Software Growth

LTV:CAC ratio

The LTV:CAC ratio compares what a customer is worth over their lifetime to what it cost to win them. A ratio above 3 is the usual target.

The LTV:CAC ratio is the quickest test of whether a SaaS business makes money on its customers. It puts customer lifetime value over customer acquisition cost. If you earn far more from a customer than you paid to get them, you can spend more on growth. If the ratio is near 1, every sale loses money once you count everything else.

How to calculate it

Example: customers pay $50 per month on average (ARPA), your gross margin is 80%, and monthly customer churn is 4%.

If CAC is $300:

What good looks like

David Skok writes that the best SaaS businesses have an LTV to CAC ratio above 3, sometimes as high as 7 or 8. Bessemer also uses 3x or more as its signal that a company should invest in customer acquisition. Both are venture-era rules of thumb, so treat them as a rough bar rather than a law.

  • Under 1: you lose money on each customer.
  • Around 3: healthy, with room to grow.
  • Above 5: you may be underinvesting in growth, if you have the demand to absorb more spend.

Why the ratio can mislead

  • Churn dominates the math. LTV divides by churn, so a small change in churn moves LTV a lot. At 2% churn the example above gives an LTV of $2,000. Early churn data from a few months of customers is shaky.
  • Revenue versus margin. LTV on revenue instead of gross profit overstates it. The a16z guide stresses that LTV should reflect net profit over the relationship, not revenue.
  • It ignores timing. A 5:1 ratio that takes four years to earn back is slow. Pair it with the CAC payback period, which tells you how long your cash is tied up.
  • Averages hide segments. Annual customers on a higher plan can have an 8:1 ratio while monthly starter customers sit at 1.5:1.

For bootstrapped founders

A 3:1 ratio with an 18 month payback might satisfy an investor, but it can empty your bank account if you grow quickly. Without outside cash, payback usually matters more than the ratio. A bootstrapped product with a 2.5:1 ratio and a 4 month payback is often easier to run than one with 4:1 and 20 months.

Use the ratio to compare channels, price changes and customer segments, not as a single score for the whole company. It is one input to your wider unit economics.

A quick way to use it

Compute the ratio for each acquisition channel and each plan, then rank them. A channel at 5:1 deserves more budget before one at 2:1 does. Recompute every quarter, because churn and CAC both drift as you scale. When a number looks unusually good, check the inputs first: a new product with two months of churn data can show a spectacular LTV that disappears once customers reach their first renewal. If you sell annual plans, use annual churn and annual revenue so the periods match, and keep the same gross margin assumption you use elsewhere so the ratio stays comparable over time.

Sources

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