Definition
LTV:CAC compares the lifetime value you earn to the cost to acquire a customer.
How to calculate LTV:CAC (practical)
- LTV:CAC = LTV / CAC.
- Use gross profit LTV when possible: (ARPA * gross margin) / churn is a common shortcut (cohort curves are better).
- Make CAC comparable to your LTV: if CAC is fully-loaded, use fully-loaded contribution in LTV (or use paid-only CAC with paid-only economics).
Why payback matters as much as the ratio
Two companies can have the same LTV:CAC and very different outcomes if one takes 6 months to pay back CAC and the other takes 24 months. Cash constraints, sales cycle length, and churn timing make payback a first-class metric.
- Short payback can tolerate lower LTV:CAC (you recycle cash faster).
- Long payback needs stronger confidence in retention and expansion (and usually more capital).
- If churn is front-loaded (customers leave early), ratio math can overstate reality unless you use cohorts.
Benchmarks (rule of thumb)
- ~3:1 is a common target for many SaaS businesses.
- Very high ratios can mean you're under-investing in growth.
- Lower ratios can be acceptable with short payback and strong retention.
A checklist for using LTV:CAC correctly
- Choose a consistent time window for CAC (e.g., last 3 months) and segment by channel if mixes differ.
- Use the same unit basis: monthly ARPA with monthly churn, annual ARPA with annual churn.
- Prefer cohort-based LTV for products with meaningful expansion, contraction, or changing churn over time.
- Pair ratio with payback months, gross margin, and NRR/GRR so you do not optimize a single number.
- Sanity-check with sensitivity: small churn changes can swing LTV a lot.
Common pitfalls
- Using inconsistent definitions for CAC (fully-loaded vs paid-only).
- Using revenue LTV but comparing to fully-loaded CAC (mismatched bases).
- Ignoring payback period and cash constraints.
- Mixing annual and monthly inputs (ARPA and churn units do not match).
- Using blended averages across segments with different economics (SMB vs enterprise).
- Treating a shortcut LTV as exact (validate with cohorts and retention curves).