LTV to CAC ratio shows what each dollar spent on winning a customer brings back.
Definition
LTV to CAC ratio is customer lifetime value divided by customer acquisition cost: the gross margin a customer returns for each dollar spent to win them.
It matters because it tells you whether to spend more on growth or fix the model first.
The ratio puts the two halves of a subscription business in one number: what a customer is worth and what a customer costs. When it is comfortably above 1, more spending on sales and marketing brings back more than it costs. When it is not, more spending only makes the loss bigger.
Investors read it the same way: it shows whether growth is worth funding.
Divide lifetime value by acquisition cost.
LTV to CAC ratio = LTV ÷ CAC
Both sides have to describe the same customers. Use LTV based on gross margin and a CAC that includes salaries, for customers won in the same period and through the same channels.
Worked example, with made-up round numbers
An average customer brings $3,200 of gross margin over their lifetime and costs $800 to win.
- $3,200 ÷ $800= 4, or 4 to 1
- With CAC at $640: $3,200 ÷ $640= 5 to 1
What a customer costs and what they return
David Skok writes that the best SaaS businesses have a ratio higher than 3.
The 3 to 1 guideline comes from investor David Skok. In his guide SaaS Metrics 2.0 he writes that the best SaaS businesses have an LTV to CAC ratio higher than 3, sometimes as high as 7 or 8, and that these are guidelines with situations where it makes sense to break them.
Source: David Skok, “SaaS Metrics 2.0”, forentrepreneurs.com, read 13 October 2026.
A low ratio and a very high ratio both tell you something.
- Below 1. Each customer costs more than they return. Growth makes the loss larger.
- Between 1 and the guideline. Customers pay back, but slowly. Work on churn, price or CAC before adding budget.
- Well above the guideline. Each customer returns far more than they cost, which can mean there is room to spend more on growth.
You raise it from either side: more value per customer or less cost per customer.
- Keep customers longer. Lower churn lengthens the lifetime and lifts LTV more than any other input.
- Earn more from each customer. Upgrades, seats and add-ons raise ARPU, and LTV with it.
- Convert more of your trials. A higher trial-to-paid rate lowers CAC with no extra spend. In the example, CAC falling from $800 to $640 lifts the ratio from 4 to 5.
1Capture works on that last point for SaaS free trials: a card at signup, the full first payment authorized, and the payment collected when the trial ends. See Stripe trial conversion.
These mistakes make the ratio unreliable.
- Margin on one side, revenue on the other. LTV built on revenue against a full CAC flatters the ratio. Use gross margin.
- One blended number for every channel. A strong channel can hide a losing one. Work the ratio out per channel.
- Ignoring how long the return takes. A ratio of 4 that takes 4 years to arrive ties up cash. Read it with the CAC payback period.
- LTV from a handful of customers. A churn rate measured on a small base swings widely, and the ratio swings with it.