What's a good LTV:CAC ratio?
3:1 is the minimum target. 3-5:1 is good, >5:1 is excellent. Below 3:1 means you're spending too much to acquire customers or not retaining them long enough.
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Analysis
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How to Use
Step-by-step instructions
- 1Enter total marketing spend for the period
- 2Add total sales spend (salaries, tools, etc.)
- 3Input number of new customers acquired
- 4Set average order value per transaction
- 5Add purchase frequency (times per year)
- 6Enter average customer lifespan (years)
CAC & LTV Formulas
CAC measures the cost of acquiring a customer. LTV measures total value from a customer. A healthy LTV:CAC ratio is 3:1 or higher.
CAC = (Marketing Spend + Sales Spend) ÷ New Customers
LTV = Average Order Value × Purchase Frequency × Customer Lifespan
LTV:CAC Ratio = LTV ÷ CACVariables:
CACCost to acquire one customerLTVLifetime value of a customerLTV:CAC RatioValue created per dollar spentPayback PeriodMonths to recover CACExample
SaaS Business Example
Inputs:
Marketing Spend:$50,000
Sales Spend:$30,000
New Customers:100
Average Order Value:$200/mo
Purchase Frequency:4× quarterly
Customer Lifespan:3 years
Steps:
- 1.Total spend = $50,000 + $30,000 = $80,000
- 2.CAC = $80,000 ÷ 100 = $800
- 3.Annual value = $200 × 4 = $800
- 4.LTV = $800 × 3 = $2,400
- 5.LTV:CAC = $2,400 ÷ $800 = 3:1 (Good!)
Result:
$800 CAC with 3:1 LTV:CAC ratio - healthy acquisition economics
Frequently Asked Questions
How do I reduce CAC?
Optimize conversion rates, improve targeting, leverage organic channels (SEO, content), increase referrals, automate sales/marketing, focus on high-ROI channels, and improve brand awareness.
What's a good payback period?
SaaS: 12-18 months. E-commerce: 3-6 months. Marketplace: 6-12 months. Faster is better for cash flow, but ensure you're not under-investing in growth.