LTV/CAC ratio
What is the LTV/CAC Ratio?
The LTV/CAC ratio compares a company’s customer lifetime value (LTV) with its customer acquisition cost (CAC). In simple terms, it shows how much value a customer brings to the business over time relative to how much it costs to acquire them. LTV measures the average revenue a customer generates throughout their relationship with the brand, while CAC includes all sales and marketing expenses needed to acquire a new customer. The ratio helps answer a critical question: are we making more from each customer than we’re spending to win them?
A ratio of 3:1 is often cited as a healthy benchmark. This suggests the business earns three times what it spends on acquiring a customer, which is typically enough to cover operational costs and generate profit. If CAC exceeds LTV, the business model is unlikely to be sustainable in the long run.
Why is the LTV/CAC ratio important for subscription businesses?
For subscription-based businesses, including SaaS companies and eCommerce brands with recurring models, the LTV/CAC ratio is one of the most important metrics for measuring profitability and growth efficiency. These businesses rely heavily on retaining customers over time to offset acquisition costs and generate recurring revenue. As customer acquisition becomes more expensive in competitive markets, brands must focus not just on attracting new customers but also on increasing LTV through strong onboarding, flexible subscriptions, personalisation, and retention strategies.
Monitoring this ratio helps businesses:
Other key subscription metrics to monitor alongside LTV/CAC include churn rate, average order value (AOV), monthly recurring revenue (MRR) and annual recurring revenue (ARR), all of which provide a fuller picture of business health.
