The LTV to CAC ratio compares how much a customer is worth to how much it costs to get one. If a customer brings in $3,000 of gross profit over their lifetime and costs $1,000 to acquire, your ratio is 3 : 1. It's the clearest single test of whether your growth is paying for itself.
How to calculate LTV
The simple formula for a subscription business:
LTV = (average revenue per customer per month × gross margin) ÷ monthly churn rate
Example: customers pay $80 a month, your gross margin is 80%, and 3% of customers cancel each month.
- Monthly gross profit per customer: $80 × 0.8 = $64
- Average customer lifetime: 1 ÷ 0.03 ≈ 33 months
- LTV: $64 ÷ 0.03 ≈ $2,133
Use gross margin, not revenue. A customer paying $80 who costs $16 a month to serve only gives you $64 to pay back acquisition.
How to calculate CAC
CAC = total sales and marketing spend in a period ÷ new customers won in that period
Include everything: ad spend, tools, content, contractors, and the share of salaries spent on sales and marketing, including your own time if you're doing it. Founders often leave their own time out and end up thinking acquisition is nearly free.
If you spent $6,000 last quarter and won 10 customers, CAC is $600. With the LTV above, your ratio is about 3.6 : 1.
What is a good LTV to CAC ratio?
| Ratio | What it usually means |
|---|---|
| Below 1 : 1 | You lose money on every customer. Growth makes things worse. |
| 1 : 1 to 3 : 1 | Growth works, but it's expensive and fragile. |
| 3 : 1 to 5 : 1 | The commonly cited healthy range. |
| Above 5 : 1 | Strong, but you may be under-spending on growth. |
Why CAC payback often matters more
LTV depends on churn, and churn is the noisiest number you have when you're young. With a few months of data, LTV can swing wildly.
CAC payback is how many months of gross profit it takes to earn back what you spent acquiring a customer:
CAC payback = CAC ÷ (monthly revenue per customer × gross margin)
In the example: $600 ÷ $64 ≈ 9.4 months. Under 12 months is generally considered strong for small-business SaaS. For bootstrapped companies, payback matters more than the ratio, because cash spent on acquisition has to come back before you can spend it again.
How to improve your LTV to CAC
Raise LTV:
- Raise prices. This lifts LTV directly, often with little effect on churn. See how to raise prices.
- Reduce churn. Halving churn doubles LTV. See what is a good churn rate.
- Add upgrades and expansion revenue so good customers grow over time.
Lower CAC:
- Cut the worst channel. Calculate CAC per channel, not just overall. One channel often costs three times the others.
- Lean on channels that compound: content, referrals, free tools.
- Improve conversion on the traffic you already have before buying more.
Common mistakes
- Using revenue instead of gross margin. This overstates LTV.
- Leaving out founder time from CAC. Your hours aren't free, and they won't scale.
- Blending all channels. An average hides a channel that's losing money.
- Trusting LTV too early. With under a year of data, treat LTV as a range and watch payback.