What Is a Good LTV to CAC Ratio for a Small Business?

Work out your ratio freeDownload the CAC and LTV:CAC worksheet (PDF)

What the ratio is

LTV:CAC divides customer lifetime value (LTV) by customer acquisition cost (CAC). If an average customer is worth $864 in gross profit over the years they buy from you, and it costs $150 to win one, the ratio is 864 ÷ 150 = 5.76, written 5.76 : 1. Each customer brings back nearly six times what it cost to get them.

Two rules make the number trustworthy. The lifetime value should be the profit version (revenue × gross margin), not revenue, or every channel looks affordable; our CLV formula guide explains why. And the acquisition cost must include everything you spent to win the customer, not only the ad bill.

The ratio has a sibling that is often more useful day to day: profit after acquisition cost, which is simply CLV minus CAC. In the example that is $864 − $150 = $714, the gross profit an average new customer leaves behind once you have paid to win them. The free CLV calculator shows both figures side by side; the button at the top of this post opens it with these numbers entered.

Where "3:1" comes from

The target you will see everywhere is 3:1. It comes from subscription software. David Skok's widely cited SaaS Metrics 2.0 sets out two guidelines for SaaS businesses: lifetime value above three times acquisition cost, and acquisition cost recovered within 12 months. He adds that the best SaaS businesses run above 3, sometimes as high as 7 or 8, and that many healthy ones fall short in their early days.

That is a reasonable starting point for a service business too, but the reasoning matters more than the number. A software company needs a big margin over CAC because it pays for product development and long sales cycles out of it. A local trade business has different overheads and a different cash position. What carries over cleanly is the floor: below 1:1, every new customer loses money, and the second guideline, how many months it takes to earn the cost back, matters as much as the ratio when cash is tight.

Step by step: work out CAC honestly

1. Pick a period

A quarter or a year. A single month is distorted by one big job or one quiet week.

2. Add up everything spent to win new customers

Ads, flyers and printing, directory and lead-site fees, the cost of quoting software you use for new work, and paid time: if someone on wages spends ten hours a week visiting prospects and writing quotes, that time is acquisition cost. Your own time counts too if you would otherwise bill it. Skok's article makes the same point bluntly: leaving out headcount to make the number look better only fools you.

3. Count new customers in the same period

Only first-time customers, and only the ones won in that period. Repeat customers are what the lifetime value already counts.

4. Divide, then compare

Example: in one quarter a landscaping business spent $1,200 on Google Ads, $300 on flyers and $900 of a helper's time on quote visits for new enquiries: $2,400. It won 16 new customers, so CAC is $2,400 ÷ 16 = $150. With a customer lifetime value of $864, the ratio is 5.76 : 1.

5. Work out the payback months

Each customer spends $480 a year at a 60% margin, which is $24 of gross profit a month. $150 ÷ $24 = 6.25 months to earn back what it cost to win them. Comfortably inside Skok's 12 months.

The ratio per channel is the one that changes decisions

The overall ratio says whether marketing as a whole pays. The per-channel ratio says where the next dollar should go. Split the same quarter by where each new customer came from:

All three pay. The flyers pay best per customer but may not scale: printing twice as many rarely doubles the customers. The useful question for each channel is whether it can take more budget at a similar cost per customer.

The hard part is knowing which channel each customer came from. Tagged links do the online half: our guide to creating UTM links covers them, and asking "how did you hear about us?" on your enquiry form covers the rest. On paid plans, Fynl's Reports page lists every source with how many leads it brought and how many of them you won, which is the customer count each channel's CAC needs.

When the ratio is too high, or too low

Below 1:1, stop or fix the channel. Either the cost per customer is too high, or the customers it brings do not stay. Look at both before cutting it.

Very high, such as 10:1 overall, can mean you are underspending: there may be customers you could win profitably and are not trying to. It can also mean the cost side is missing something, so recheck what you included.

Either way, the ratio has two sides. Lowering CAC is one route; raising lifetime value is the other, and often cheaper. Our guide to raising customer lifetime value covers that half. The free CLV calculator shows the ratio and the profit left after acquisition cost as you change any input.

The CLV calculator sits with the NPS, missed-call and no-show calculators on our free tools page.

Questions people also ask

Sources

• For Entrepreneurs (David Skok) — SaaS Metrics 2.0
• Wikipedia — Customer lifetime value