LTV/CAC Ratio

LTV/CAC Ratio, or Lifetime Value to Customer Acquisition Cost Ratio, measures the ratio of the amount of revenue a customer will generate over the entire duration of their subscription to their acquisition cost. LTV/CAC is a composite metric that combines LTV and CAC to measure efficiency and profitability in acquiring customers.

LTV measures the lifetime profitability of a customer, and CAC measures the customer’s acquisition cost. LTV/CAC thus measures how many dollars of customer lifetime value are returned for every dollar spent on customer acquisition.

LTV Formula

While there are several kinds of LTV calculations, Grid uses Simple LTV to calculate LTV/CAC. Simple LTV is an approximation of customer lifetime value (CLTV) using annual contract value, gross margin, and churn rates. Simple LTV is calculated with the following formula:

Simple LTV

ACV x Gross Margin

Churn Rate

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Annual Contract Value is the average annualized contract value of all customers

Gross Margin is the percentage of revenue that remains after subtracting COGS

Churn Rate is the percentage of customers that churn after some period of time.

For example, with an ACV of $21,000, a gross margin of 40%, and a churn rate of 13%, Simple LTV is equal to ($21,000*40%)/13%, or $64,615. This can be interpreted as the average lifetime value that a customer will have. Note that to calculate a trailing simple LTV, Gross Margin and Churn Rate must have the same trailing period. Note that churn rate is annualized in the formula, as it is compared to Annual Contract Value, which is an annualized figure.

How do I calculate CAC?

CAC (Customer Acquisition Cost) represents the sales and marketing cost of acquiring a new customer. CAC can be represented with the following formula:

CAC

S&M Expenses

Count of New Customers

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To account for sales cycle length, new customers in a period are compared to sales and marketing expenses from a previous period. This offset is typically 1-3 months, but can vary depending on the metric and the date aggregation, and more correctly ties S&M costs to their resulting revenue.

For example, if S&M expenses in April were $500,000 and there were 20 new customers in May, then the CAC (1-month offset) would be $25,000.

How do I calculate LTV/CAC?

Combining the formulas above, LTV/CAC can be represented as:

LTV/CAC

Churn Rate x Total S&M Expenses

ACV x Gross Margin x # New Customers

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With five different metrics in the formula, it can be helpful to explore the different effects of these metrics on overall LTV/CAC:

Metric	Effect on LTV/CAC Ratio
Annual Contract Value (ACV)	Increasing ACV: Improves LTV with larger value per contract and increases LTV/CAC Decreasing ACV: Lowers LTV with lower value per contract and decreases LTV/CAC
Gross Margin	Increasing Gross Margin: Improves revenue per customer and improves LTV and LTV/CAC Decreasing Gross Margin: Lowers revenue per customer and decreases LTV and LTV/CAC
Churn Rate	Decreasing Churn Rate: Lengthens customer lifetime and increases LTV and LTV/CAC Increasing Churn Rate: Shortens customer lifetime and decreases LTV and LTV/CAC
Sales and Marketing Expenses (S&M Expenses)	Decreasing S&M Expenses: Lowers acquisition costs and increases LTV and LTV/CAC Increasing S&M Expenses: Shortens customer lifetime and decreases LTV and LTV/CAC
Number of New Customers	Increasing Number of New Customers: Improves acquisition efficiency and increases LTV and LTV/CAC Decreasing Number of New Customers: Lowers acquisition efficiency and decreases LTV and LTV/CAC

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Let’s bring together the two metrics above to calculate LTV/CAC:

We’ve calculated LTV to be $64,615 and CAC to be $25,000. We can then calculate LTV/CAC as $64,615/$25,000, or about 2.6. We can also write LTV/CAC as a ratio: here, the LTV/CAC can be represented as 2.6:1. This indicates that the business returns $2.60 for every dollar spent acquiring a customer.

How should I interpret LTV/CAC?

LTV/CAC can be a powerful signal to indicate inefficiency, high costs, or poor retention. A healthy LTV/CAC ratio is ideally 3:1, with $3 in revenue coming in for every $1 of acquisition costs. To increase the LTV/CAC ratio, businesses can either increase lifetime value or reduce acquisition costs. Other LTV/CAC ratios can be interpreted as follows:

LTV/CAC Ratio	Description	Interpretation
Under 1:1	Inefficient Spending	The business is spending more to acquire customers than they generate in revenue, and will lose money over time. This LTV/CAC indicates that immediate adjustment is necessary to both improve LTV and reduce acquisition costs.
1:1	Break-even	Each dollar spent returns one dollar, and thus leaves little room for growth or reinvestment. Evaluating different acquisition costs can help identify high ROI S&M spend.
1:1 to 3:1	Early Growth	The business is now generating more value from customers than it spends to acquire, but the ratio suggests that LTV/CAC can be further optimized. At this stage, improving customer lifetimes by focusing on retention can improve LTV/CAC.
3:1 to 4:1	Ideal Range	Each dollar spent returns between $3 and $4 over the customer lifetime, indicating a healthy balance between acquisition and profitability.
Over 4:1	Underinvestment	The business has a very high efficiency in acquiring customers, but is possibly underinvesting in sales and marketing. Increasing CAC can add more growth opportunities.

Grid allows you to explore your LTV/CAC and turn your data into insights. Talk to us here to learn more!

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Date Aggregation

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S&M Offset

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LTV/CAC Ratio

LTV Formula

How do I calculate CAC?

How do I calculate LTV/CAC?

How should I interpret LTV/CAC?

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