The LTV to CAC ratio compares the gross profit a customer brings over their whole relationship with you with what it cost to win that customer. A ratio of 3:1 means each £1 spent on acquiring a customer comes back as £3 of gross profit over time; a ratio below 1:1 means you lose money on every customer you win.
How the LTV to CAC ratio works
The ratio divides two numbers. The first is customer lifetime value (LTV or CLV): average revenue per customer per period, multiplied by your gross margin, multiplied by how many periods a typical customer stays. The second is customer acquisition cost (CAC): everything you spend on sales and marketing in a period, divided by the number of new customers won in it.
Here is a worked example for a coffee subscription business in Leeds, using revenue excluding VAT:
| Step | Figure |
|---|---|
| Monthly subscription (ex VAT) | £25.00 |
| Gross margin | 55% |
| Gross profit per month | £13.75 |
| Average months a subscriber stays | 10 |
| Lifetime value | £137.50 |
| Monthly spend: £4,000 ads plus £1,000 tools and freelance help | £5,000 |
| New subscribers that month | 50 |
| CAC | £100.00 |
| LTV to CAC ratio | 1.4:1 |
At 1.4:1 the business makes a thin profit on each customer, and it pays £100 up front but earns only £13.75 of gross profit a month, so it takes just over seven months to get the £100 back. That wait is the CAC payback period, and for a small business it often matters as much as the ratio itself, because cash runs out before lifetime value arrives.
A ratio of 3:1 is widely repeated as a healthy target, particularly in software. Treat it as a convention rather than a rule. A business with fast payback and little need for cash can live with less; a very high ratio can mean you are under-investing and leaving growth to competitors.
Why it matters
The ratio tells you how much you can afford to spend to win a customer, which is the question behind every advertising budget. It stops a business judging channels only on first-order revenue, which undervalues customers who come back, and it is a figure investors commonly ask about when a UK start-up raises money.
Common mistakes
- Using revenue instead of gross profit for LTV. Revenue-based LTV can make a loss-making channel look healthy.
- Leaving costs out of CAC. Salaries, agency fees, tools and creative production are part of the cost of winning customers, not just media spend.
- Guessing lifetime for a new business. Without retention history, a lifetime of “three years” is an assumption. Use a short, cautious window until real data exists.
- Relying on a blended figure. A blended ratio can hide one channel that is excellent and another that loses money.
- Including VAT. Calculate both sides on figures excluding VAT.
How to act on it
Calculate the ratio by acquisition channel and by monthly cohort of customers, using gross profit and fully loaded costs. Check the payback period alongside it. Then work on whichever side is weaker: lower CAC through better targeting and conversion rate, or raise LTV through retention, higher order values and repeat purchase.
My free LTV and CAC calculator shows the ratio and the payback period from your own figures. If you want ad spend set against lifetime value rather than first-sale revenue, that is how I approach performance marketing.