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Glossary · Unit economics

LTV:CAC

Lifetime value to customer acquisition cost, a headline health metric that misleads when LTV is built on revenue instead of contribution margin.

  • Reviewed
  • 3 min read
  • Part of the 14 term glossary
  • Median finding $58k a year across 74 audits
01

What LTV:CAC means

LTV:CAC is the ratio of a customer's LTV, lifetime value, to the CAC it took to acquire them. It is the headline unit economics metric of most growth plans. The formula is simple: a ratio well above one says each customer returns more than they cost, and the business can afford to buy more of them.

The ratio is only as honest as its two inputs, and both are easy to inflate. Lifetime value is often built on revenue rather than on the contribution margin a customer produces, which can multiply it. CAC is often built on media spend alone. Put a revenue LTV over a media only CAC and a business that loses money on every customer can show a ratio that looks comfortable.

02

The LTV:CAC formula and a worked example

The formula and an illustration; the corpus line is the audited figure behind it.

LTV:CAC = lifetime contribution margin per customer ÷ CAC

Worked example Illustration, not a client figure

$1,800 of lifetime revenue at a 40% contribution margin is $720 of lifetime margin. Against a $400 CAC that is 1.8 to 1, not the 4.5 to 1 the revenue version shows.

03

Why LTV:CAC matters in an audit

In an audit, LTV:CAC is rebuilt from both ends before it is read. Lifetime value becomes lifetime contribution margin: revenue per customer over the period they actually stay, multiplied by the contribution margin rate. CAC becomes fully loaded. The rebuilt ratio is regularly a fraction of the one in the plan, and the difference is the clearest single number in the report.

The second step is to split it by cohort and by channel. A healthy average ratio can contain a segment acquired well above its lifetime value, carried by a cheaper segment beside it. Because the plan scales the whole budget on the average, the next increment of spend often goes to exactly the segment that does not pay, and the average ratio keeps reading well while it does.

Lifetime value is also a forecast, which makes it the easiest number in the model to stretch. The audit bases it on observed retention in real cohorts rather than on an assumed lifetime, and states how long the observation runs. Subsidies, discounts and win back offers justified on a lifetime value that the cohorts never reach are a recurring finding in the published cases.

04

LTV:CAC in the audited cases

Published cases where a customer was worth less over their lifetime, or cost more to win, than the ratio assumed, each with the audited annual figure.

06

Questions about LTV:CAC

What is LTV:CAC?

LTV:CAC is the ratio of a customer's lifetime value to the cost of acquiring them. Built honestly, lifetime value is lifetime contribution margin, not lifetime revenue, and CAC is fully loaded, not media alone.

How do you calculate LTV:CAC?

Divide lifetime contribution margin per customer by CAC. $1,800 of lifetime revenue at a 40% contribution margin is $720 of lifetime margin; against a $400 CAC that is 1.8 to 1, not the 4.5 to 1 the revenue version shows.

What is a good LTV:CAC ratio?

A ratio built on contribution margin and observed retention needs to stay comfortably above one once the payback period is counted, because the cash spent today comes back over months. A ratio built on revenue can look strong while the business loses money on each customer, so the inputs matter more than any benchmark. Read the payback period page →

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LTV:CAC and the wider audit evidence