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LTV:CAC ratio

Also called: LTV/CAC, LTV to CAC ratio, LTV:CAC

Customer lifetime value divided by customer acquisition cost: how many times a typical customer pays back what it cost to win them. A common rule of thumb for healthy subscription businesses is about 3 or more.

The LTV:CAC ratio compares what a customer is worth over their whole lifetime with what it cost to win them: LTV:CAC = LTV ÷ CAC. A ratio of 3 means that for every 1 UAH spent acquiring a customer, the business gets 3 UAH of gross profit back over time.

The usual rule of thumb is that 3 or more is healthy, around 1 means each customer barely pays for their own acquisition, and below 1 means growth is destroying money. A very high ratio (10 or more) isn't automatically great either: it can mean the business is underspending on growth and leaving customers to competitors, or that it relies on a cheap channel that won't scale.

Calculate LTV from gross profit, not revenue, or the ratio will look far better than reality. And look at the ratio per channel: the average hides the fact that referrals might return 12× while ads return 1.5×. Pair the ratio with the CAC payback period, because a high LTV:CAC that takes three years to pay back can still run a small business out of cash.

Example

In year 2 a new GarageDesk shop brings about 633 UAH of gross profit a month (750 UAH price minus about 117 UAH to serve it), and monthly churn is about 4%, so LTV ≈ 633 / 0.04 ≈ 15,825 UAH.

  • Referrals: 20 shops came through referral links at 1,350 UAH each, but 5 would have come anyway, so a shop really added costs 27,000 / 15 = 1,800 UAH. LTV:CAC ≈ 15,825 / 1,800 ≈ 8.8.
  • Ads: about 5,000 UAH per shop. LTV:CAC ≈ 15,825 / 5,000 ≈ 3.2.

Both clear the usual bar of 3, but ads only just. The much higher ratio for referrals says where the next hryvnia should go.

Common mistakes

  • Revenue LTV in the numerator. Use gross profit, or the ratio is inflated.
  • Treating 3 as a law. It's a rule of thumb; cash, payback and growth goals matter too.
  • One blended ratio. Split by channel; the average hides both the stars and the losers.
  • Ignoring time. A great ratio with a two-year payback can still starve a small business of cash.