What Founders Need to Know About LTV to CAC Ratios

What Founders Need to Know About LTV to CAC Ratios

Blog Article

If you're running or starting a company, you've probably heard people talk about the LTV to CAC ratio. It might sound like one of those complicated accounting terms, but it’s actually a pretty simple idea once you break it down. If you're building a business — especially one that relies on getting new customers and keeping them around — this is something you want to get familiar with early on. It could save you a big routecanal of cash-related headaches down the road.

Let’s start with the basics. “LTV” stands for "Customer Lifetime Value." In plain terms, that’s how much money a single customer brings into your business over the time they use your product or service. “CAC” stands for "Customer Acquisition Cost," which is how much money you spend (think ads, marketing, sales efforts) to get that person in the door.

The ratio between these two numbers helps you understand if your business is spending money in smart ways. If you're spending $100 to gain a customer and the average customer ends up bringing you $500, you're in great shape. But if you're spending $150 to get a customer who only brings in $100, you’ve got a problem you need to fix — fast.

So, what’s a good LTV to CAC ratio? Many experts suggest aiming for a ratio of 3:1. That means for every dollar you spend on getting a new customer, you’re earning three dollars back over time. It gives you room to profit while still covering your costs.

But keep in mind, this ratio isn’t a one-and-done thing. It changes based on how your business grows, how your marketing performs, and how happy your customers are. If people cancel their subscriptions early or stop buying from you, your LTV drops. If your marketing gets more expensive or stops working, your CAC goes up.

To make the most of your LTV to CAC ratio, you’ll want to hang on to customers for as long as you can and make sure they’re satisfied. At the same time, look for smart and cost-effective ways to attract new people.

It’s a balancing act, for sure — but one that can make or break a growing business. Keep an eye on those numbers, and you’ll be in a much better spot to grow sustainably.