Introduction
LTV/CAC ratio is the most important metric for sustainable growth. It tells you: for every $1 spent acquiring a customer, how much do they generate in lifetime value?
What Is LTV and CAC
LTV (Lifetime Value): Total revenue a user generates over their lifetime
Example: User pays $10/month for 24 months → LTV = $240
CAC (Customer Acquisition Cost): Cost to acquire one customer
Example: Spent $10K on ads, acquired 100 users → CAC = $100
How to Calculate
LTV:
LTV = (Average revenue per user) / (Monthly churn rate)
Example: $10/month ARPU, 5% monthly churn → LTV = $10 / 0.05 = $200
CAC:
CAC = (Marketing spend + Sales spend) / New customers acquired
Example: $50K marketing spend, 500 customers → CAC = $100
LTV/CAC Ratio & Sustainability
LTV/CAC = $200 / $100 = 2:1
Interpretation: For every $1 spent, you get $2 in lifetime value. Sustainable but tight.
Payback period: CAC / (Monthly revenue per user) = $100 / $10 = 10 months
You recover CAC after 10 months. Months 11-24 are profit.
Industry Benchmarks
- SaaS B2B: 3-5:1 (long sales cycles, high CAC)
- eCommerce: 2-3:1 (lower LTV, high competition)
- Mobile apps: 1.5-2.5:1 (low ARPU, high CAC)
- Marketplace: 2-4:1 (depends on GMV model)
How to Improve Ratio
Increase LTV: Improve retention, increase ARPU (pricing tiers, upsell)
Decrease CAC: Improve conversion funnel, focus on organic growth, optimize ad spend
Conclusion
LTV/CAC ratio is your north star for growth profitability. Maintain 3:1+ for sustainable scale. Below 2:1, you're not profitable.
Related Resources
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