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Join early accessLTV:CAC ratio
Lifetime value divided by acquisition cost — the core unit-economics health check.
The LTV:CAC ratio compares what a customer is worth (LTV) to what they cost to acquire (CAC). Around 3:1 is a common healthy target — you earn roughly three times what you spend to acquire. Below 1:1 you lose money on each customer; far above 3:1 you may be under-investing in growth.
In practice
LTV:CAC compresses the whole growth question into one figure: for every dollar spent winning a customer, how many come back over the relationship? Below 1:1 you're buying customers at a loss. The widely-quoted 3:1 is a rule of thumb from subscription software, not a law of e-commerce — it's a reasonable starting reference, but your margins and repeat behaviour decide what's actually healthy.
A very high ratio deserves as much scrutiny as a low one. 8:1 usually means you're underinvesting — there's profitable growth on the table you're not buying — or that the LTV side is built on generous assumptions. Because the ratio depends on a forecast, it's most trustworthy read per channel and per cohort, where a bad assumption shows up as one segment behaving unlike the rest.
Formula
LTV:CAC = LTV ÷ CAC
Example: $75 LTV ÷ $25 CAC = 3:1.
What a good result depends on
≈3:1 is the rule of thumb; the right number depends on payback time and cash.
Common mistakes
- Using revenue-based LTV, which inflates the ratio.
- Ignoring how long it takes to realise the LTV (payback period).
Questions people ask
- Is 3:1 really the target?
- It's a convention borrowed from SaaS, not a universal truth. Use it as a rough orientation, then judge against your own margins, payback period and how confident you are in the lifetime figure.
- What does a ratio below 1:1 mean?
- Each customer costs more to acquire than they'll ever contribute. It's sustainable only as a deliberate, funded land-grab — otherwise it's a business paying for its own decline.
- Why can a high ratio be a problem?
- It often signals underinvestment: you could profitably spend more and grow faster. It can also mean the LTV assumption is too optimistic, so check the inputs before celebrating.