LTV/CAC
Efficiency
Industry:
Sector Agnostic
Short Definition
LTV/CAC compares the lifetime value of a customer (LTV) to the cost to acquire that customer (CAC). It shows how many dollars of gross profit you earn for every dollar spent to acquire a customer.
Short Definition
LTV/CAC compares the lifetime value of a customer (LTV) to the cost to acquire that customer (CAC). It shows how many dollars of gross profit you earn for every dollar spent to acquire a customer.
Short Definition
LTV/CAC compares the lifetime value of a customer (LTV) to the cost to acquire that customer (CAC). It shows how many dollars of gross profit you earn for every dollar spent to acquire a customer.
Why it matters for Investors
Unit economics in one number: Ties acquisition spend to long-term gross profit.
Capital efficiency: Higher ratios mean you can scale without constant fundraising.
Prioritization: Guides channel mix, pricing, and retention investments.
Why it matters for Investors
Unit economics in one number: Ties acquisition spend to long-term gross profit.
Capital efficiency: Higher ratios mean you can scale without constant fundraising.
Prioritization: Guides channel mix, pricing, and retention investments.
Why it matters for Investors
Unit economics in one number: Ties acquisition spend to long-term gross profit.
Capital efficiency: Higher ratios mean you can scale without constant fundraising.
Prioritization: Guides channel mix, pricing, and retention investments.
Formula
Practical considerations:
Use gross profit, not revenue: LTV should be after COGS/Cost of Sales.
Match time units: Monthly ARPA → monthly churn/retention.
Cap horizon: Use 12–36 months unless you have strong evidence beyond.
Fully-loaded CAC: Include S&M salaries, commissions, programs, tools, agencies, and overhead; exclude success/retention costs.
Segment it: Compute by channel, product, geo, and cohort. A single blended ratio hides waste.
Formula
Practical considerations:
Use gross profit, not revenue: LTV should be after COGS/Cost of Sales.
Match time units: Monthly ARPA → monthly churn/retention.
Cap horizon: Use 12–36 months unless you have strong evidence beyond.
Fully-loaded CAC: Include S&M salaries, commissions, programs, tools, agencies, and overhead; exclude success/retention costs.
Segment it: Compute by channel, product, geo, and cohort. A single blended ratio hides waste.
Formula
Practical considerations:
Use gross profit, not revenue: LTV should be after COGS/Cost of Sales.
Match time units: Monthly ARPA → monthly churn/retention.
Cap horizon: Use 12–36 months unless you have strong evidence beyond.
Fully-loaded CAC: Include S&M salaries, commissions, programs, tools, agencies, and overhead; exclude success/retention costs.
Segment it: Compute by channel, product, geo, and cohort. A single blended ratio hides waste.
Worked Example
Line Item | Value | Notes |
|---|---|---|
ARPA (Monthly) | $150 | Avg. Revenue per Account per Month |
Gross Margin (%) | 80% | Use 0.80 in math |
Monthly Churn (%) | 3% | 0.03 |
LTV | $40,000 | 150×0.80÷0.03 |
S&M Expense (Q4) | $350,000 | Fully loaded: salaries, commissions, ads, tools, agencies, overhead |
New Paying Customers (Q4) | 330 | Count of new paying customers |
CAC (Average across all Channels) | $1,061 | 350,000÷330 |
LTV : CAC | 3.8x | 4,000÷1,061 |
Notes:
Use gross profit, not revenue in LTV calculation.
Match time units: monthly ARPA ↔ monthly churn; annual ARPA ↔ annual churn.
Cap the horizon: Use 12–36 months unless cohorts prove longer.
Fully loaded CAC: Include S&M people, commissions, programs, tools, agencies, and a fair overhead share; exclude success/retention.
Segment it: Report by channel/product/geo/cohort—the blended ratio hides waste.
Establish Guardrails: eg. ≳ 3× healthy; ~1× value-destructive; >5× may mean under-investing.
Worked Example
Line Item | Value | Notes |
|---|---|---|
ARPA (Monthly) | $150 | Avg. Revenue per Account per Month |
Gross Margin (%) | 80% | Use 0.80 in math |
Monthly Churn (%) | 3% | 0.03 |
LTV | $40,000 | 150×0.80÷0.03 |
S&M Expense (Q4) | $350,000 | Fully loaded: salaries, commissions, ads, tools, agencies, overhead |
New Paying Customers (Q4) | 330 | Count of new paying customers |
CAC (Average across all Channels) | $1,061 | 350,000÷330 |
LTV : CAC | 3.8x | 4,000÷1,061 |
Notes:
Use gross profit, not revenue in LTV calculation.
Match time units: monthly ARPA ↔ monthly churn; annual ARPA ↔ annual churn.
Cap the horizon: Use 12–36 months unless cohorts prove longer.
Fully loaded CAC: Include S&M people, commissions, programs, tools, agencies, and a fair overhead share; exclude success/retention.
Segment it: Report by channel/product/geo/cohort—the blended ratio hides waste.
Establish Guardrails: eg. ≳ 3× healthy; ~1× value-destructive; >5× may mean under-investing.
Worked Example
Line Item | Value | Notes |
|---|---|---|
ARPA (Monthly) | $150 | Avg. Revenue per Account per Month |
Gross Margin (%) | 80% | Use 0.80 in math |
Monthly Churn (%) | 3% | 0.03 |
LTV | $40,000 | 150×0.80÷0.03 |
S&M Expense (Q4) | $350,000 | Fully loaded: salaries, commissions, ads, tools, agencies, overhead |
New Paying Customers (Q4) | 330 | Count of new paying customers |
CAC (Average across all Channels) | $1,061 | 350,000÷330 |
LTV : CAC | 3.8x | 4,000÷1,061 |
Notes:
Use gross profit, not revenue in LTV calculation.
Match time units: monthly ARPA ↔ monthly churn; annual ARPA ↔ annual churn.
Cap the horizon: Use 12–36 months unless cohorts prove longer.
Fully loaded CAC: Include S&M people, commissions, programs, tools, agencies, and a fair overhead share; exclude success/retention.
Segment it: Report by channel/product/geo/cohort—the blended ratio hides waste.
Establish Guardrails: eg. ≳ 3× healthy; ~1× value-destructive; >5× may mean under-investing.
Best Practices
Compute cohort LTVs: Use real retention/expansion from cohorts; don’t rely only on a churn shortcut.
Pair with Payback: Great LTV:CAC with slow payback can still strain cash.
Keep CAC apples-to-apples: Same cost policy every period; publish inclusions.
Channel discipline: Track per-channel CAC and LTV; shift budget to the highest LTV:CAC with acceptable payback.
Refresh inputs: Update ARPA, margin, and churn quarterly; re-run sensitivity.
Best Practices
Compute cohort LTVs: Use real retention/expansion from cohorts; don’t rely only on a churn shortcut.
Pair with Payback: Great LTV:CAC with slow payback can still strain cash.
Keep CAC apples-to-apples: Same cost policy every period; publish inclusions.
Channel discipline: Track per-channel CAC and LTV; shift budget to the highest LTV:CAC with acceptable payback.
Refresh inputs: Update ARPA, margin, and churn quarterly; re-run sensitivity.
Best Practices
Compute cohort LTVs: Use real retention/expansion from cohorts; don’t rely only on a churn shortcut.
Pair with Payback: Great LTV:CAC with slow payback can still strain cash.
Keep CAC apples-to-apples: Same cost policy every period; publish inclusions.
Channel discipline: Track per-channel CAC and LTV; shift budget to the highest LTV:CAC with acceptable payback.
Refresh inputs: Update ARPA, margin, and churn quarterly; re-run sensitivity.
FAQs
Freemium/trials: where do those costs sit?
Pre-conversion marketing and sales go to CAC. Post-conversion onboarding/success sits outside CAC and influences LTV via churn/expansion.Include expansion revenue?
Yes—if it’s recurring and observed in cohorts. Be consistent and disclose.Which churn should I use?
Use logo churn for account-level LTV, or revenue churn when ARPA moves a lot. Match to ARPA.How does this relate to CAC Payback?
Payback asks how long to recoup CAC from gross profit; LTV:CAC asks how much profit you earn per CAC dollar.Transactional (non-subscription) businesses?
Use the cohort LTV sum: ARPU × margin × repeat probability per period, discounted, over a finite horizon.
FAQs
Freemium/trials: where do those costs sit?
Pre-conversion marketing and sales go to CAC. Post-conversion onboarding/success sits outside CAC and influences LTV via churn/expansion.Include expansion revenue?
Yes—if it’s recurring and observed in cohorts. Be consistent and disclose.Which churn should I use?
Use logo churn for account-level LTV, or revenue churn when ARPA moves a lot. Match to ARPA.How does this relate to CAC Payback?
Payback asks how long to recoup CAC from gross profit; LTV:CAC asks how much profit you earn per CAC dollar.Transactional (non-subscription) businesses?
Use the cohort LTV sum: ARPU × margin × repeat probability per period, discounted, over a finite horizon.
FAQs
Freemium/trials: where do those costs sit?
Pre-conversion marketing and sales go to CAC. Post-conversion onboarding/success sits outside CAC and influences LTV via churn/expansion.Include expansion revenue?
Yes—if it’s recurring and observed in cohorts. Be consistent and disclose.Which churn should I use?
Use logo churn for account-level LTV, or revenue churn when ARPA moves a lot. Match to ARPA.How does this relate to CAC Payback?
Payback asks how long to recoup CAC from gross profit; LTV:CAC asks how much profit you earn per CAC dollar.Transactional (non-subscription) businesses?
Use the cohort LTV sum: ARPU × margin × repeat probability per period, discounted, over a finite horizon.
Related Metrics
Commonly mistaken for:
CAC Payback (months): Payback is time to recover CAC from gross profit; LTV/CAC is a return multiple.
Magic Number: Revenue/ARR growth per prior-quarter S&M dollar; not a lifetime-value ratio.
Gross Margin (%) / Contribution Margin (%) : Unit profitability metrics; don’t include acquisition cost.
Revenue-based LTV: LTV computed on revenue instead of gross profit—overstates LTV.
Related Metrics
Commonly mistaken for:
CAC Payback (months): Payback is time to recover CAC from gross profit; LTV/CAC is a return multiple.
Magic Number: Revenue/ARR growth per prior-quarter S&M dollar; not a lifetime-value ratio.
Gross Margin (%) / Contribution Margin (%) : Unit profitability metrics; don’t include acquisition cost.
Revenue-based LTV: LTV computed on revenue instead of gross profit—overstates LTV.
Related Metrics
Commonly mistaken for:
CAC Payback (months): Payback is time to recover CAC from gross profit; LTV/CAC is a return multiple.
Magic Number: Revenue/ARR growth per prior-quarter S&M dollar; not a lifetime-value ratio.
Gross Margin (%) / Contribution Margin (%) : Unit profitability metrics; don’t include acquisition cost.
Revenue-based LTV: LTV computed on revenue instead of gross profit—overstates LTV.
Index