LTV:CAC Ratio
The ratio between customer lifetime value and acquisition cost - the core measure of unit economics health.
What it means
The LTV:CAC Ratio divides a customer's lifetime value by the cost of acquiring them. A ratio of 5:1 means every dollar spent on acquisition generates five dollars in lifetime revenue. This single number encapsulates the fundamental question of whether your business model works: are your customers worth more than they cost to get?
Formula
LTV:CAC Ratio = Customer Lifetime Value ÷ Customer Acquisition Cost
Why it matters
Below 1:1 means you lose money on every customer. 1:1 to 3:1 means you're not efficient enough. 3:1 to 5:1 is the sweet spot for most SaaS companies. Above 5:1 might mean you're underinvesting in growth. Investors treat this as the single most important metric for evaluating SaaS business health.
What is a good LTV to CAC ratio?
3:1 is the minimum healthy ratio. 5:1 is excellent. Above 5:1 might indicate you should invest more aggressively in acquisition.
How do you improve LTV:CAC ratio?
Reduce acquisition costs (organic marketing, referrals), increase retention (better product, customer success content), and raise prices or drive expansion revenue.
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