LTV:CAC ratio

The conventional target is 3:1 or better. Below 3:1 the acquisition cost is eating too much of the customer’s value; far above 3:1 usually means you are underinvesting in growth rather than running a brilliant machine.

That “underinvesting” reading surprises people, but it follows from the maths. If every customer returns five times what they cost to acquire, and you have any remaining demand at that price, the rational move is to spend more until the ratio compresses toward 3:1. A 7:1 ratio in a large market is a signal to hire, not a trophy.

Why the ratio is easy to abuse

LTV:CAC inherits every weakness of both inputs, and the errors compound in the same direction:

• Using revenue instead of gross profit in LTV inflates the numerator.
• Using blended rather than paid CAC deflates the denominator.
• Using an optimistic churn assumption inflates the implied lifetime.

Do all three and a 1.5:1 business reports 6:1. This is common enough that experienced investors generally recompute it from the underlying inputs rather than accepting the stated ratio.

Use payback alongside it

CAC payback period is the more honest short-term companion metric because it depends on far fewer assumptions — you only need the first year or two of data, not a projected lifetime. Where the two disagree, trust payback.