Term · Business Model & Operating KPIs
LTV/CAC
In briefLTV/CAC compares customer lifetime value with the acquisition cost per customer. Values above one mean that customers generate more than their acquisition costs. Because the LTV rests on assumptions, rules of thumb such as a 3:1 ratio should be scrutinized critically.
Definition
The LTV/CAC metric relates customer lifetime value to customer acquisition cost (CAC). It shows how much value a customer generates over their lifetime compared with the cost of acquiring them. A ratio above one means that a customer brings in more than their acquisition cost.
How it is calculated
Formula. LTV/CAC = Customer Lifetime Value ÷ Customer Acquisition Cost
Why it matters for small caps
For growth-driven small caps, LTV/CAC shows whether growth is economically sustainable or merely bought at a high price. A ratio that is too low points to unprofitable customer acquisition.
Common misreadings
- A high LTV/CAC is celebrated as a success, even though it may rest on optimistic LTV assumptions about lifetime and margin.
In the process
Frequently asked
What counts as a good LTV/CAC ratio?
In practice, a ratio of around 3:1 is often cited. This is a rule of thumb and depends heavily on industry, margin, and the reliability of the LTV estimate.
Why is the LTV the most vulnerable figure?
It rests on assumptions about customer lifetime, margin, and churn. Small changes to these assumptions alter the ratio considerably.
How is LTV/CAC related to the CAC payback period?
Both measure the efficiency of customer acquisition. The payback period shows when costs are recouped, LTV/CAC the total value over the lifetime.
Related terms
Education only, not investment advice. Ranges and thresholds are didactic orientation values, not an official standard.