What Is LTV vs CAC and Why Do They Matter?

Two Numbers That Define Your Business

LTV and CAC are the two most important metrics for any business that earns money from customers over time. Together they answer one critical question: is your business sustainable?

LTV (Lifetime Value) is how much total money a customer brings you during the entire time they stay with you. If someone pays $10/month and stays for 18 months, their LTV is $180. Simple enough.

CAC (Customer Acquisition Cost) is how much you spend — in time, money, and effort — to get one new customer. This includes ads, sales team salaries, marketing tools, and anything else you spend to bring someone through the door.

Alone, each number is interesting. Together, they tell you everything about whether your growth engine is working.

The Ratio That Decides Your Fate

Imagine spending $200 to get a customer who only ever pays you $50. That business is dying — you just haven't noticed yet. Now imagine spending $200 to get a customer who pays you $800 over two years. That's a business with a heartbeat.

The LTV:CAC ratio is the clearest signal of business health. A ratio of 3:1 means you earn $3 for every $1 you spend getting a customer. Most healthy businesses aim for at least 3:1. Go much higher (like 10:1) and you might be underspending on growth — leaving easy wins on the table. Go lower (like 1:1) and you're burning money to grow without real profit.

Investors look at this ratio closely because it tells them whether a company can scale without needing endless cash injections. If your CAC is higher than your LTV, scaling makes you poorer, not richer.

Calculating LTV and CAC

Here's how to figure out both numbers for your own business.

Calculating LTV: Take your average revenue per customer per month, multiply by how many months the average customer sticks around. So if your product is $29/month and customers typically cancel after 8 months, your LTV is $29 x 8 = $232.

Calculating CAC: Take your total sales and marketing spend over a month, then divide by how many new customers you got that month. If you spent $5,000 on marketing in April and got 25 new customers, your CAC is $5,000 divided by 25 = $200 per customer.

The ratio: Divide LTV by CAC. $232 divided by $200 = 1.16. That's a 1.16:1 ratio — dangerous territory. You'd want to either raise your price, reduce your CAC, or find ways to keep customers longer.

A SaaS Business Breakdown

Let's look at a real scenario. You run a project management tool that charges $49/month. After analyzing your data, you find:

LTV:CAC ratio = $686 divided by $100 = 6.86:1. That's excellent — you're earning nearly $7 for every $1 spent on acquisition. You might double down on the ads that are working, or experiment with raising prices.

// Quick LTV:CAC calculator for a SaaS business

const avgMonthlyRevenue = 49;       // $49/month plan
const avgCustomerMonths = 14;      // avg months before churn
const ltv = avgMonthlyRevenue * avgCustomerMonths;
console.log(LTV: $${ltv}); // → LTV: $686

const monthlyAdSpend = 3200;   // total ad budget
const newCustomers = 32;        // new customers won
const cac = monthlyAdSpend / newCustomers;
console.log(CAC: $${cac}); // → CAC: $100

const ratio = ltv / cac;
console.log(LTV:CAC = ${ratio.toFixed(2)}:1);
// → LTV:CAC = 6.86:1 — healthy!

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