LTV to CAC Ratio
Quick definition
The LTV to CAC ratio compares what a customer is expected to be worth with what it cost to acquire them, calculated as LTV divided by CAC.
Formula
LTV to CAC Ratio = Customer Lifetime Value ÷ Customer Acquisition Cost
Formula variables
- Customer Lifetime Value
- The estimated value of a customer, using a stated method.
- Customer Acquisition Cost
- The cost of acquiring a customer, for the same customer group.
Worked example
- Customer lifetime value (margin-based)
- $900
- Customer acquisition cost
- $360
900 ÷ 360
Result: 2.5
Each unit spent on acquisition is expected to return 2.5 units of lifetime value. The figures are illustrative.
How to interpret it
The ratio summarises whether acquisition spend is expected to be repaid by customer value. A ratio that is rising generally means acquisition is becoming more efficient relative to value.
There is no universally correct target; the right level depends on margins, cash timing and risk. Read it with the CAC payback period.
When it is useful
- Summarising acquisition efficiency in one number for planning.
- Comparing channels or segments on value returned per unit of cost.
- Pairing with payback period to cover both value and timing.
Limitations
- Both inputs are estimates, so the ratio is only as reliable as they are.
- It ignores timing: two businesses with the same ratio can have very different cash flow.
- Methods for LTV and CAC vary, which makes ratios hard to compare across companies.
Common mistakes
- Comparing a margin-based LTV with a revenue-based one.
- Quoting a ratio without saying how LTV and CAC were calculated.
- Treating a fixed ratio as a universal target.