Digital Lexicon Hub

A unit economics ratio that compares the lifetime value of a customer with the cost of acquiring that customer.

The ratio tells leaders whether acquisition spending creates value: too low means customers return less than they cost, while a very high ratio can signal underinvestment in growth. A 3:1 ratio is widely cited as a SaaS reference point.

A customer pays $500 per month at 75% gross margin and stays 30 months on average, so margin-based LTV is $500 x 0.75 x 30 = $11,250. With a CAC of $3,000, the LTV:CAC ratio is $11,250 / $3,000 = 3.75:1.

LTV depends on churn and margin assumptions that are unreliable for young companies, and revenue-based LTV overstates value. A healthy ratio can coexist with a payback period too long for the company's cash position.

The ratio is Customer Lifetime Value (CLV) divided by Customer Acquisition Cost (CAC). LTV is often estimated as average revenue per account times gross or contribution margin times expected customer lifetime, where lifetime is roughly 1 divided by the monthly churn rate. CAC is total sales and marketing cost for a period divided by new customers won. Teams compute it by segment and channel and keep paid CAC separate from blended CAC that includes organic customers.