How it's calculated
The LTV:CAC ratio compares what a customer is worth over their lifetime with what it cost to win them. It is the single most quoted test of whether a subscription business's growth is profitable.
David Skok, who popularised the measure, gives the formulas as LTV = ARPA × gross margin % ÷ churn rate, CAC = sales and marketing expenses ÷ new customers added, and LTV:CAC = LTV ÷ CAC. His rule of thumb is that LTV should be at least three times CAC, alongside recovering CAC within about 12 months.David Skok, For Entrepreneurs
The formula
- LTV = ARPA × gross margin ÷ monthly churn
- CAC = sales and marketing spend ÷ new customers
- LTV : CAC = LTV ÷ CAC
- CAC payback = CAC ÷ (ARPA × gross margin), in months
Worked example
With $100 ARPA, an 80% margin and 2% monthly churn, LTV is $4,000. Spending $50,000 to win 100 customers makes CAC $500, so the ratio is 8.0×, with payback in 6.3 months.
| Line | Value |
|---|---|
| Revenue per customer per month (ARPA) | $100 |
| × gross margin (80%) | $80 |
| Expected lifetime (1 ÷ 2% churn) | 50 |
| Customer lifetime value (LTV) | $4,000 |
| Customer acquisition cost (CAC) | $500 |
| LTV : CAC | 8 |
| CAC payback | 6.25 |
At 5% monthly churn the same business has a ratio of 3.2×: churn is usually the biggest lever on LTV.
Assumptions and limitations
- LTV is only as good as the churn estimate. Young companies rarely know long-run churn; use a cautious figure.
- The ratio ignores timing. A healthy ratio with a long payback still ties up cash for months.
- Blended figures hide weak channels. Calculate the ratio per channel or segment where possible.