Unit economics

LTV:CAC ratio

Lifetime value divided by acquisition cost. A rule of thumb for whether growth spending is productive.

LTV:CAC divides expected lifetime gross profit by what it cost to acquire the customer. Around 3:1 is the conventional target.

Below 3:1 usually means acquisition is too expensive or retention too weak. Well above 3:1 is not automatically good news: it often means the business is underinvesting in growth and could profitably spend more.

The ratio inherits every weakness of LTV, including a churn assumption that may not hold. Two businesses can report the same ratio with completely different payback periods, and the one that gets its money back in nine months is in a different position from the one that waits three years.

LTV (Customer Lifetime Value) The total gross profit expected from a customer across their whole relationship with you.
CAC (Customer Acquisition Cost) Total sales and marketing spend in a period divided by the customers acquired in it.
CAC payback period How many months of gross profit from a new customer it takes to earn back what you spent acquiring them.

LTV:CAC ratio

Related terms