LTV:CAC Ratio measure the relationship between a customer’s lifetime value and their overall cost of acquisition. It calculates the value a customer brings to the business in comparison to the amount the company has spent to acquire them.
In order to calculate the LTV:CAC Ratio, you need to divide Customer Lifetime Value by Customer Acquisition Cost.
LTV = ARPU x Gross Margin% x Customer Lifetime (in months)
CAC = Total sales and marketing spend / Number of new customers acquired
LTV:CAC Ratio= Customer Acquisition Cost (CAC) / Customer Lifetime Value (LTV)
The ideal LTV:CAC Ratio is 3:1. You must generate $3 in lifetime value for every $1 spent acquiring a customer.
Gross Margin %
ARPU (Average Revenue Per User)
Churn Rate
Customer Retention Rate
Customer Lifetime (Months/Years)
Learn how to increase ROI with the right LTV:CAC balance. Just write to us at info@diggrowth.com — we’ll get back to you promptly.
You can improve the ratio by either increasing LTV (through better retention, upselling, or pricing) or reducing CAC (via more efficient marketing, sales alignment, or higher conversion rates). Even small changes in either input can significantly shift the ratio in your favor.
For early-stage startups, the LTV:CAC ratio can be directionally useful, but it's often based on limited or unstable data. Retention patterns and acquisition costs evolve rapidly at this stage. It’s best to use conservative estimates and revisit the ratio frequently as you scale.
The LTV:CAC ratio should be reviewed quarterly at a minimum, or more frequently during periods of rapid growth, changing go-to-market strategies, or major shifts in pricing or acquisition channels. Since both LTV and CAC can fluctuate based on customer behavior and marketing performance, regular monitoring ensures you're scaling sustainably and adjusting spend based on actual return.