Back to Revenue Systems
Section 2 · Understanding Revenue
LTV and CAC: The Two Numbers That Decide If You Can Grow
Customer Lifetime Value must beat Customer Acquisition Cost — by a lot.
Revenue
Profit
Growth
Retention
Why it works
LTV ÷ CAC tells you whether marketing is an investment or a leak. Below 3:1, you're burning money.
Connects to
Revenue
Profit
Growth
Retention
When to use it
Before scaling any paid channel and every quarter as a health check.
When NOT to use it
Don't use blended LTV for a brand-new product — segment by cohort.
How to use it
- LTV = average revenue per customer × gross margin × average retention months.
- CAC = total marketing + sales spend ÷ new customers in the period.
- Target LTV:CAC ≥ 3:1. Aim to recover CAC inside 12 months.
- If the ratio drops, raise prices, increase retention, or cut acquisition cost — in that order.
Examples
Healthy SaaS
LTV $1,800, CAC $400 → 4.5:1. Safe to scale ads.
Broken DTC
LTV $60, CAC $48 → 1.25:1. Every new customer barely covers ad cost.