What to do next
Show the working, step by step
Where I used this
At Praava Health I directed the growth engines behind about 45% overall compound annual growth from 2021 to 2023, and about 57% in the consumer business.
Read the case: Directing a healthcare startup through multi-year hypergrowth →Everything is calculated in your browser. Nothing you type is sent or stored.
How to read your result
- Below 1 : 1. Every new customer loses money. Growth makes the hole deeper. Fix price, margin or retention before spending more on acquisition.
- 1 to 3 : 1. You make money, but thinly. A small rise in acquisition cost or churn can wipe it out.
- 3 : 1 or better. The common benchmark for a healthy, fundable model.
- Above 5 : 1. Healthy, and possibly too cautious. You may be able to grow faster by spending more to acquire customers.
Payback matters as much as the ratio. A 4 : 1 ratio that takes three years to pay back can still run you out of cash. The curve above shows when each customer has earned back what they cost.
Three mistakes that flatter the number
- Using revenue instead of margin. A customer worth 100 in revenue at 30% margin is worth 30, not 100.
- Counting only paid media in CAC. Salaries, agency fees, tools and sales commissions are acquisition costs too.
- One churn rate for everyone. New customers usually churn faster than loyal ones. Run the calculator by cohort or by channel, and compare.
When this ratio is weak, the lever is often retention, which is why retention is the real growth engine, or price, because pricing is positioning. And if the number makes you uncomfortable, that is the one to measure first.
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Is your growth paying for itself?
Bring your LTV and payback numbers to a free 30-minute call. I directed the growth engines behind Praava Health’s multi-year hypergrowth, and I will show you which lever moves your ratio fastest.
Questions
What is a good LTV to CAC ratio?
A common rule of thumb is 3 to 1 or better: each customer returns at least three times what it cost to win them, in gross margin. Below 1 to 1 you lose money on every customer. Well above 5 to 1 can mean you are under-investing in growth.
What is CAC payback and why does it matter?
CAC payback is the number of months of gross margin it takes to earn back what you spent to acquire a customer. It tells you how long your cash is tied up. Many subscription businesses aim for 12 months or less.
Should LTV use revenue or gross margin?
Gross margin. Revenue overstates what a customer is worth because it ignores the cost of serving them. This calculator multiplies revenue by your gross margin before anything else.
Why cap the customer lifetime?
With low churn the formula can promise customers who stay for decades. Capping the horizon, five years by default, keeps the estimate conservative and closer to what a lender or investor will accept.
Are the industry examples benchmarks?
No. They are illustrative numbers that show how revenue, margin and churn differ by industry. Replace them with your own data.