTV:CAC different from CAC payback?
LTV:CAC compares total lifetime value to acquisition cost. CAC payback measures how long it takes to recover CAC from gross profit.
Why does LTV:CAC vary by segment?
Different segments can have different CAC, churn, and expansion behavior, so SMB and enterprise often have very different ratios.
Can usage-based businesses calculate LTV:CAC?
Yes, but LTV often uses cohort retention and usage curves or committed recurring amounts, since revenue can vary with consumption.
