LTV:CAC Ratio: The Most Important Metric for Startup Growth
This single metric tells you whether your business model works. Here's how to calculate and optimize it.
Quick Definition
LTV:CAC Ratio compares customer lifetime value to customer acquisition cost. It tells you how much value you get from each customer relative to what you spent to acquire them.
If there's one metric that captures the fundamental health of your business, it's the LTV:CAC ratio. It answers the question every investor wants to know: "Do you make more from customers than you spend to get them?"
A strong LTV:CAC ratio means your growth is profitable and sustainable. A weak ratio means you're burning cash on growth that won't pay off. Let's break down how to calculate and optimize this critical metric.
What Is LTV:CAC Ratio?
The LTV:CAC ratio compares two metrics:
- LTV (Lifetime Value): The total revenue (or profit) you expect to receive from a customer over their entire relationship with you
- CAC (Customer Acquisition Cost): The total cost to acquire that customer (see our CAC guide)
LTV:CAC Ratio = Customer Lifetime Value ÷ Customer Acquisition Cost
A ratio of 3:1 means you make $3 for every $1 you spend on acquisition. A ratio of 1:1 means you're breaking even. Below 1:1 means you're losing money on every customer.
How to Calculate LTV
There are several ways to calculate LTV, depending on your business model and data availability.
Simple LTV Formula
The most basic calculation:
Simple LTV
LTV = ARPU × Customer Lifetime
ARPU = Average Revenue Per User (monthly)
Customer Lifetime = 1 ÷ Monthly Churn Rate
Gross Margin-Adjusted LTV
For a more accurate picture, adjust LTV for gross margin:
Gross Margin-Adjusted LTV
LTV = ARPU × Gross Margin × Customer Lifetime
This is the version investors typically want to see, as it reflects true contribution to the business.
Example LTV Calculation
SaaS Company LTV Example
Calculating the LTV:CAC Ratio
Once you have both LTV and CAC, the ratio is simple division:
Complete Example
Good vs Bad LTV:CAC Ratios
Here's how to interpret your ratio:
LTV:CAC < 1:1 — Danger Zone
You're spending more to acquire customers than you make from them. This is unsustainable and needs immediate attention. Either dramatically reduce CAC or increase prices/retention.
LTV:CAC 1:1 to 3:1 — Marginal
You're profitable at the unit level, but barely. Little room for operating expenses, overhead, or mistakes. Focus on improving both sides of the equation.
LTV:CAC 3:1 to 5:1 — Healthy
The sweet spot for most VC-backed startups. Strong unit economics that support aggressive growth. This is typically the target range.
LTV:CAC > 5:1 — Excellent (Or Under-Investing)
Exceptional unit economics. But this might also signal you're under-investing in growth. Consider scaling marketing spend to accelerate growth while maintaining 3:1+ ratios.
| Business Type | Target LTV:CAC | Notes |
|---|---|---|
| SMB SaaS | 3:1+ | Higher churn = need higher ratio |
| Enterprise SaaS | 5:1+ | Long sales cycles, high CAC |
| E-commerce (repeat) | 3:1+ | Based on repeat purchase behavior |
| E-commerce (one-time) | 1.5:1+ | Lower expectations, single purchase |
How to Improve Your LTV:CAC Ratio
There are two sides to the equation: increase LTV or decrease CAC. Here's how to work on both.
Increasing LTV
Reduce Churn
The biggest lever. Reducing monthly churn from 3% to 2% increases customer lifetime from 33 to 50 months—a 50% LTV increase. See our churn guide.
Increase ARPU
Raise prices, upsell premium features, add seats/usage-based revenue. Even small ARPU increases compound over customer lifetime.
Improve Gross Margin
Reduce cost of goods sold through better infrastructure, automation, or supplier negotiations. See our gross margin guide.
Drive Expansion Revenue
Build features that naturally drive upgrades. Create expansion paths as customers grow.
Decreasing CAC
Improve Conversion
Better landing pages, streamlined sign-up flows, and faster sales cycles all reduce CAC without cutting spend.
Invest in Organic
Content marketing, SEO, and referrals have high upfront costs but low marginal CAC. They reduce blended CAC over time.
Focus ICP
Target your ideal customer profile more precisely. Better targeting means less wasted spend on prospects who won't convert.
Product-Led Growth
Let the product do the selling. Free trials, freemium tiers, and self-serve onboarding can dramatically reduce CAC.
CAC Payback Period
While LTV:CAC tells you the total return, CAC payback periodtells you how long it takes to get there. This matters for cash flow.
CAC Payback (months) = CAC ÷ (ARPU × Gross Margin)
Payback Period Example
Payback Benchmarks
<12 mo
Excellent for SMB SaaS
12-18 mo
Good for Mid-Market
18-24 mo
Acceptable for Enterprise
Why does payback matter? Because shorter payback means faster reinvestment. If you recover CAC in 6 months instead of 12, you can reinvest that cash in acquiring more customers sooner.
Common LTV:CAC Mistakes
Using Revenue Instead of Gross Profit
LTV should be gross margin-adjusted. Using raw revenue overstates LTV and makes your ratio look better than reality.
Projecting Future LTV Instead of Actual
"Our LTV will be $10K once we reduce churn" is wishful thinking. Use actual, observed data. Project separately if needed.
Comparing Different Time Periods
If you calculate LTV from 2-year-old cohorts and CAC from last month, you're mixing apples and oranges. Use consistent time periods.
Ignoring Cohort Variation
Blended LTV:CAC hides important variation. Your Facebook customers might have 5:1 ratio while Google customers are 2:1. Track by cohort.
Not Including All CAC Costs
Excluding sales salaries or overhead makes CAC look artificially low and inflates your ratio. Use fully loaded CAC.
Key Takeaways
- 1LTV:CAC measures the return on your customer acquisition investment
- 2Target 3:1 ratio or better for sustainable, profitable growth
- 3Use gross margin-adjusted LTV for accuracy
- 4Also track CAC payback period for cash flow visibility
- 5Improve by reducing churn, increasing ARPU, or lowering CAC
Need Help With Your Unit Economics?
Eagle Rock CFO helps seed and Series A startups calculate LTV:CAC, build metrics dashboards, and present compelling unit economics to investors.
Schedule a Consultation