LTV:CAC Ratio Calculator
Lifetime value over acquisition cost gives the ratio investors and operators watch — a quick read on whether your growth is healthy or burning money. Your own LTV and CAC.
Is a customer worth more than they cost?
A ratio under ~3:1 often means you're under-investing or over-spending — but the healthy number varies by model.
The LTV:CAC ratio is calculated as Customer Lifetime Value (LTV) divided by Customer Acquisition Cost (CAC). LTV is the total net profit a business expects to earn from a single customer over the entire duration of their relationship. It is typically computed as Average Revenue Per User (ARPU) multiplied by Gross Margin (as a decimal) multiplied by Average Customer Lifespan (in months or years). CAC is the total cost of acquiring a new customer, including marketing, sales salaries, advertising, and software costs, divided by the number of new customers acquired in a given period. The formula is: LTV:CAC = (ARPU × Gross Margin × Lifespan) / CAC. For example, if ARPU is $100 per month, gross margin is 70% (0.70), average lifespan is 24 months, and CAC is $500, then LTV = $100 × 0.70 × 24 = $1,680, and the ratio is $1,680 / $500 = 3.36. This ratio indicates how efficiently a company generates value from its acquisition spending. A higher ratio suggests healthy unit economics, while a ratio below 1 means the cost to acquire exceeds the value returned, which is unsustainable.
SaaS Startup with Monthly Subscription
A B2B SaaS company charges $150 per month per user. Gross margin is 80% (0.80). Average customer lifespan is 36 months (churn rate of 2.78% per month). CAC is $1,200 per customer. LTV = $150 × 0.80 × 36 = $4,320. Ratio = $4,320 / $1,200 = 3.6. This indicates the company earns $3.60 for every $1 spent on acquisition, which is healthy for most investors.
E-commerce Store with One-Time Purchases
An online clothing store has an average order value of $60, with a gross margin of 50% (0.50). Customers typically make 2 purchases over 18 months (lifespan = 18 months, but note: LTV calculation uses total revenue per customer, not monthly). Here, ARPU is $60 per purchase, but total revenue per customer is $120. Gross margin per customer is $120 × 0.50 = $60. CAC is $25 per customer. LTV = $60. Ratio = $60 / $25 = 2.4. This means for every dollar spent acquiring a customer, the store nets $2.40 in profit.
Mobile App with In-App Purchases
A freemium mobile game has an average revenue per paying user of $4.50 per month. Gross margin is 70% (0.70). Average lifespan for paying users is 12 months. CAC is $15 per paying user (including ad spend and app store fees). LTV = $4.50 × 0.70 × 12 = $37.80. Ratio = $37.80 / $15 = 2.52. The company recovers its acquisition cost in about 4.8 months ($15 / ($4.50 × 0.70) = 4.76 months).
A good LTV:CAC ratio typically falls between 3:1 and 5:1, indicating strong unit economics and efficient growth. A ratio below 1:1 means you are spending more to acquire a customer than you earn from them, which is unsustainable unless you plan to monetize later (e.g., through upsells or referrals). Ratios above 5:1 may suggest you are underinvesting in growth, leaving potential revenue on the table. However, these ranges vary by business model: high-margin SaaS companies often target 3:1 or higher, while low-margin e-commerce may accept 2:1. The ratio is most meaningful when calculated consistently over time, using the same definitions for LTV and CAC. Always consider payback period (CAC divided by monthly gross profit) as a companion metric. Do not rely on a single snapshot; monitor trends to see if efficiency improves or degrades as you scale.
A common mistake is using revenue instead of gross profit in LTV, which inflates the ratio and hides variable costs. Another error is calculating LTV based on total customer lifespan without accounting for churn, leading to overestimated values. Some people use average order value without multiplying by purchase frequency, especially in non-subscription businesses. Edge cases include negative CAC (e.g., referral bonuses that reduce net cost) or LTV for customers who never pay (freemium models). Also, failing to segment customers (e.g., high vs low value) can mask problems. Finally, comparing LTV:CAC across different time periods without adjusting for seasonality or changes in pricing can mislead decision-making.
- Customer Lifetime Value (LTV)
- The total net profit a business expects to earn from a single customer over their entire relationship.
- Customer Acquisition Cost (CAC)
- The total cost of acquiring a new customer, including marketing and sales expenses, divided by the number of new customers.
- Gross Margin
- The percentage of revenue remaining after subtracting the direct costs of delivering a product or service.
- Churn Rate
- The percentage of customers who stop using a product or service over a given period, used to estimate customer lifespan.
- Payback Period
- The time required for a customer's gross profit to equal the CAC, calculated as CAC divided by monthly gross profit.
What is a good LTV:CAC ratio?
A ratio of 3:1 or higher is generally considered healthy, while below 1:1 indicates you lose money on each customer.
How do I calculate LTV for a business with no subscriptions?
Use average purchase value times purchase frequency times customer lifespan (in years) times gross margin.
Should I include salaries in CAC?
Yes, include all costs directly tied to acquisition, such as sales team salaries, marketing salaries, ad spend, and software tools.
What if my CAC is very low?
A low CAC can be good, but ensure your LTV is accurate and not inflated by ignoring costs like support or returns.
Can LTV:CAC be negative?
No, because both LTV and CAC are positive in normal scenarios. A negative ratio would indicate negative LTV (e.g., high returns) or negative CAC (e.g., cash incentives).
How often should I recalculate this ratio?
Monthly or quarterly, depending on your business cycle, to track trends and adjust strategies.
Does this ratio work for one-time purchases?
Yes, but you must estimate average customer lifespan and purchase frequency accurately.
What is the difference between LTV:CAC and payback period?
LTV:CAC measures total value vs cost, while payback period measures how quickly you recover the CAC.
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