LTV to CAC Ratio
Why it matters
A ratio near 1 means the business only recovers what it spent winning the customer, and then has nothing left for rent, salaries or growth. A common rule of thumb treats 3 as healthy. A ratio far above 5 is often read as a sign the business could spend more on growth. These are guides, not laws, and the right figure depends on margin and cash. The ratio shows profitability. It does not show speed, which is why it is read together with the CAC payback period, the time taken to earn the acquisition cost back.
How to apply it
- Work out lifetime value from gross margin per customer and expected lifespan, not from revenue.
- Work out fully loaded CAC: all sales and marketing cost, including salaries and tools, divided by new customers won in the same period.
- Calculate the ratio by channel as well as in total, because a healthy blend can hide a channel that loses money.
- Treat a ratio below 1 as urgent, around 3 as healthy, and a very high ratio as a prompt to test more spend.
- Recheck it when price, churn or acquisition cost changes.
What it is
Lifetime value is the profit a customer brings over the whole relationship. Customer acquisition cost, or CAC, is the sales and marketing spend needed to win one customer. Divide the first by the second and the result is the ratio. A ratio of 3 means every £1 spent winning a customer comes back as £3 of profit over time.
Say a client is worth £21,000 in lifetime margin and costs £6,000 to win. The ratio is 3.5.
Common mistakes
Leaving salaries out of CAC, which flatters the ratio. Using lifetime value from an optimistic lifespan on a young customer base. Comparing a lifetime figure that takes years to arrive with a cost paid today, with no regard for cash. A business with a ratio of 4 can still run out of money if payback takes three years.
