LTV:CAC Ratio
The ratio comparing the lifetime gross profit of a customer to the cost required to acquire them.
FORMULA
LTV:CAC Ratio = Lifetime Value / Customer Acquisition CostWhy it matters
The LTV:CAC ratio is the canonical indicator of unit economics in subscription businesses. A ratio of 3:1 means that for every dollar spent on acquiring a customer, the company generates three dollars of gross profit over that customer's lifespan. If the ratio is too low (e.g., 1:1), the company is destroying capital with every sale. If the ratio is exceptionally high (e.g., 8:1), the company is likely underinvesting in sales and marketing and leaving growth on the table. Investors look for a 3:1 ratio as the baseline for a sustainable, scalable business model.
2025 BENCHMARK
Bessemer's 2025 guidance states that a 3:1 LTV:CAC ratio remains the baseline for Series A/B funding, with top-tier companies achieving 5:1 or better.
COMMON MISTAKES
- Calculating the ratio without applying gross margin to the LTV numerator.
- Using an uncapped LTV formula that inflates the ratio artificially.
- Failing to segment the ratio by acquisition channel or customer tier.