The LTV:CAC ratio compares the total gross profit a customer generates over their lifetime to the cost of acquiring them. It's used as a primary signal of whether the business model is fundamentally working at customer-economics level. The standard benchmark is 3:1 or higher considered healthy (a customer generates 3x what it cost to acquire them), 5:1 or higher considered excellent, and ratios below 3:1 typically signal business model problems that need addressing before scaling. It is one of the most-discussed SaaS metrics and a useful diagnostic, but also one frequently calculated poorly or interpreted out of context.
The calculation:
Basic formula:
LTV calculation (typical SaaS approach):