LTV to CAC compares what a customer is worth to what it cost to win them. LTV is lifetime value, CAC is customer acquisition cost. The ratio tells you whether your growth engine makes money, and the payback time tells you how long your cash is tied up before a customer pays for themselves.
The formulas
LTV = average revenue per customer per month x gross margin x average lifetime in months. Use gross margin, not revenue alone, because only the profit part of revenue can repay acquisition cost. CAC = total sales and marketing cost in a period / number of new customers won in that period. Include salaries, tools, and ad spend, not just ad spend.
LTV:CAC ratio = LTV / CAC. Payback time = CAC / (monthly revenue per customer x gross margin). Payback is in months.
Worked example
A subscription business charges $50 per month, keeps a 70% gross margin, and customers stay 24 months on average. LTV = $50 x 0.70 x 24 = $840. In one quarter it spent $21,000 on sales and marketing and won 100 customers, so CAC = $21,000 / 100 = $210. The ratio is $840 / $210 = 4.0, written 4:1.
Payback = $210 / ($50 x 0.70) = $210 / $35 = 6 months. So each customer repays their acquisition cost after six months, and the remaining eighteen months of lifetime value are profit before other costs.
Reading the bands
Below 1:1 means you lose money on every customer, and growing faster only loses money faster. From 1:1 to 3:1 is tight: the model works but leaves little room for churn surprises or rising ad costs. From 3:1 to 5:1 is the healthy zone most businesses aim for. Above 5:1 can mean you are under-investing in growth and could afford to spend more to win customers faster.
Treat the bands as a guide, not a law. A business with very fast payback can survive a lower ratio, and a business with slow payback needs a higher one. Always read the ratio together with payback time and churn.
Mistakes to avoid
The biggest error is computing LTV from revenue instead of gross profit, which flatters the ratio. The second is leaving salaries and tools out of CAC, which flatters it again. The third is using lifetime figures from your oldest, happiest customers for a business whose recent churn is much higher. Use recent cohorts, not lifetime averages, when churn is changing.
Cohorts beat averages
A blended LTV hides changes over time. Suppose your oldest customers have an LTV of $900, but customers won this year have an LTV of $600 because they churn faster. A blended figure of $840 flatters the business and hides the deterioration.
Split LTV and CAC by cohort: customers won in each quarter, tracked separately. If recent cohorts show a falling LTV or a rising CAC, act on that, even if the blended ratio still looks healthy. Investors and operators who watch cohorts catch problems quarters before those who watch averages.
A final practical note: recompute the ratio whenever ad costs jump or churn shifts, since both move fast in paid acquisition. A ratio that was 4:1 last quarter can be 2:1 this quarter with no change in your product, simply because auction prices rose. Businesses that check quarterly catch the slide while there is still room to fix pricing, onboarding, or targeting.
Try it faster with the tool
You can follow every step above by hand, but the free LTV:CAC Ratio Calculator — the Ratio, the Bands & Payback in One View does the arithmetic for you. Enter your numbers and it gives the answer right away, so you can check your hand calculation or skip straight to the result.
Quick tips
- LTV uses gross margin, not raw revenue.
- Payback = CAC / monthly gross profit per customer.
- Read the ratio together with payback and churn, never alone.