LTV to CAC Ratio
AdvancedThe LTV to CAC ratio compares the lifetime value of a customer, the total profit a business expects to earn from them, with the customer acquisition cost, the cost of winning them.
This ratio shows whether a business earns enough from customers to justify what it spends acquiring them. It is especially popular among subscription and online businesses.
For example, customers pay 40 a month with a gross margin of 75%, contributing 30 a month. If 2.5% of customers cancel each month, the average customer stays about 40 months, giving a lifetime value of about 1,200. If acquiring each customer costs 400, the LTV to CAC ratio is 3.
A ratio of around 3 or more is often quoted as a healthy benchmark, though this is a rule of thumb rather than a strict standard. A ratio below 1 means each customer costs more to acquire than they are worth. A very high ratio might suggest the business is underinvesting in growth.
The ratio depends heavily on assumptions, especially about how long customers will stay, which may be uncertain for young companies. Investors also look at how quickly acquisition costs are paid back, since a good ratio with a very long payback can still strain cash.
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