What is a good LTV:CAC ratio?

3:1 is widely quoted and is a convention rather than a finding. The ratio is only meaningful next to payback period — a 5:1 ratio recovered over four years is worse for a cash-constrained business than 3:1 recovered in nine months.

How do you calculate LTV?

Gross margin per customer per period, divided by the churn rate for that period. Using revenue rather than gross margin is the single most common inflation, because it counts money that goes straight back out as cost of service.

Why is LTV unreliable for young companies?

Because dividing by churn assumes the observed rate persists indefinitely. With a year of data you are extrapolating a lifetime from a fraction of it, and small errors in the churn estimate produce very large errors in LTV.

Should LTV:CAC be calculated by segment?

Yes. A blended ratio averages segments with genuinely different economics and can look healthy while one segment is unprofitable. Segment-level ratios are what support a decision about where to spend.

LTV:CAC Ratio

Lifetime value divided by acquisition cost. Whether a customer returns more than they cost to win.

The calculation

Lifetime value divided by customer acquisition cost. LTV is normally gross margin per customer per period divided by the period churn rate; CAC is fully loaded acquisition cost per new customer.

The assumption doing the work

Dividing by churn assumes today's churn rate continues forever. That single assumption determines most of the answer. At 2% monthly churn LTV is fifty periods of margin; at 3% it is thirty-three. A one-point estimate error moves the ratio by a third.

Two inflations to avoid

Using revenue instead of gross margin. Revenue-based LTV counts money that leaves again as hosting, support and success cost. In a service-heavy business this can double the figure.
Blending segments. Self-serve and enterprise have different margins, different churn and different acquisition costs. One ratio across both describes no real customer and hides the segment that is losing money.

Computing it defensibly

Use gross margin, not revenue. If gross margin per customer is not available, this is the finding — get it before computing the ratio.
Estimate churn from the longest cohort history you have, and state the observation window. Say "based on 14 months" rather than presenting an implied lifetime as fact.
Compute by segment. Report the blended figure only alongside the segment ones.
Report payback period beside it. The ratio says whether acquisition eventually pays; payback says whether you can afford the wait.
Test sensitivity: recompute with churn one point higher. If the conclusion changes, the conclusion was resting on the assumption rather than the data.

Where it misleads

It is a steady-state measure applied to businesses that are not in steady state.
Improving the ratio by cutting acquisition spend looks like efficiency and is often just contraction.
Expansion revenue is frequently included in LTV but its cost is not included in CAC, which flatters both sides of the ratio at once.

RELATED TERMS

CAC Payback Period

How long it takes for a customer's gross profit to repay the cost of acquiring them. The bridge between sales efficiency and cash flow.

Net Revenue Retention (NRR)

Revenue retained from an existing cohort over a period including expansion, expressed as a percentage of where that cohort started. The clearest single indicator of whether the base grows without new customers.

Customer Acquisition Cost (CAC)

The fully loaded cost of acquiring one new customer: sales and marketing spend for a period divided by new customers acquired from it.

COMMON QUESTIONS

What is a good LTV:CAC ratio?: 3:1 is widely quoted and is a convention rather than a finding. The ratio is only meaningful next to payback period — a 5:1 ratio recovered over four years is worse for a cash-constrained business than 3:1 recovered in nine months.
How do you calculate LTV?: Gross margin per customer per period, divided by the churn rate for that period. Using revenue rather than gross margin is the single most common inflation, because it counts money that goes straight back out as cost of service.
Why is LTV unreliable for young companies?: Because dividing by churn assumes the observed rate persists indefinitely. With a year of data you are extrapolating a lifetime from a fraction of it, and small errors in the churn estimate produce very large errors in LTV.
Should LTV:CAC be calculated by segment?: Yes. A blended ratio averages segments with genuinely different economics and can look healthy while one segment is unprofitable. Segment-level ratios are what support a decision about where to spend.