LTV:CAC Ratio
The LTV:CAC ratio compares the total value a customer generates over their lifetime (LTV) to what it costs to acquire them (CAC). A 3:1 ratio means every dollar spent on acquisition returns three dollars in customer value. It is the primary measure of SaaS business model efficiency.
Why LTV:CAC Ratio Matters for SaaS Companies
This single ratio tells investors and operators whether a SaaS company can grow profitably. Below 1:1, you are literally losing money on every customer. At 1-3:1, you are growing but the economics are tight and vulnerable to churn increases or cost changes. At 3:1+, you have a scalable engine. Above 5:1, you are likely under-investing in growth and leaving market share on the table. For Series A and B companies, this ratio determines your fundraising narrative — it is the difference between 'we need money to survive' and 'we need money to accelerate.'
Formula
LTV:CAC = (ARPA x Gross Margin % / Monthly Churn Rate) / Fully-Loaded CAC
Benchmark
Target: 3:1 minimum. Strong: 3-5:1. Exceptional: 5:1+. Under-investing if consistently above 5:1.
Tools for Measurement
An Operator's Take
I have seen founders present a 4:1 LTV:CAC ratio to their board and feel great about it — until we loaded in the real numbers. The LTV was calculated with gross revenue instead of gross margin, and the CAC only counted ad spend. Real ratio: 1.8:1. Not a crisis, but a fundamentally different conversation about growth strategy. The fix was not to cut acquisition costs — it was to improve retention (which increases LTV) and fix pricing (which improved margins). Within two quarters, we moved from 1.8:1 to 3.4:1 without reducing customer acquisition. The lesson: do not optimize the numerator or denominator in isolation. Both levers matter.
Common Mistakes
What I see go wrong at Seed to Series B companies.
Using gross revenue LTV instead of gross margin LTV. If your margins are 70%, your real LTV is 30% lower than the revenue-based calculation.
Comparing fully-loaded LTV against partially-loaded CAC. If LTV includes expansion revenue, CAC should include all acquisition costs — not just ads.
Not tracking the ratio by cohort over time. A declining LTV:CAC trend is an early warning that your acquisition is getting less efficient or retention is degrading.
Over-optimizing by cutting acquisition spend to improve the ratio. A very high LTV:CAC (above 5:1) often signals under-investment in growth, not efficiency.
What to Do This Week
Concrete steps you can take right now.
Recalculate your LTV:CAC with fully-loaded numbers on both sides. Use gross margin in LTV and include all sales/marketing costs in CAC.
Use the Sales Efficiency Calculator to see how your acquisition efficiency compares to benchmarks.
Track the ratio by quarterly cohort. If it is declining, determine whether the cause is rising CAC (acquisition problem) or falling LTV (retention/pricing problem).
If your ratio is below 3:1, focus on the lever with the most upside. Usually that is improving retention (LTV) rather than cutting costs (CAC).
Related Resources
Related Terms
Try These Tools
Further Reading
Frequently Asked Questions
What is a good LTV:CAC ratio for SaaS?
The widely accepted benchmark is 3:1 — meaning each customer generates three times what it cost to acquire them. Below 3:1 indicates the business model may not scale efficiently. Between 3-5:1 is strong. Above 5:1 may signal under-investment in growth. Context matters: early-stage companies with short track records should weight recent cohort data over lifetime averages.
How do you improve LTV:CAC ratio?
There are two sides: increase LTV or decrease CAC. To increase LTV, focus on reducing churn, improving expansion revenue through upsells, and aligning pricing with value. To decrease CAC, optimize conversion rates, double down on organic channels with lower acquisition costs, and improve sales efficiency. Most Seed-B companies see faster improvement from the LTV side.
What does it mean if LTV:CAC is below 1?
An LTV:CAC ratio below 1:1 means you are spending more to acquire each customer than they will ever generate in value. This is unsustainable. Immediate actions: audit your churn to understand why customers leave, review pricing for misalignment with value, and evaluate whether you are acquiring the wrong customer profile.
Need Help With Growth Metrics?
Most Seed to Series B companies are leaving money on the table. Let's figure out where.