The LTV:CAC ratio explained
Short answer: the LTV:CAC ratio compares the lifetime gross profit of a customer to the cost of acquiring them. A ratio of 3:1 is the widely used health benchmark — below it you are spending too much, far above it you may be under-investing in growth.
If there is one number that tells you whether a subscription or repeat-purchase business is built to last, it is this ratio. It is also one of the easiest to fudge, so let us be precise about it.
How to calculate it
LTV here is monthly revenue per customer × gross margin × average lifespan in months. Divide that by CAC and you get the ratio. Crucially, use gross-margin LTV, not revenue LTV — otherwise the ratio flatters you.
Why 3:1?
3:1 leaves enough margin after acquisition to cover overhead, fund growth, and absorb churn surprises. At 1:1 you barely recover acquisition cost. At 10:1 the ratio looks heroic, but it usually means you are too conservative with spend and a competitor will out-grow you. The sweet spot is roughly 3:1 to 5:1.
Do not forget payback period
The ratio ignores time. CAC payback period — how many months of gross profit it takes to recover CAC — tells you the cash-flow story. A great ratio with an 18-month payback can still sink a cash-strapped business. Watch both together.
The LTV:CAC calculator returns the ratio and the payback period side by side.
FAQ
Is a higher ratio always better?
No. Above ~5:1 you are likely under-spending on growth.
Where does CAC come from?
See CPA vs CAC for how to calculate it correctly.