Business Glossary
How to Calculate LTV to CAC Ratio
The LTV:CAC ratio compares customer lifetime value to acquisition cost. It is the fundamental test of commercial viability — if it costs more to acquire a customer than you earn from them, the business cannot scale profitably.
The Formula
LTV:CAC Ratio = Customer Lifetime Value ÷ Customer Acquisition Cost
Worked Example — UK SME
A UK SaaS business: average customer pays £95/month, stays 28 months. LTV = £2,660. CAC = £480. LTV:CAC = 5.5x — a strong ratio.
UK Benchmark
📊 LTV:CAC of 3x or above is generally healthy. Below 1x means losing money on every customer acquired. 5x+ is excellent but may indicate underinvestment in growth.
Common Questions
How do I calculate customer lifetime value?
For subscriptions: average monthly revenue × average months retained. For transactional: average order value × purchase frequency × customer lifespan. Use gross margin to get true LTV.
What is a good LTV:CAC for a UK service business?
4–6x is a strong target. Below 2x means churn is too high or acquisition costs are too high.
How do I reduce customer acquisition cost?
Focus on highest-converting channels. Improve conversion rates. Build referral programmes — referred customers have 30–50% lower CAC on average.
Related terms