LTV to CAC Ratio: How to Calculate It and What Counts as Good

LTV to CAC divides the gross profit a customer is expected to generate over their lifetime by what it cost to win them. A customer worth $2,107 who cost $600 gives a ratio of 3.5 to 1.

The usual target, 3:1, is investor guidance. David Skok introduced it in his SaaS Metrics article, and Bessemer Venture Partners repeats it in its 2021 benchmarks. Both sources attach caveats to the number.

A single company-wide ratio also hides the decision that matters most.

The same product can have one channel at 8.4:1 and another at 1.8:1, and telling them apart depends on attributing each customer, and every renewal they pay, to the channel that found them.

What LTV and CAC measure

Customer lifetime value (LTV) is the profit a customer generates between their first payment and their last.

Andreessen Horowitz defines it as the present value of the future net profit from the customer, and lists LTV built on revenue, or even on gross margin, as a common mistake.

The classic formula, which Skok describes as average gross profit per customer divided by churn, is the gross-margin version a16z warns about.

Skok's gross margin does include customer support and the account management time spent retaining customers, so part of the cost of serving a customer is already inside it.

Customer acquisition cost (CAC) is what you spend to win new customers in a period divided by the number of new customers in that period.

The same a16z metrics guide says CAC should be the full cost, with referral fees, credits and discounts included, and that investors like to see it twice: blended across every channel, and for paid channels only.

You will also see the pair written as CAC to LTV, or CAC:LTV.

That is the same relationship turned over: a CAC:LTV of 1:3.5 is an LTV:CAC of 3.5:1, and it can also be stated as a percentage, with CAC at 28% of LTV.

Check which way a benchmark is written before comparing your number with it.

How to calculate the LTV to CAC ratio

Five formulas cover the arithmetic. ARPA is average revenue per account per month, and churn is the share of customers who cancel in a month.

Gross profit per customer per month = ARPA x gross margin
LTV                  = gross profit per customer per month / monthly churn
CAC                  = acquisition spend in a period / new customers in that period
LTV to CAC           = LTV / CAC
CAC payback (months) = CAC / gross profit per customer per month

A worked example

Take a SaaS product that charges $79 a month at an 80% gross margin and loses 3% of its customers each month. Last month it spent $18,000 on acquisition and signed 30 new customers. Every figure here is hypothetical.

What churn does to the same product

Churn is hard to estimate early on, and of all the inputs it moves the answer furthest.

Moving from 3% to 5% turns a comfortable 3.5:1 into 2.1:1 without a dollar of extra spend. Gross margin deserves the same suspicion.

Bessemer's cloud portfolio averages 70% between $1 million and $10 million of ARR, and at 70% this product earns $55.30 a month per customer, which gives an LTV of $1,843 and a ratio of 3.1:1.

Which LTV to divide by

The simple formula assumes churn stays at 3% for as long as customers last, which implies an average life of 33 months.

Cap the horizon at 24 months, a window a16z prefers to measure when data is thin, and the same customer is worth $1,092, a ratio of 1.8:1. The other $1,014 of the simple LTV arrives after month 24.

Skok's later article on discounted cash flow goes further. It applies a 10% discount rate to revenue far in the future, and it handles customers who expand their spend, a case where the simple formula returns an infinite LTV.

Pick one method and use it for every comparison.

What is a good LTV to CAC ratio

Three to one is the figure everyone quotes. Skok wrote that the best SaaS businesses have a ratio higher than 3, sometimes 7 or 8.

He presented it as one of two guidelines, the other being months to recover CAC, that began as early guesses and held up when he checked them against SaaS businesses over two years.

Bessemer's Scaling to $100 Million, published in September 2021, recommends investing in acquisition when CLTV to CAC is 3x or better, and says a company well under that should keep experimenting until its unit economics improve.

It adds that customers only turn profitable beyond 1x, and that when CAC exceeds lifetime value you should stop acquiring more of them.

Read the 3:1 target with its caveats. Both sources are venture investors, and neither publishes a measured median across SaaS companies. The 3 was also set against the simple formula.

In the discounted-LTV article, Skok wrote that discounting produces a lower LTV, that the target would need to move to a lower number, and that an updated recommendation would come in a later post.

He also warned that these formulas only give meaningful results once your sales and marketing costs are predictable and scalable, which rules out plenty of early-stage companies.

Before comparing yourself with any benchmark, check three things: which LTV method produced your number, whether CAC includes salaries and commissions, and which customer segment the benchmark describes.

CAC payback period

The ratio says how much a customer returns eventually. Payback says how long you wait to get your money back.

Skok recommends recovering CAC in 12 months or less, allows 18 months or longer if you can raise capital cheaply, and reported that many of the best SaaS businesses manage 5 to 7 months.

Bessemer measures payback against gross-margin-adjusted revenue and reports an average of 15 months across its portfolio for companies at $1 million to $10 million of ARR. Its targets depend on who you sell to.

The example product pays back in 9.5 months by the standard formula, which assumes nobody cancels before then.

With 3% monthly churn, a cohort of customers has repaid $600 of gross profit per head only in month 12: $599.77 after 11 months and $644.97 after 12.

A $79 plan sold to small teams falls in the SMB bucket, so the 12-month target is a close call.

LTV to CAC by channel

A company-level 3.5:1 can sit on top of channels that fall well short of 3:1.

Skok suggests using his guidelines to evaluate different lead sources, Bill Gurley, a critic of leaning on the formula, concedes that used correctly it is a good tactical tool for comparing marketing programs across channels, and a16z says investors want CAC broken out by paid channel, using Facebook as its example.

The same hypothetical company looks different when split by where its customers came from.

Blended, the company clears the bar. Google Ads, at 1.8:1 with a 14.2-month payback, does not. SEO content pays back in 4 months and returns 8.4 times its cost over a customer's life.

The sponsorships show why both numbers belong on the page: 4.8:1 is the second-best ratio, yet the cash takes almost 12 months to come back, which matters if you fund growth from your own bank balance.

Moving all the budget from ads to content is the wrong reading. The 12 content customers are the cheap ones.

Gurley and a16z both point out that acquisition cost climbs as you buy more of a limited audience, so each ratio describes the average for what you have spent so far. Raise a channel's budget in small steps and recalculate.

Keep organic signups out of a paid channel's denominator as well: dividing the $9,000 of ad spend by all 30 customers would show a CAC of $300 and flatter the ads.

Why channel-level LTV needs attribution

The table above assumes you know which channel every customer came from and can follow that customer's payments for years. Each assumption breaks in its own way.

Customers land in the wrong channel

WebKit's Intelligent Tracking Prevention documentation says Safari treats click IDs in link URLs as link decoration and caps cookies created by JavaScript on the landing page at 24 hours.

It also deletes all script-written cookies and storage after 7 days without user interaction with the site.

A visitor who clicks an ad in Safari, leaves, and subscribes 10 days later has lost the cookie that held the ad source, and the signup can be filed under direct.

What survives is covered in Safari ITP and SaaS conversions.

Ad platforms add the opposite error. Each one claims the conversions it influenced, so the customers credited to channels can add up to more than the customers you have, and every channel's CAC looks lower than it is.

The post on self-reported against tracked attribution compares the two.

Renewals happen where no browser is watching

Most of a subscription's LTV is renewals. A charge in month 8 is Stripe billing a card with nobody on your site, so a browser-side analytics tag never sees it.

Lifetime value by channel needs the billing system to carry the original source forward on every renewal. Subscription LTV attribution by channel covers how renewals get credited to the original channel.

Pick the credit rule before you compare

Since November 2023, the attribution reports in Google Analytics offer 3 models: data-driven, paid and organic last click, and Google paid channels last click.

First click, linear, time decay and position-based were removed, and every remaining model withholds credit from direct visits unless the whole path was direct.

A channel that introduces buyers but rarely gets the last click, such as a newsletter or a podcast, then looks more expensive per customer than it is.

The credit rule changes the denominator of every channel's ratio, so choose it once and keep it. The post on last-touch, first-touch and linear attribution compares the three models TrackRev offers.

How to improve LTV to CAC

Each lever changes one input. The table moves one at a time from the worked example, so the effects are comparable.

Gurley's point that the formula's variables depend on one another applies here. A higher price tends to raise churn, and more spend raises CAC, so test each change on real cohorts before trusting the table.

Lower churn first

Churn has the largest effect in the sensitivity table. Skok says getting paid more up front usually lowers it, because a customer who has committed more is likelier to spend the time getting the product running.

Annual plans also pull cash forward, which shortens payback. His cohort analysis compares churn in the first months across signup groups, which shows whether changes to onboarding and training helped.

Move spend between channels

The channel table is the quickest source of CAC improvement, since it needs no product change. Shift budget toward the channels with short payback and a ratio above 3, and trim the ones under 2.

Channels that pay per customer change the mix further.

An affiliate or referral program turns part of acquisition cost into a share of revenue paid after the customer pays, which is why starting an affiliate program is a CAC decision as well as a marketing one.

Raise price or margin with a churn check

A $10 price rise lifts the ratio from 3.5:1 to 4.0:1 only if churn holds at 3%. If churn climbs to 3.5%, LTV is $2,034 ($71.20 / 0.035) and the ratio 3.4:1, slightly worse than where you started.

Margin work, such as cheaper hosting, avoids that particular trade-off, though it moves the ratio less.

Mistakes that distort the ratio

Each of these input errors flatters the result.

A fourth mistake has no tidy number: calculating the ratio from two months of data. Churn estimated from so little history is unreliable, which is why Skok cautions that the formulas mean little until acquisition is repeatable.

Where TrackRev fits

TrackRev's Revenue Attribution supplies the LTV half of the channel table.

It matches charges from Stripe, Paddle, Polar and Lemon Squeezy to the tracked click that produced them and carries that source across every renewal, so a customer's month-14 payment credits the same channel as month 1.

The Channels page has a lifetime value table with customers, orders including renewals, lifetime revenue and average LTV per customer for each channel, and credit can be switched between last-touch (the default), first-touch and linear without re-tagging links.

Two limits apply. The table shows all-time revenue rather than gross profit, so apply your margin, and it mixes customers of different ages, so a channel you started last quarter looks worse than it is.

Compare channels of similar age, or use the formula with each channel's churn from billing data. Spend is also yours to bring: take what you paid each channel, with affiliate commission included, and divide by that channel's new customers.

At 20% recurring for 12 months, a referred customer on a $79 plan costs $189.60 in commission ($79 x 0.20 x 12) before software and your own time.

Revenue and LTV figures are hidden on the free plan, which tracks up to 50 links and 1,000 events a month. Starter is $39 a month; see pricing for Growth and Scale.