LTV vs CAC
LTV and CAC are two numbers that only matter together. One tells you what a customer is worth over the whole relationship. The other tells you what you paid to get that customer. When the ratio is wrong, you lose money on every new customer you add.
LTV
LTV stands for lifetime value. It is the total profit you earn from one customer across the whole relationship. A higher LTV means each customer is worth more, which gives you more room to spend on acquisition and still make money.
CAC
CAC stands for customer acquisition cost. It is your total sales and marketing spend divided by the number of new customers it brought in. It tells you how expensive it is to buy a new customer.
LTV vs CAC: side by side
| Dimension | LTV | CAC |
|---|---|---|
| What it measures | The total profit one customer generates over their entire relationship with you. | The cost to win one new customer through sales and marketing. |
| How to calculate it | Average revenue per customer times gross margin, divided by churn rate. Simpler forms use average purchase value times purchase frequency. | Total sales and marketing spend in a period divided by the number of new customers acquired in that same period. |
| What healthy looks like | LTV should be at least 3 times CAC. Below 3-to-1 the math gets painful. Above 5-to-1 can mean you are underinvesting in growth. | There is no universal good CAC. A good CAC is one that keeps the LTV to CAC ratio above 3-to-1. |
| How to improve it | Raise prices, upsell, cross-sell, reduce churn, and increase purchase frequency. | Improve targeting, increase conversion rates, reduce paid spend waste, and lean on referrals and organic channels. |
Which one, when?
LTV: Use LTV when you want to know what you can afford to spend to acquire a customer. It shapes pricing, retention strategy, and how much budget you can put behind growth.
CAC: Use CAC when you want to know if your marketing and sales machine is efficient. Watch it alongside LTV, because CAC alone does not tell you if a customer is worth the price.
Frequently asked questions
What is a good LTV to CAC ratio?
A commonly used benchmark is 3-to-1 or higher. That means a customer is worth at least three times what you paid to acquire them. Below 3-to-1 you are likely burning cash to grow. Above 5-to-1 you may be leaving growth on the table by under-spending on acquisition.
How do I calculate each one?
For CAC, add your sales and marketing costs for a period and divide by the number of new customers in that period. For LTV, the simplest version is average revenue per customer times gross margin, divided by churn rate. If you do not have subscription churn, use average purchase value times purchase frequency times average customer lifespan.
How do I lower CAC or raise LTV?
Lower CAC by improving your targeting, increasing conversion rates, cutting underperforming ad spend, and building organic channels like referrals and content. Raise LTV by raising prices, reducing churn, offering upsells and cross-sells, and improving onboarding so customers stay longer and buy more.
Now run your own numbers
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