What is a Good LTV to CAC Ratio?

If you’re running a business, it’s extremely important to understand how your customer lifetime value to acquisition cost ratio (or LTV to CAC ratio) impacts your bottom line. In a nutshell, this ratio answers, “Are we making a profit and attracting the right customers?”

Successful customer acquisition means attracting buyers who are most likely to do business with you. But when you have these customers, how do you know if your acquisition methods actually turn a profit? Comparing customer acquisition cost against lifetime value is a great way to calculate this.

Let’s walk through the differences between CAC and LTV, how to calculate the LTV/CAC ratio, and how to get the most from this metric for your business.

Table of Contents:

• Customer Acquisition Cost vs. Lifetime Value
• LTV:CAC Ratio
• How to Calculate LTV to CAC
• What is a good LTV:CAC ratio?
• LTV:CAC Ration Benchmarks
• How to Optimize Your LTV:CAC Ratio

Customer Acquisition Cost vs. Lifetime Value

Customer acquisition cost (CAC) is how much your business spends on sales and marketing to attract a new customer. Lifetime Value (LTV) is the average amount of revenue one single customer generates for the duration of their business with you.

These metrics exist independently, but they also are used as a comparison to help you understand the effectiveness of your acquisition efforts and business profitability.

LTV:CAC Ratio

An LTV:CAC ratio helps you understand your customers’ overall spending with your business based on how much you spend to acquire them. You’ll see whether you’re outspending on acquisition or missing out on valuable opportunities to gain new customers because you don’t spend enough.

Overall, your ratio tells you if your business is profitable and companies use this metric to guide spending and find a balance between acquisition and retention that achieves profitability.

How to Calculate LTV to CAC

To calculate LTV:CAC ratio, divide customer lifetime value by your customer acquisition cost. Not sure how to calculate these? Here’s a post from a former HubSpot service employee on how to calculate customer lifetime value. And, here’s a post that will teach you how to calculate customer acquisition cost.

The most common way to interpret results is to view it as an X:1 ratio, where X is the result of your equation and 1 represents one dollar spent on acquisition.

So, for example, if your business’ LTV is $1200 and your CAC is $500, your equation would be

1000/500 = 2.4

Your LTV, rounded, for this example, would be 2:1, where for every $1 spent on acquisition, you get $2 back.

If your business’ LTV is $600 and your CAC is $200, your equation would be

600/200 = 3

And your business’ LTV:CAC would be 3:1.

Featured Resource: Free LTV:CAC Ratio Calculator

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Once you’ve conducted your equation, how do you know if you have a good score?

What is a good LTV:CAC ratio?

Most experts like Sergey Pirogov, Founder and CEO of molfar.io, agree that 3:1 is a good LTV to CAC ratio, and you can interpret it as your business makes 3x what it costs to acquire a customer, or for every $1 spent on acquisition, you get $3 back.

A ratio closer to 1:1 means you’re spending just as much on acquisition as customers spend, so you’re not generating a profit, and you can stand to improve your acquisition strategy. If your ratio is significantly higher than 3:1, like 6:1, you might not be spending enough on sales and marketing and are missing out on valuable opportunities to attract new customers.

LTV:CAC Ratio Benchmarks

Although 3:1 is considered the standard when it comes to LTV:CAC ratios, good ratios can vary depending on the industry. Let’s take a look at different industries’ LTV/CAC ratios as calculated and compiled by First Page Sage:

Remember that every industry operates and grows differently. This means, what’s considered a good LTV:CAC ratio for one industry might not be great for another. Do your research and compare ratios across your industry to determine ways you can improve your business.

How to Optimize Your LTV:CAC Ratio

It’s important to monitor your LTV:CAC ratio to understand customer acquisition changes over time. If your ratio is trending in the wrong direction or you’re seeing that there’s room for improvement, some of the best things you can do are:

• Focus on conversion rate optimization so it’s easy for prospects to convert into leads and for leads to convert into customers.
• Use acquisition channels that are the right fit for your customers based on their behaviors and needs.
• Build customer loyalty through things like exciting loyalty programs, excellent customer service, and active feedback loops that show customers you’re invested in supporting them.

Crunching the Numbers

The most straightforward understanding of comparing your business’ LTV to CAC is to see if your company is profitable — you don’t want to spend more money than you get back. Use our template to figure out your LTV:CAC ratio and see if there’s room for improvement at your business.