How to Know If Your LTV:CAC Is Healthy

Calculate and benchmark your lifetime value to customer acquisition cost ratio to determine if your unit economics are sustainable.

1. Calculate your customer lifetime value. Multiply average order value by purchase frequency by gross margin percentage by average customer lifespan in months. If your average customer spends $100 monthly at 60% margin for 24 months, your LTV is $1,440.
2. Calculate your customer acquisition cost. Divide total sales and marketing spend by new customers acquired in the same period. Include salaries, ad spend, tools, content creation, and events. If you spent $50,000 and acquired 100 customers, your CAC is $500.
3. Calculate your LTV:CAC ratio. Divide LTV by CAC. Using the examples above: $1,440 ÷ $500 = 2.88:1. This ratio tells you how much lifetime value you get per dollar of acquisition cost.
4. Check your payback period. Divide CAC by monthly recurring profit per customer. With $500 CAC and $60 monthly profit ($100 × 60% margin), payback is 8.3 months. This measures how long until you recover acquisition costs.
5. Compare against healthy benchmarks. Healthy SaaS and subscription businesses maintain 3:1 to 5:1 LTV:CAC with 6-18 month payback periods. E-commerce typically runs 2:1 to 4:1 with 3-12 month payback. Below 3:1 signals unsustainable unit economics.
6. Track monthly and investigate trends. Monitor both metrics monthly since acquisition costs change with seasonality and competition. If your ratio drops below 3:1 for two consecutive months, audit your acquisition channels and pricing strategy immediately.