LTV vs CAC: The Ratio That Determines Your Business Health
Customer Lifetime Value vs Customer Acquisition Cost, the ratio every SaaS and subscription business needs to understand. How to calculate it, what it means, and when to act.
LTV:CAC is the single most important ratio for subscription and SaaS businesses. It tells you how much value a customer generates relative to what it cost to acquire them. A healthy ratio means your growth is sustainable. An unhealthy ratio means you are growing yourself into insolvency.
LTV (Lifetime Value) vs CAC (Customer Acquisition Cost): The Definitions
LTV (also CLV) is the total revenue, or profit, you expect to earn from a customer over their entire relationship with your business.
Formula
LTV = Average Revenue Per User (ARPU) × Gross Margin % ÷ Churn Rate
Example
SaaS: £50/month ARPU, 70% gross margin, 5% monthly churn rate. LTV = £50 × 0.70 ÷ 0.05 = £700.
CAC is the total cost of acquiring a new customer, including all sales and marketing expenses divided by the number of new customers gained in a period.
Formula
CAC = Total Sales & Marketing Spend ÷ Number of New Customers Acquired
Example
If you spend £10,000 on marketing and sales in a month and acquire 50 new customers, CAC = £10,000 ÷ 50 = £200.
Key Differences
- 1LTV is a forward-looking estimate; CAC is a backward-looking measure of actual spend
- 2LTV depends on retention (churn rate); improving retention improves LTV without changing CAC
- 3CAC varies by acquisition channel; paid advertising CAC is often higher than organic/referral CAC
- 4Both are meaningless in isolation, their ratio (LTV:CAC) is what drives decisions
When to Use LTV (Lifetime Value) vs CAC (Customer Acquisition Cost)
You need both. LTV tells you how valuable a customer is; CAC tells you how much you paid for them. The LTV:CAC ratio tells you whether your business model is working.
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Common Mistakes to Avoid
Using revenue LTV instead of gross margin LTV, ignoring margin makes your unit economics look far better than they are
Using blended CAC across all channels instead of channel-specific CAC, which masks inefficient channels
Ignoring the CAC payback period, even a healthy LTV:CAC ratio is problematic if it takes 5 years to recover CAC
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Frequently Asked Questions
What is a good LTV:CAC ratio?↓
The benchmark for SaaS businesses is 3:1 or higher, meaning LTV is at least 3× CAC. Below 1:1 means you are losing money on each customer. Above 5:1 may indicate you are under-investing in growth.
What is a good CAC payback period?↓
Most SaaS businesses aim for under 12 months. Under 6 months is excellent. Over 24 months is a concern, as it ties up significant capital. Your payback period = CAC ÷ (ARPU × Gross Margin %).
How does churn affect LTV?↓
Churn has an enormous impact on LTV. At 2% monthly churn, average customer lifetime is 50 months. At 5% churn, it is 20 months. Reducing churn from 5% to 3% can increase LTV by 67%.
Should I use revenue or profit LTV?↓
Use gross margin LTV (revenue × gross margin %) for unit economics decisions. This gives you the most honest picture of what each customer is actually worth to the business after direct costs.
How do I reduce my CAC?↓
Focus on improving conversion rates at each funnel stage, invest in lower-cost organic channels (SEO, content, referral), improve sales efficiency, and test different acquisition channels to find cheaper sources of customers.