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The LTV:CAC ratio compares the lifetime value of a customer to the cost of acquiring them. Learn how to calculate, interpret, and improve this key SaaS efficiency metric.
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If there’s one number every investor asks for, it’s your LTV:CAC Ratio.
It distills the essence of SaaS economics into a single question:
“How much value do you generate for every dollar you spend acquiring customers?”
This ratio is the heartbeat of profitability in a recurring revenue business — simple in theory, but powerful in practice.
Definition:
LTV:CAC Ratio = Customer Lifetime Value ÷ Customer Acquisition Cost
Ideal Range:
Recommended Diagnostic: GTM Readiness Diagnostic
The LTV:CAC ratio shows how efficiently your company converts acquisition spend into long-term customer value.
If your CAC is too high or your customers don’t stay long enough, you’ll never reach profitability — no matter how fast you grow.
Founders and investors use this ratio to:
When LTV significantly exceeds CAC, growth becomes self-reinforcing. When it doesn’t, you’re burning to stand still.
The simplest SaaS formula for customer lifetime value is:
[LTV](/glossary#ltv-customer-lifetime-value) = ([ARPU](/glossary#arpu-average-revenue-per-user) × [Gross Margin](/glossary#gross-margin) %) ÷ [Churn](/glossary#churn) Rate
Where:
Example:
If your ARPU = $200/month, gross margin = 80%, and churn = 5%:
[LTV](/glossary#ltv-customer-lifetime-value) = (200 × 0.8) ÷ 0.05 = $3,200
[CAC](/glossary#customer-acquisition-cost-cac) = Total [Sales](/glossary#champion-sales) & [Marketing](/glossary#attribution-marketing) Spend ÷ Number of New Customers Acquired
If you spent $160,000 last month to acquire 40 new customers:
[CAC](/glossary#customer-acquisition-cost-cac) = 160,000 ÷ 40 = $4,000
[LTV](/glossary#ltv-customer-lifetime-value):[CAC](/glossary#customer-acquisition-cost-cac) = 3,200 ÷ 4,000 = 0.8
In this example, you’re losing money per customer — an unsustainable model.
Healthy SaaS businesses aim for 2.5:1 or higher, meaning each dollar invested in acquisition returns at least $2.50 in lifetime value.
| Stage | Average | Good | Best-in-Class |
|---|---|---|---|
| Seed | <1.5:1 | 2:1 | 3:1+ |
| Series A | 2–3:1 | 3:1 | 4:1+ |
| Series B | 3–4:1 | 4:1 | 5:1+ |
| Growth (C+) | 3–5:1 | 4:1 | 6:1+ |
Keep in mind: early-stage ratios are volatile. Consistency over 2–3 quarters matters more than a single snapshot.
| Ratio | Meaning | Action |
|---|---|---|
| <1:1 | Losing money on every customer | Fix pricing, churn, or CAC |
| 1–2:1 | Weak unit economics | Reassess ICP and retention |
| 2–3:1 | Healthy balance | Maintain and monitor efficiency |
| >4:1 | Excellent, but may under-invest | Consider scaling acquisition |
A ratio above 5:1 can actually signal under-spending on GTM — meaning you could grow faster while staying efficient.
Increase LTV
Reduce CAC
Raise Gross Margin
Reduce Churn
Always ensure apples-to-apples comparisons — particularly when benchmarking across geographies or business models.
| Metric | Focus | Complements |
|---|---|---|
| LTV:CAC | Profitability per customer | Magic Number, CAC Payback |
| Magic Number | Sales efficiency | Growth acceleration |
| Rule of 40 | Financial balance | Company-level health |
| Burn Multiple | Capital efficiency | Cash management |
Together, these reveal whether you can scale profitably, sustainably, and quickly.
Even elite SaaS players revisit this ratio quarterly to validate spending velocity.
The LTV:CAC ratio should be your compass for funding strategy, pricing decisions, and growth pacing.
Next step:
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