Definition
LTV/CAC Ratio
The LTV/CAC ratio compares the lifetime value of a customer to the cost of acquiring them, gauging the efficiency of growth spending.
Dividing lifetime value by customer acquisition cost shows how much value each acquired customer generates per rupee of acquisition spend. A ratio around 3:1 is often cited as healthy: each customer is worth roughly three times what they cost to acquire. A ratio near 1:1 means the company barely breaks even on growth.
Investors use the LTV/CAC ratio to assess whether a startup's growth is sustainable or merely 'buying' revenue at a loss. A very high ratio can also suggest under-investment in growth.
Related terms
- Customer Acquisition Cost (CAC)CAC is the average cost a company incurs to acquire one new customer, including marketing and sales spend.
- Lifetime Value (LTV)LTV is the total profit a company expects to earn from a customer over the entire duration of the relationship.
- Unit EconomicsUnit economics is the analysis of the revenue and costs associated with a single unit — typically one customer or one transaction.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.