Growth economics
LTV:CAC ratio: what a good ratio is and how to work it out
Use gross profit, not revenue, and count every cost of winning the customer. A ratio built on revenue and ad spend alone will look better than it is.
The direct answer
A good LTV:CAC ratio is usually 3:1 or higher. Divide the gross profit a customer brings over their lifetime by the full cost of winning that customer. Below 1:1 you lose money on each customer. Between 1:1 and 3:1 the economics are thin. Treat 3:1 as a common rule of thumb, not a law. Cash on hand, payback time, and the quality of your data can all move the right target.
1. Work out lifetime value on gross profit
Lifetime value (LTV) is the gross profit one customer brings before they leave. Start with the average revenue per customer each month. Multiply it by your gross margin. Then multiply by the average number of months a customer stays.
Use gross profit, not revenue. Revenue includes money that pays for the product and delivery. Only the margin is left to repay what you spent to win the customer.
- LTV = average monthly revenue per customer x gross margin x average months a customer stays.
- For one-off purchases, use average gross profit per order x expected orders over your chosen window.
- Pick one time window, such as 24 months, and keep it the same each time you compare.
2. Count the full cost of winning a customer
Customer acquisition cost (CAC) is total acquisition spend divided by the new customers won in the same period. Include ad spend, agency or platform fees, and the pay of people whose job is to win new customers.
A common mistake is to use only ad spend. That gives a lower CAC and a better looking ratio. It also hides the real cost of growth from the people making budget decisions.
- CAC = total acquisition spend / new customers won in the same period.
- Count new customers, not leads, orders, or repeat buyers.
- Match the spend period to the customer period. Spend in March wins customers that may buy in April.
3. Follow one example from start to finish
The numbers below are invented to show the steps. They are not a benchmark or a client result.
| Item | Amount |
|---|---|
| Average revenue per customer per month | $150 |
| Gross margin | 70% |
| Average months a customer stays | 24 |
| LTV (150 x 0.70 x 24) | $2,520 |
| Acquisition spend in the period | $50,000 |
| New customers won | 100 |
| CAC (50,000 / 100) | $500 |
| LTV:CAC (2,520 / 500) | 5.04 to 1 |
4. Read the ratio with its limits in mind
These bands are a common rule of thumb. Your own cash position and growth plans decide what is right for you.
A very high ratio can mean you are not spending enough to grow. It can also mean the lifetime guess is too generous. Check the lifetime figure against real cohorts before you act on it.
| Ratio | What it usually means | A sensible next step |
|---|---|---|
| Below 1:1 | Each customer costs more to win than they return | Fix retention, margin, or CAC before adding spend |
| 1:1 to 3:1 | The model works but leaves little room | Raise gross margin or lifetime, or lower CAC |
| 3:1 to 5:1 | Often healthy and ready to scale | Test more spend while watching payback time |
| Above 5:1 | May be under-investing, or LTV may be overstated | Check cohort data, then test a higher budget |
5. Check the inputs before you trust the answer
LTV depends on how long customers stay. New businesses often do not have enough history to know. In that case use a short window you can support with real data, and say so.
Also check that the customer count and the spend come from the same source. Mixed definitions are the most common reason two teams report different ratios.
- Use cohorts: group customers by the month they were won and follow each group.
- Do not mix new and returning customers in the CAC count.
- Write down which costs you included so the next review uses the same rules.
6. Connect the ratio to your Google Ads decisions
A blended ratio can hide a weak campaign. Compare CAC by campaign or customer type where your data allows it. Then ask whether each group sits above or below the level you need.
Pair this ratio with CAC payback. A strong ratio with a very long payback can still strain cash. The payback guide and the break-even ROAS guide cover those two checks.
Put it to work
Keep the evidence beside the decision.
Record revenue, margin, lifetime, spend, and new customers, then see the ratio with the assumptions beside it.
Download the LTV:CAC worksheetCommon questions
What is a good LTV to CAC ratio?
Many teams use 3:1 or higher as a healthy level. It means each customer returns at least three dollars of gross profit for every dollar spent to win them. Treat it as a rule of thumb. Cash needs and data quality can change the target.
Should LTV use revenue or gross profit?
Use gross profit. Revenue includes the cost of the product and delivery, which is not available to repay acquisition cost.
What costs belong in CAC?
Include ad spend, agency and platform fees, and the pay of the people whose work is winning new customers. Count only new customers.
Is a higher ratio always better?
No. A very high ratio can mean you are not investing enough to grow, or that the lifetime figure is too optimistic. Check it against real cohort data.
Sources and method
This guide combines the linked sources with Ad Prophet's editorial methods and original decision aids. Numerical examples are illustrative. They do not describe client results or industry benchmarks.