LTV:CAC Calculator
Written by Michal Dallos
LTV:CAC ratio

LTV:CAC ratio is one of the key predictive indicators for the sustainable growth of your business. It shows the value of a customer (LTV) in proportion to the costs of acquiring a customer (CAC). In regard to different ratio values, we can identify following thresholds:

  • LTV:CAC < 1:1 the revenue of the sales does not even cover the costs directly associated with winning new customers. Any new customer you gain causes your business to lose money.
  • LTV:CAC = 1:1 the CAC payback threshold is reached: the revenue of the sales is just enough to cover the marketing & sales expanses. Overall the company is still losing money, as there are additional costs not yet covered by revenue.
  • LTV:CAC < 3:1 (but above 1:1) depending on the individual structure of your business, your company may still lose money. LTV:CAC ratio below 3:1 is considered industry-wide not to be enough for an economically sustainable growth.
  • LTV:CAC =3:1 is considered to be the minimum value required for the successful and sustainable growth of a company. The ideal LTV:CAC ratio lies between 3:1 and 5:1. A value in this range indicates not only a great business model but also a great team managing the CAC-LTV-pricing strategy triangle.

LTV:CAC Calculator: enter your values below

Marketing & Sales Expenses

consist of marketing- & sales-related salaries, costs of tools, and marketing expenditures. As CAC refers to the acquisition of new subscribers, only the corresponding one-time cost component should be included. Recurring costs of customer service, like server costs and support, should not be considered.

Number of New Subscribers

is the number of new subscribers acquired per month. When there is a time lapse between marketing activities and sign-up of new subscribers, the business needs to consider the number of new customers resulted from the marketing & sales expenses.

ARPU

describes the Average Revenue Per User (or subscriber, in our case) at the end the analyzed period. It can be easily calculated as: ARPU = Total Revenue / Number of Subscribers

Gross Margin

is the revenue that a company retains after covering the direct expenses associated with generating those revenue streams. It can be easily calculated as: GM = (Total Revenue – COGS) / Total Revenue

Churn

describes the fraction of subscribers who have dropped out over a specific time period – in this case a month – relative to the existing subscriber base.

LTV = 0 €

CAC = 0 €

LTV : CAC = 0 : 1

LTV:CAC related challenges in subscription businesses

  • LTV:CAC ratio is not a static value: For example, if a new competitor enters the market, your subscribers could turn to its services. This would result in a LTV drop combined with an increase of your churn. In businesses strongly dependent on constant subscriber engagement, subscribers may easily lose interest and leave. For Example, in a fashion subscription company, the moment you stop providing new fashion models, the subscribers get bored and will leave, resulting in a sudden increase of churn.
  • LTV:CAC ratio too low: Values around 2:1 or lower may indicate that your CAC value is too high, which means you may be using expensive or inefficient channels to obtain new subscribers.
  • LTV:CAC ration too high: Values abover 5:1 are typically a sign of underspent marketing expenses, resulting in a low CAC value. In this case, the company is leaving money on the proverbial table, not fueling its growth by aquiring new customers.
  • In order to better undestand the situation, additional parameters should be analyzed as well.

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