Glossary · Finance
What is LTV:CAC Ratio?
Definition
The LTV:CAC ratio compares what a customer is worth over their lifetime to what it costs to acquire them, with 3:1 commonly cited as a healthy benchmark.
LTV:CAC = customer lifetime value ÷ customer acquisition cost
Why it matters
This single number tells you if your growth engine is sound. A ratio below 1:1 means you lose money on every customer you win, while a very high ratio may mean you are underinvesting in growth.
A pet grooming shop calculates that the average client generates $450 in gross profit over two years and costs $90 to acquire through ads and a first-visit discount. The LTV:CAC ratio is 450 divided by 90, or 5:1, which suggests room to spend more on marketing.
If the same shop paid $300 per client, the ratio would drop to 1.5:1 and it would need to cut acquisition costs or raise retention. Treat 3:1 as a guideline rather than a rule, since cash timing also matters.
Common mistakes
- !Ignoring payback time, so cash runs out long before the lifetime value is collected.
- !Calculating the ratio with blended numbers that hide a very unprofitable channel.
Frequently asked questions
What is LTV:CAC Ratio?
The LTV:CAC ratio compares what a customer is worth over their lifetime to what it costs to acquire them, with 3:1 commonly cited as a healthy benchmark.
How do you calculate LTV:CAC Ratio?
LTV:CAC = customer lifetime value ÷ customer acquisition cost
What mistakes do beginners make with LTV:CAC Ratio?
Ignoring payback time, so cash runs out long before the lifetime value is collected. Calculating the ratio with blended numbers that hide a very unprofitable channel.
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