CAC LTV Ratio Calculator: Benchmarks, Five Non-Obvious Ways to Improve
An LTV:CAC ratio of 3:1 is optimal. Any higher shows underinvestment in growth. Any lower means you could struggle for profitability. Use the calculator below to calculate your ratio.
What is the LTV/CAC Ratio?
The LTV to CAC ratio shows how much revenue a customer brings in over their lifetime compared to the cost of acquiring them. It helps you see if the income from each customer is higher than the cost to bring them on board.
LTV:CAC Ratio Benchmarks
- Good Ratio (3:1): For every $1 spent on customer acquisition, you get $3 in lifetime revenue, indicating a strong return.
- Warning Zone (Below 1:1): A ratio below 1:1 means acquisition costs exceed customer revenue, which can strain profitability.
- High Ratio (Above 5:1): Although high ratios suggest efficient spending, they can also mean under-investment in growth.
LTV to CAC Ratio Calculator
Use the interactive calculator below to quickly determine your LTV to CAC ratio.
Formula for LTV:CAC Ratio and Challenges
LTV to CAC Ratio = Lifetime Value of a Customer / Customer Acquisition Cost
where,
CAC = Total Marketing and Sales Expenses / Number of New Customers
Lifetime Value = Average Revenue per User / Churn Rate
It's not an easy metric to calculate—fluctuating churn rates, seasonality, unknown length of how long customers will stay with you, and attribution challenges to correctly calculate the acquisition cost. Instead, consider using payback period.
Why Lowering Churn Improves LTV:CAC Ratio
LTV is the inverse of churn. The lower your churn, the higher your LTV.
Let's look at an example. Company A and Company B have the same details except for the churn rate. A 3% improvement in churn rate almost doubles the LTV and drastically improves the ratio.
Metric | Company A | Company B |
---|---|---|
ARPU | $12 | $12 |
CAC | $100 | $100 |
Expenses | $50,000 | $50,000 |
Acquisition | 500 new customers | 500 new customers |
Churn Rate | 7% | 4% |
LTV to CAC Ratio | 1.7:1 | 3:0 |
LTV | $171.4 | $300.0 |
On average, with Churnkey, our customers retain 20-40% of the revenue that they would have otherwise lost to churn.
It tackles both voluntary churn as well as involuntary churn. Start with the free Churn Metrics product if you're not sure how your retention metrics look.
Other Ways to Improve LTV:CAC Ratio
1. Transition Use Cases
People used Zillow to buy or sell homes. You don't purchase homes all that often, maybe once a year. So, to offset that, Zillow launched a Zillow Zestimate to increase engagement.
2. Launch New Products
Bumble, the dating platform, launched Bumble for friends and Bumble for work.
3. Layer A Retention Automation Tool
Launching new products or pivoting to a different ICP are resource-intensive efforts. A quicker way to improve the slope of your retention curve is with a good retention automation software.
Churnkey can offer a strong feedback loop from both trialing customers and paid customers that you can then input back into your product strategy. It can also reduce voluntary and involuntary churn as and when it happens. You get a complete platform including cancel flows, precision retries, customer health scores, and Feedback AI.
4. Increase AOV From Power Users
Lego, the toy company has always had high natural churn. Children grow up and don't need toys anymore. So LEGO expanded their portfolio to include sets for adults. You might be able to impact net revenue retention by focusing on your power users.
5. Reduce Activation Friction
A template library, successfully adopted by Notion, Figma, and Miro, reduces activation friction and minimizes churn by helping users derive value from your product.
Growthmates and ProductLedGrowers offer valuable insights on how to reduce activation friction.
FAQs
Compare Customer Acquisition Cost vs. Lifetime Value
CAC focuses on acquisition costs, while LTV focuses on revenue generated over time. CAC tells you how much it costs to get a customer; LTV tells you how valuable each customer is. Reducing CAC improves the efficiency of acquisition, while increasing LTV increases overall revenue.
What is a good CAC: LTV Ratio?
An LTV:CAC ratio of 3:1 is generally considered healthy for SaaS businesses, indicating strong returns on acquisition costs.
CLV and CAC: Which is More Important?
Both metrics matter, but the priority depends on your current growth stage and goals:
- Early-Stage Growth: Focus on reducing CAC as you scale.
- Growth and Expansion: Increase LTV through retention and upselling strategies to optimize profitability.