What is the LTV to CAC ratio? Unit economics explained
The LTV to CAC ratio divides customer lifetime value by customer acquisition cost to show how many times over a customer repays what it cost to win them. Here is what it means, how to calculate it, a SAR example and the most quoted guideline.
The LTV to CAC ratio divides customer lifetime value by customer acquisition cost. It shows how many times over a customer repays what you spent to win them, measured in gross margin. A ratio of 3 means each customer generates three times their acquisition cost, and below 1 you lose money on every customer you add.
How do you calculate the LTV to CAC ratio?
| Metric | Formula |
|---|---|
| LTV (subscription) | Monthly revenue per customer × gross margin ÷ monthly churn |
| CAC | Sales and marketing costs ÷ new customers |
| LTV to CAC ratio | LTV ÷ CAC |
Use margin-based LTV and fully loaded CAC, both for the same customer segment and period. Mixing revenue-based LTV with paid-only CAC can make a weak business look healthy.
LTV to CAC example
Illustrative figures for a Riyadh SaaS company:
- Average subscription: SAR 1,500 a month at a 75% gross margin, so SAR 1,125 of margin a month.
- Monthly churn: 2.5%, so an expected lifetime of 40 months.
- LTV: SAR 1,125 × 40 = SAR 45,000.
- Fully loaded CAC: SAR 12,000.
- LTV to CAC ratio: SAR 45,000 ÷ SAR 12,000 = 3.75.
What is a good LTV to CAC ratio?
The most quoted guideline comes from David Skok's SaaS Metrics 2.0: "The best SaaS businesses have a LTV to CAC ratio that is higher than 3, sometimes as high as 7 or 8." He adds that these are "only guidelines". A very high ratio is not automatically good either, since it can mean you are underinvesting in growth.
Pair the ratio with the CAC payback period: a 4:1 ratio that takes three years to pay back still strains cash.
How Grower helps
Grower sets budgets by month, quarter or year and by campaign group, compares them with live spend from connected channels and generates budget insights every month. The B2B SaaS page includes a free CAC payback calculator.
Frequently asked questions
Is a 3:1 LTV to CAC ratio a rule?
No, it is a rule of thumb from SaaS. It assumes subscription-level gross margins and enough customer lifetime to cover costs beyond acquisition. Businesses with low margins, long sales cycles or expensive capital may need more, while those with fast payback and cheap capital can run lower. Treat 3 as a starting point for discussion, not a pass mark.
How can I improve my LTV to CAC ratio?
Raise LTV or lower CAC. Reduce churn, expand accounts through upsells and price increases, and protect gross margin. On the CAC side, move budget away from channels with a high cost per customer, improve conversion rates through the funnel and shorten sales cycles. Measure by acquisition channel, since a blended ratio can hide one channel losing money.
Can ecommerce brands use the LTV to CAC ratio?
Yes. Calculate LTV as average order value × orders per year × margin × years retained, ideally on contribution margin after shipping, payment fees and returns. Ecommerce lifetimes are less predictable than subscriptions, so many brands also track a 12-month LTV to CAC ratio, which uses only the first year of repeat purchases.
Check how fast your acquisition spend comes back with the free CAC payback calculator.