Money, pricing & model

What is a good LTV to CAC ratio?

The short answer

The rule of thumb is LTV:CAC of at least 3:1, earn back roughly three times what it costs to acquire a customer. Below 1:1 you lose money on every sale; way above 3:1 usually means you're underspending on growth. Just as important is CAC payback: recover your acquisition cost within 12 months or cash flow will strangle you.

Go deeper, your way

3 hand-picked resources, 2 link-checked. Pick how you want to dig in.

📄 Article
✓ Link checked Free Advanced

Why we picked it David Skok's For Entrepreneurs work is the foundational, near-universally cited source on SaaS unit economics and modeling. It's where the LTV:CAC and CAC-payback conventions were popularized.

SaaS Metrics 2.0, Detailed Definitions

From forentrepreneurs.com by David Skok long-form reference

  • Unit economics (LTV:CAC and months to recover CAC) reveal long-term profitability
  • Simple LTV formulas break when revenue expands over a customer's lifetime
  • Build financial models from real drivers, not top-down market-share guesses
Open forentrepreneurs.com →
📄 Article
✓ Link checked Free Intermediate

Why we picked it The reference primer on the metrics and market-sizing logic investors use, including bottom-up market sizing that keeps founders honest about how big a market really is. Canonical a16z source.

16 Startup Metrics

From a16z by Andreessen Horowitz (a16z) ~15 min read

  • Size markets bottom-up from customer count and willingness to pay
  • Know the metrics that actually signal a healthy business
  • Distinguish real traction from vanity metrics
  • Use consistent definitions when comparing yourself to the market
Open a16z.com →
📄 Article
Free Intermediate

Why we picked it A focused a16z piece on the single ratio that most captures a business's efficiency and drives its valuation. Great for founders who need to understand the 3:1 benchmark and its limits.

Why Do Investors Care So Much About LTV:CAC?

From a16z.com by Andreessen Horowitz (a16z) article

  • 3x LTV:CAC is a common rule-of-thumb benchmark for healthy unit economics
  • Higher LTV:CAC drives higher margins and therefore higher valuation
  • The ratio can mislead, CAC payback period matters just as much for cash
Open a16z.com →

Terms in this answer

Customer Acquisition Cost Lifetime Value Cash Flow

People also ask

What are unit economics and why do they matter? Unit economics is the profit or loss on a single customer or unit, strip away the noise and ask 'do I make money on one customer?' If the answer is... Beginner 3 resources → How do I calculate CAC (customer acquisition cost) and LTV? CAC = total sales and marketing spend divided by new customers acquired in that period, count everything, not just ad spend. LTV = the profit (not ... Intermediate 3 resources → What metrics should I actually track as an early-stage SaaS founder? Early on, obsess over MRR growth, churn, gross margin, and CAC payback, ignore vanity metrics like downloads and pageviews. Net revenue retention t... Intermediate 3 resources → How do I build a simple financial model or revenue projection? Build bottom-up from real drivers, leads, conversion rate, price, churn, not top-down from 'we'll grab 1% of a huge market.' A useful early model f... Intermediate 3 resources → What is churn and how much churn is too much? Churn is the rate customers leave, and it silently caps your growth because you're refilling a leaky bucket. For SMB SaaS, ~3-5% monthly is common ... Intermediate 2 resources → My CAC looks great but I paid for it with a founder-led discount. How do I know my unit economics without the promo? Discounts and founder hustle hide your real acquisition cost, so run two versions: the promo number and the number when a stranger buys at list pri... Intermediate 2 resources →

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