What It Means
The LTVCustomer lifetime value (LTV)The total revenue a business expects to earn from one customer over the whole time that customer keeps buying. See more to CACCustomer acquisition cost (CAC)The average amount a business spends on sales and marketing to win one new paying customer. See more ratio divides customer lifetime value (LTV), the revenue one customer brings in over the whole relationship, by customer acquisition cost (CAC), what the business spent on sales and marketing to win that customer. A result of 3 means each customer brings in three times what it cost to land them. It's written as 3, 3:1 or "3 to 1".
Try It: Slide CAC and Watch the Ratio Move
Example: a customer worth $900 over their lifetime. Slide what it costs to win one and watch the ratio.
At or above 3 to 1, the benchmark Harvard Business School Online gives for most industries.
Each customer earns back more than they cost, though below the 3 to 1 benchmark.
Below 1 to 1, each customer costs more to win than they bring in.
How People Say It at Work
- "We're sitting at about 3 to 1 on LTV to CAC."
- "Paid search is dragging our ratio under two."
- "Can we afford that channel at this ratio?"
The Breakdown
Formula
LTV to CAC ratio = customer lifetime value รท customer acquisition cost
Measure both for the same group of customers and the same period.
Worked example. Three made-up businesses:
| Business | LTV | CAC | Ratio |
|---|---|---|---|
| Meal kit service | $400 | $500 | 0.8 to 1 |
| TutoringTutoringExtra one-on-one or small-group teaching outside regular class time, to help a student catch up, keep up or get ahead in a subject. See more studio | $1,200 | $600 | 2 to 1 |
| Accounting software | $3,600 | $900 | 4 to 1 |
The meal kit service loses money on every customer it wins. At the tutoring studio, each customer earns back their acquisition cost twice over, which still sits below the usual target. Only the software company clears the benchmark.
Benchmark. Harvard Business School Online calls a ratio of at least three healthy for most industries, and Stripe says software-as-a-service (SaaS) businesses generally aim for 3 to 1, about $3 back for every $1 spent winning a customer. Below 1, growth deepens the loss, since each new customer costs more than they return.
What moves the ratio. It rises when LTV goes up (bigger orders, more of them, customers who stay longer) or when CAC comes down (cheaper ways to find customers, more of the people you reach deciding to buy).
Good to Know
Both halves need the same definition of a customer and the same kind of value. If LTV counts revenue while CAC is judged against profit targets, the ratio flatters the business. The ratio also hides timing: CAC is spent up front, while LTV arrives over months or years, so a company can clear 3 to 1 and still run short of cash while it waits. That wait is what the CAC payback period tracks.
FAQ
How do you calculate the LTV to CAC ratio?
Divide customer lifetime value by customer acquisition cost for the same group of customers. An LTV of $900 and a CAC of $300 gives 3, usually written 3:1.
What is a good LTV to CAC ratio?
Harvard Business School Online gives at least three as the benchmark in most industries, and Stripe says SaaS businesses generally aim for 3 to 1. That works out to about $3 back for every $1 spent winning a customer.
What does an LTV to CAC ratio below 1 mean?
Each customer costs more to win than they'll ever bring in, so winning more customers makes the loss bigger. The fix is spending less per new customer, raising what each customer is worth, or both.
Do It in Buhata
Team Space
Start a thread in your Team Space in Buhata for the LTV to CAC ratio, and post each quarter's LTV, CAC and result there so the trend stays in one place.
Open BuhataRelated Terms and Categories
- Customer lifetime value (LTV)
The total revenue a business expects to earn from one customer over the whole time that customer keeps buying.
- Customer acquisition cost (CAC)
The average amount a business spends on sales and marketing to win one new paying customer.
Sources
Harvard Business School Online, "LTV/CAC Ratio: What It Is & How to Calculate It"; Stripe, "CAC SaaS: A guide for businesses"
Last updated .