What LTV:CAC is (and what it isn’t)
LTV:CAC compares the value you get from a customer to what it cost to acquire them. It’s a useful directional metric — but it’s easy to inflate with optimistic assumptions.
Start with clean definitions
- CAC = (marketing + sales spend) / new customers
- ARPA / ARPU = average revenue per account (per month)
- Gross margin = (revenue − variable costs) / revenue
- Churn = % of customers that cancel per month
Simple LTV approximation
For a steady-state subscription model:
- LTV ≈ (ARPA × gross margin) / churn
This assumes churn stays stable and ignores expansion. If you have expansion, you can approximate by increasing ARPA or using net retention methods.
Interpreting the ratio
- < 1: you lose money on acquisition.
- 1–3: could be OK if payback is fast.
- 3–5: typically healthy, assuming churn is real.
- 5+: often means under-spending or measurement issues.
Health checklist (avoid false confidence)
- Is CAC measured consistently? Include sales comp and tools if you have a sales motion.
- Is churn cohort-based? Early cohorts often churn more.
- Is margin truly variable? If support scales with customers, include it.
- Are you mixing monthly and annual numbers? Normalize to the same period.
- Does payback make sense? A strong LTV:CAC with 18-month payback is still risky.
Quick calculation
Use the CAC & LTV tool to compute the ratio with margin and churn.