# What is the LTV:CAC ratio?

> The LTV to CAC ratio compares what a customer is worth with what it cost to win them. Formula, a worked example and why 3 to 1 is the common target.
- **Author**: Marxx
- **Published**: 2026-10-23
- **Category**: Metrics
- **URL**: https://marxx.ai/library-glossary/ltv-to-cac-ratio

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The LTV:CAC ratio compares how much a customer is worth over their lifetime (LTV) with what it cost to win them (CAC). A ratio of 3 means each customer brings in three times what you paid to get them.

## The formula

LTV:CAC = customer lifetime value / customer acquisition cost

Use gross profit for LTV, not revenue. Otherwise the ratio flatters you.

## A worked example

Say a coffee subscription brand has these numbers:

- Average order: INR 800, with a 60% gross margin, so INR 480 profit per order
- Customers order 6 times on average before they stop
- LTV = 480 x 6 = INR 2,880
- CAC from all marketing = INR 960

LTV:CAC = 2,880 / 960 = **3.0**

## What is a good ratio?

| Ratio | What it usually means |
|---|---|
| Under 1 | You lose money on every customer |
| 1 to 3 | You make money, slowly. Growth eats cash |
| Around 3 | A common healthy target |
| Above 5 | You may be under-spending and growing slower than you could |

The target of 3 comes from subscription software. [David Skok](https://www.forentrepreneurs.com/ltv-cac/) wrote that this ratio should be greater than 3 for a healthy subscription software (SaaS) business. For a store, treat it as a rule of thumb. A brand with cheap financing can live with a lower ratio. One that needs cash fast wants a higher one.

## Watch the payback time

A ratio of 3 that takes three years to collect is risky. Track the [CAC payback period](/glossary/cac-payback-period) too: how many months of profit it takes to earn back the CAC.

## How to improve it

- Raise LTV: subscriptions, bundles, better onboarding, win-back emails.
- Lower CAC: better ads, better landing pages, more referrals.

## FAQ

### How do I estimate LTV for a new brand?

Use the first 3 to 6 months of repeat orders and be conservative. Update it every quarter as real data comes in.

### Should LTV use revenue or profit?

Profit. Revenue-based LTV can show a healthy ratio for a business that loses money on every order.

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