LTV:CAC Ratio

Overview

The LTV:CAC ratio compares the lifetime value of a customer to the cost of acquiring that customer. This fundamental SaaS metric determines whether your customer acquisition efforts are profitable and sustainable long-term.

A healthy LTV:CAC ratio indicates that customers generate significantly more value than they cost to acquire, ensuring profitable growth. This metric helps businesses optimize their sales and marketing spend while maintaining sustainable unit economics.

Formula:
LTV:CAC Ratio = Customer Lifetime Value / Customer Acquisition Cost

5:1+

Excellent

3-5:1

Good

2-3:1

Acceptable

<2:1

Poor

Quick Insight

Most successful SaaS companies target a 3:1 ratio as the minimum threshold for healthy unit economics, with ratios above 5:1 indicating very strong performance.

Why It Matters

Unit Economics Validation: Proves that customer acquisition is profitable
Investment Decisions: Determines how aggressively to invest in growth
Channel Optimization: Identifies which acquisition channels deliver best returns
Pricing Strategy: Informs pricing decisions to optimize lifetime value
Fundraising: Key metric investors evaluate for business sustainability
Strategic Planning: Guides long-term growth and expansion strategies

How to Measure It

Calculate LTV:CAC by dividing customer lifetime value by customer acquisition cost. Both components require careful measurement to ensure accuracy.

Basic LTV:CAC Calculation

-- Calculate LTV:CAC ratio by acquisition cohort
WITH customer_ltv AS (
  SELECT 
    customer_id,
    DATE_TRUNC('month', first_purchase_date) as acquisition_month,
    acquisition_channel,
    SUM(revenue) as total_ltv
  FROM customer_revenue_history
  GROUP BY 1, 2, 3
),
monthly_cac AS (
  SELECT 
    acquisition_channel,
    DATE_TRUNC('month', expense_date) as month,
    SUM(amount) as channel_spend
  FROM acquisition_expenses
  WHERE department IN ('Sales', 'Marketing')
  GROUP BY 1, 2
),
customer_counts AS (
  SELECT 
    acquisition_channel,
    DATE_TRUNC('month', first_purchase_date) as month,
    COUNT(DISTINCT customer_id) as new_customers
  FROM customers
  GROUP BY 1, 2
)
SELECT 
  ltv.acquisition_channel,
  ltv.acquisition_month,
  AVG(ltv.total_ltv) as avg_ltv,
  cac.channel_spend / cc.new_customers as avg_cac,
  ROUND(AVG(ltv.total_ltv) / (cac.channel_spend / cc.new_customers), 2) as ltv_cac_ratio
FROM customer_ltv ltv
JOIN monthly_cac cac ON ltv.acquisition_channel = cac.acquisition_channel 
  AND ltv.acquisition_month = cac.month
JOIN customer_counts cc ON ltv.acquisition_channel = cc.acquisition_channel 
  AND ltv.acquisition_month = cc.month
GROUP BY 1, 2, 4
ORDER BY ltv_cac_ratio DESC;

Cohort-Based LTV:CAC Analysis

-- Track LTV:CAC evolution by customer cohort
WITH cohort_performance AS (
  SELECT 
    DATE_TRUNC('month', c.created_date) as cohort_month,
    c.customer_id,
    EXTRACT(month FROM AGE(r.transaction_date, c.created_date)) as months_since_acquisition,
    SUM(r.amount) as cumulative_revenue
  FROM customers c
  JOIN revenue r ON c.customer_id = r.customer_id
  WHERE c.created_date >= '2024-01-01'
  GROUP BY 1, 2, 3
),
cohort_cac AS (
  SELECT 
    DATE_TRUNC('month', created_date) as cohort_month,
    AVG(acquisition_cost) as avg_cac
  FROM customers
  WHERE created_date >= '2024-01-01'
  GROUP BY 1
)
SELECT 
  cp.cohort_month,
  cp.months_since_acquisition,
  AVG(cp.cumulative_revenue) as avg_cumulative_ltv,
  cc.avg_cac,
  ROUND(AVG(cp.cumulative_revenue) / cc.avg_cac, 2) as evolving_ltv_cac_ratio
FROM cohort_performance cp
JOIN cohort_cac cc ON cp.cohort_month = cc.cohort_month
GROUP BY 1, 2, 4
ORDER BY 1, 2;

Calculation Tips

Use consistent time periods for both LTV and CAC. Consider using predicted LTV for newer customers and ensure all acquisition costs are included in CAC calculation.

Best Practices

1. LTV Calculation Accuracy

Use historical data for mature customer cohorts
Apply predictive modeling for newer customers
Include expansion revenue in LTV calculations
Account for gross margins, not just revenue

2. CAC Consistency

Include all sales and marketing expenses
Use blended CAC for overall performance
Calculate channel-specific CAC for optimization
Consider time lag between spend and acquisition

3. Ratio Interpretation

Ratio Guidelines

Below 1:1: Losing money on each customer
1-2:1: Barely profitable, unsustainable
3:1: Minimum healthy threshold
5:1+: Very strong unit economics