LTV:CAC Ratio Calculator

What is LTV:CAC Ratio?

The LTV:CAC ratio compares the lifetime value of a customer to the cost of acquiring them. It's one of the most important metrics for understanding business sustainability and growth potential. This ratio tells you whether your customer acquisition strategy is profitable and scalable. A high LTV:CAC ratio indicates that customers are worth significantly more than it costs to acquire them, giving you room to invest in growth while maintaining profitability.

Understanding your LTV:CAC ratio is crucial for any business looking to scale sustainably. It helps you make informed decisions about marketing spend, pricing strategy, and growth investments. Investors and stakeholders often use this metric to evaluate the health and scalability of a business model.

How to Calculate LTV:CAC Ratio

Calculating your LTV:CAC ratio involves two main steps: first calculating Customer Lifetime Value (LTV), then comparing it to Customer Acquisition Cost (CAC).

For example, if a customer has an average order value of $75, purchases 4 times per year, and stays with you for 3 years, their LTV would be $900. If your CAC is $300, your LTV:CAC ratio would be 3:1, indicating a healthy, sustainable business model.

Understanding the Ratio

The LTV:CAC ratio provides insight into your business's unit economics. Here's what different ratios mean:

Common Use Cases

• Investor Presentations: Demonstrate sustainable unit economics to potential investors
• Growth Planning: Determine how much you can afford to spend on customer acquisition
• Pricing Strategy: Validate whether your pricing supports profitable customer acquisition
• Channel Optimization: Compare LTV:CAC ratios across different marketing channels
• Budget Allocation: Decide how much to invest in marketing vs. product development
• Payback Period Analysis: Understand how long it takes to recover acquisition costs

Example Calculation

Industry Benchmarks

• SaaS: 3:1 to 5:1 is considered healthy (can be higher for enterprise)
• E-commerce: 3:1 to 4:1 is typical for sustainable growth
• Marketplaces: 2:1 to 3:1 is acceptable due to network effects
• B2B Services: 4:1 to 6:1 is common due to higher LTV
• Mobile Apps: 2:1 to 3:1 is typical (can be lower for freemium models)

Remember, these are general benchmarks. Your ideal ratio depends on your business model, growth stage, and market conditions. A 3:1 ratio is often considered the minimum for sustainable growth, while 5:1 or higher indicates strong unit economics and significant growth potential.

Why It Matters

• Growth sustainability: Higher ratios mean more room to invest in growth without sacrificing profitability
• Investor metric: VCs and investors look for 3:1 or higher LTV:CAC ratios as a sign of scalable business models
• Pricing strategy: Helps determine if you can afford to acquire customers at current pricing levels
• Payback period: Shows how long until you recoup acquisition costs and start generating profit
• Channel evaluation: Compare ratios across channels to identify the most efficient acquisition methods
• Risk assessment: Lower ratios indicate higher risk and less room for error in acquisition strategy