What Is the LTV:CAC Ratio?
The LTV:CAC ratio compares how much a customer is worth over their lifetime to how much it cost to acquire them. It is the fundamental measure of whether your business model works.
Key Takeaways
- LTV:CAC ratio = Customer Lifetime Value ÷ Customer Acquisition Cost
- A ratio of 3:1 or above is generally the minimum for a sustainable subscription business
- CAC payback period (months to recover CAC) is equally important — high LTV:CAC means nothing if payback takes 4 years
- The ratio should be calculated by customer segment, not just blended — enterprise vs SMB customers can look very different
How to calculate LTV and CAC
CAC = total sales and marketing spend in a period ÷ number of new customers acquired in that period. LTV (Customer Lifetime Value) = average revenue per customer per month × gross margin % ÷ monthly churn rate. If your average customer pays £100/month, you have 70% gross margin, and 2% monthly churn, your LTV = £100 × 0.70 ÷ 0.02 = £3,500. If your CAC is £800, your LTV:CAC ratio is 3,500 ÷ 800 = 4.4x.
Why 3:1 is the benchmark
A 3:1 LTV:CAC ratio means you earn £3 over a customer's lifetime for every £1 spent acquiring them. This is the widely-cited minimum threshold because it leaves room for the operating costs of serving that customer (customer success, support, infrastructure) and still generates a positive return. Below 3:1, you are likely destroying value on each customer acquired — the economics only work if you can reduce CAC or increase LTV.
The CAC payback period
LTV:CAC is a long-run metric. CAC payback period answers a more immediate question: how many months until you recover your acquisition cost? CAC payback period = CAC ÷ (average monthly revenue per customer × gross margin %). A business with LTV:CAC of 5:1 but a 36-month payback period needs significant working capital to fund growth — it will be cash-flow negative for three years per customer acquired. Many fast-growing SaaS businesses target sub-12-month CAC payback to keep cash requirements manageable.
Segment-level analysis
Blended LTV:CAC ratios can hide very different underlying unit economics. Enterprise customers typically have higher LTV (larger contracts, lower churn, expansion revenue) but also much higher CAC (longer sales cycles, more resources required). SMB customers have lower CAC but often much higher churn. Calculating LTV:CAC by customer segment helps you decide where to focus your sales and marketing investment for the best return.