The LTV/CAC ratio divides the value a customer leaves over their lifetime by what it costs to acquire them. If a customer contributes €240 of margin and acquiring them costs €60, the ratio is 4:1. The starting benchmark is 3:1: below that, acquisition eats your profitability; above 5:1 it almost always means you are investing less than you could.
The detail that decides whether the number is useful or theatre: LTV has to be built on margin, not on revenue. Calculated on gross revenue, every business looks healthy.
How to calculate it, with numbers
Step 1: LTV on margin. The practical version, no discount rate and no probabilistic models:
- Average order value: €85
- Gross margin per order (after product, shipping, fees and returns): 38% → €32.30
- Orders per customer over 24 months (real cohort data, not a blended average): 2.7
- LTV on margin = 32.30 × 2.7 = €87.21
Step 2: CAC. Total acquisition cost for the period divided by new customers in the period. Say €29.
Step 3: the ratio. 87.21 ÷ 29 = 3.0. Inside the band, with no room to relax.
Had we calculated LTV on revenue (85 × 2.7 = €229.50), the ratio would have come out at 7.9 and the conclusion would have been "we can double spend". That mistake is the single most frequent cause of scaling that blows up the P&L.
What each band means
- Below 1:1. You lose money on every new customer. This is not a campaign optimisation problem: it is a pricing, product or margin problem.
- Between 1:1 and 3:1. You make money, but the margin doesn't cover overheads and growth at the same time. Raise margin, improve repeat purchase or lower CAC before adding budget.
- Around 3:1. The healthy zone in most models: the customer pays for their acquisition, pays for the structure and leaves profit.
- Above 5:1. Counterintuitive but almost always bad news: you are leaving growth on the table. With that much headroom you can accept a higher CAC, move into more expensive audiences and take share. A very high ratio usually describes a business that is only capturing demand that was already coming.
The four mistakes that inflate the ratio
- LTV on revenue instead of margin. The most common and the most expensive. It multiplies the ratio by two or three.
- Infinite horizon. A "5-year LTV" in a business that has been trading for 18 months is a projection, not a number. Use a window your cohorts have actually lived through: 12 or 24 months.
- Blended average instead of cohorts. If customers from three years ago repurchased more than today's, the historical average hides a downward trend. Look at cohorts by month of first purchase.
- CAC calculated over all conversions. If the denominator includes orders from returning customers, CAC comes out low and the ratio comes out high. It is exactly the confusion between cost per acquisition and cost of acquiring a new customer.
How we use it in practice
LTV/CAC is not a day-to-day management metric: it is the one that sets the investment ceiling. The sequence we follow:
- Calculate LTV on margin by cohort using back-office data.
- Set the maximum acceptable CAC by dividing that LTV by 3.
- Translate that maximum CAC into platform language: a target CPA in acquisition campaigns, or a first-purchase target ROAS in ecommerce.
- Scale while real CAC stays below the maximum, and watch MER to confirm the growth is coming from the business and not from attribution.
In B2B with a long sales cycle the reasoning is identical, but LTV is built on contract value and average relationship length instead of repeat orders. That is the framework behind €18M of media managed and €220M billed by our clients — an aggregate of more than €10 returned per euro invested. See how it plays out in our case studies.
Frequently asked questions
What is a good LTV to CAC ratio?
3:1 is the healthy reference in most models with repeat purchase or subscription. Below 3, acquisition consumes too much margin; above 5 you are usually under-investing and leaving market share uncaptured.
Should LTV be calculated on revenue or on margin?
On gross margin. Calculating it on revenue inflates the ratio in the same proportion as your cost of goods and is the most common reason businesses scale their way into losses. Subtract cost of goods, shipping, payment fees and returns before multiplying by expected orders.
What time horizon should be used for LTV?
The one your cohorts have actually lived: 12 or 24 months in ecommerce, and the observed average contract duration in B2B or subscription. Projecting 3 or 5 years in a young business turns LTV into an optimistic estimate nobody can falsify.
Is a very high LTV/CAC ratio good?
It usually signals under-investment. An 8:1 means you could pay considerably more per customer and still be profitable, which means there is demand you are not reaching. Unless the constraint is cash or delivery capacity, a very high ratio is a missed opportunity, not an achievement.
Does LTV/CAC work for one-off purchase businesses?
With caveats. If there is no repeat purchase, LTV is the margin on a single order and the ratio simply becomes margin divided by CAC. It still works as a profitability control, but it loses the interesting part, which is how much you can front-load into acquisition on the strength of future value.
What is your real investment ceiling?
The Viability Diagnostic works out your LTV on margin and your real CAC, and tells you how much you can invest without breaking profitability.