What is LTV to CAC Ratio?
The LTV to CAC ratio compares the lifetime value of a customer to the cost of acquiring them, with a 3:1 ratio considered the benchmark for healthy SaaS economics.
LTV:CAC is the fundamental unit economics metric for subscription businesses. It answers the question: for every dollar you spend acquiring a customer, how many dollars do you get back over the lifetime of that relationship? A ratio below 1:1 means you're losing money on every customer. Above 5:1 might mean you're underinvesting in growth.
How to Calculate LTV:CAC
LTV = (Average Revenue Per Account x Gross Margin) / Churn Rate. CAC = Total Sales & Marketing Spend / New Customers Acquired. Then divide LTV by CAC. Example: $50K ARPA, 80% gross margin, 10% annual churn gives LTV of $400K. If CAC is $100K, your LTV:CAC is 4:1. That's healthy.
LTV:CAC Benchmarks
Below 1:1, you're destroying value. Between 1:1 and 3:1, your economics are tight, and you need to improve retention or reduce acquisition costs. 3:1 is the widely accepted benchmark for healthy SaaS. Between 3:1 and 5:1 is the sweet spot. Above 5:1 often signals underinvestment in growth. You could afford to spend more on sales and marketing to capture market share.
Why LTV:CAC Matters for Sales Leaders
CROs own both sides of this ratio. Improving the sales process (lower CAC) and driving expansion and retention (higher LTV) are core CRO responsibilities. When presenting to the board, tying hiring requests to LTV:CAC improvements is more compelling than simply asking for headcount. A CRO who can show that adding 5 AEs will maintain a 3.5:1 ratio while adding $5M in ARR has a strong case.
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