LTV & CAC: How to Calculate and Optimize This Ratio

10 min read Updated: October 2025
TL;DR

The LTV:CAC ratio measures the profitability of your customer acquisition. It compares customer lifetime value (LTV) to acquisition cost (CAC). A customer generating $300 in CAC and $1,200 in LTV yields a 4x ratio (excellent).

LTV CAC
=
ARPA × Number of new customers Churn × Sales & Marketing expenses

Rule of thumb: Aim for a 3x to 5x ratio for healthy and scalable growth.

Table of contents

What is CAC?

CAC (Customer Acquisition Cost) represents how much you spend on average to acquire a new paying customer.

CAC =
Marketing expenses + Sales expenses Number of new customers

It includes expenses related to:

Marketing:

  • Marketing team salaries
  • Advertising (Google Ads, Facebook Ads, LinkedIn Ads)
  • Content marketing (writing, SEO)
  • Marketing tools (HubSpot, Mailchimp, etc.)
  • Events, sponsorship

Sales:

  • Sales team salaries
  • Commissions
  • CRM tools (Salesforce, Pipedrive)
  • Travel, demos

What is LTV?

LTV (Lifetime Value) represents the total revenue generated by a customer throughout their entire relationship with your SaaS.

LTV =
ARPA Churn Rate

If a customer subscribes to your Starter plan at $100/month and remains a customer for 20 months (thus being part of a cohort with an average monthly churn of 5%): their LTV is $100 × 20 = $2,000.

LTV:CAC Decoded

The LTV:CAC ratio puts two fundamental metrics into perspective: the economic value a customer generates over their lifetime (LTV) versus the cost required to acquire them (CAC).

This comparison is at the heart of unit profitability analysis, similar to the contribution margin logic in an income statement: it measures what remains after covering direct acquisition costs.

LTV CAC
=
ARPA × Number of new customers Churn × Sales & Marketing expenses

In analytics terms, the net LTV:CAC further refines this reading by integrating gross margin into the calculation, thus reflecting the net economic value of direct costs.

Net
LTV CAC
=
LTV CAC
× Gross margin

To calculate your LTV:CAC ratio in a few clicks with your own data, use our interactive LTV:CAC simulator.

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Interpreting Your LTV:CAC

< 1x: Critical

You're losing money on each acquired customer. Unsustainable situation requiring immediate action: drastically reduce CAC, increase ARPA, or decrease churn. Without quick correction, growth accelerates bankruptcy.

1x - 2x: Fragile

Profitable, but margin too thin to scale comfortably. Typical profile of early-stage companies still testing their acquisition model. Acceptable temporarily during experimentation phase, but you should aim for 3x quickly to convince investors and be able to invest massively in growth.

3x - 5x: Ideal Zone

The sweet spot sought by all growing SaaS. Profitable enough to invest massively in acquisition without risking cash flow, while avoiding underexploiting your growth potential. The 3x ratio balances three key items: one third covers the initial acquisition cost, one third the operational costs over the customer's lifetime (servers, support, product), and one third generates profit margin.

> 5x: Under-Investment

You're probably under-investing in marketing and artificially limiting your growth. Either your CAC is exceptionally low (highly effective PLG), or you're not exploiting all your acquisition channels. Gradually increase your marketing budget to test new channels and accelerate growth without degrading the ratio below 3x.

Optimizing LTV:CAC

Improving your LTV:CAC ratio means working on two levers: reducing acquisition cost or increasing customer lifetime value. Each lever activates different mechanics, with short-term or long-term impacts.

Reducing CAC

Focus budget on top-performing channels. Calculate the CAC of each channel separately, rank them in ascending order, and reallocate your budget to the top two or three. SEO and content marketing often display the lowest CAC in the long run: a $300 article that generates 50 customers over 24 months brings your CAC down to $6.

Improve conversion rate. Going from 2% to 3% conversion with the same $10,000 budget drops CAC from $50 to $33 (34% decrease). Effective tactics: A/B testing landing pages, improving product onboarding, reducing signup friction.

Increasing LTV

Reduce churn. Lowering your churn from 5% to 3% monthly extends customer lifetime from 20 to 33 months, a LTV jump from $2,000 to $3,300 (+65%). Main levers: better onboarding, proactive customer success, addictive features that make the product indispensable.

Increase ARPA. Through upsell and cross-sell, you can boost ARPA by 30% and thus LTV in the same proportion. Effective strategies: tiered pricing (Starter, Pro, Enterprise), usage-based pricing, premium add-ons a la carte.

Extend contracts. Pushing annual contracts rather than monthly divides churn by two or three. A customer on an annual commitment churns on average at 15% per year versus 5% per month on monthly, which can explode LTV from $2,000 to $7,200. To encourage annual commitment, offering 10 to 20% discount remains an excellent deal.

Common Mistakes

Comparing CAC and LTV with Different Periods

Calculating a ratio by taking the CAC from March 2025 and the LTV from a January 2023 cohort can give a false impression of health. If your product or pricing have evolved in the meantime, this comparison becomes misleading. Always compare current CAC with projected LTV of new customers, using metrics from recent cohorts.

Ignoring CAC Payback

A good LTV:CAC ratio doesn't guarantee good financial health. With a CAC of $1,000, an LTV of $4,000 (4x ratio - excellent!), but an ARPA of $50/month, the payback period reaches 20 months. This means you must finance 20 months of cash flow before recovering your initial investment, which can strangle your growth.

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