A CEO once asked me whether doubling the marketing budget would accelerate growth or just burn cash. The question wasn’t about spending more. It was about knowing whether customer acquisition was profitable in the first place.
One critical metric helps answer that question: the ratio of Customer Lifetime Value (CLTV) to Customer Acquisition Cost (CAC).
What CLTV and CAC Measure
CLTV:CAC = (Customer Lifetime Gross Profit) ÷ (Average CAC per customer)
Customer Lifetime Value (CLTV) represents the total profit a company anticipates generating from a customer over the entire duration of their customer relationship.
Customer Acquisition Cost (CAC) refers to the total amount spent to acquire a customer, including sales compensation, marketing expenses, and demand generation costs.
The ratio between them reveals whether your customer acquisition engine creates value or destroys it.
What the Ratio Tells You
A ratio of 3:1 means you generate three dollars of gross profit for every dollar spent on acquisition. That signals efficient, profitable growth.
A ratio of 1:1 or less means you are losing money on every new customer. That signals a fundamental problem in either your acquisition costs, pricing, retention, or all three.
Understanding the ratio requires calculating its two components.
Understanding Customer Lifetime Value
The CLTV is the Net Present Value (NPV) of total profits expected from a given customer, or customer cohort, during their relationship with the company.
Let’s review the elements of this definition.
The formula’s NPV component reflects the discount of the value of money over time. In other words, a specific amount of money today is expected to be worth more than that same amount will be in 5 years, and the NPV accounts for that.
To use the NPV, one would adopt an agreed-upon yearly discount rate and apply it based on the expected average number of years. A 5% annual discount rate would mean discounting future profits by roughly 5% per year (e.g., multiplying by about 0.95 for each year).
While you could adjust for the time value of money as illustrated above, most businesses keep it simple and use Gross Profit (GP) directly. We will do the same here.
For GP, while some businesses reduce it by considering pertinent Operating Expenses (OPEX), many use unadjusted GP figures for this calculation. Notably, Compensation and Marketing spending, typically categorized as OPEX, are included in the computation of CAC below.
For SaaS Companies and Contract-Based Businesses
For SaaS companies and businesses with customer contracts, the average length of the relationship between the company and its customers is derived from the churn amongst the measured customer cohort.
The churn is calculated by dividing the number of customers in a cohort leaving the company over the measured period by the total number of customers in that same cohort at the beginning of the period.
The formula could be:
Churn = Number of cohort customers who left the company during the period / Total number of cohort customers at the beginning of the period.
For example, in a cohort of 100 customers, 20 customers leaving the company over a one-year period would be 20/100, or a churn rate of 20%.
For these companies, the CLTV would then be calculated by dividing the yearly Gross Profit by the Churn rate. The formula could be:
CLTV = Annualized GP $ / Annualized Churn %
In our example, assuming cohort clients generate $1,000 in yearly GP, the CLTV would be $1,000 / 20% = $5,000. In other words, the average total estimated GP per customer over their lifetime relationships with the company would be $5,000.
For Non-Contract Businesses
What if one needs to calculate the CLTV for a business that cannot count on customer contracts? If the average length of the relationship is known, we could use a similar formula. For example, the formula could be:
CLTV = Yearly GP $ * Average length of the relationship.
Variations of this formula also exist for businesses that accept and benefit from renewal subscriptions from their customers. In those cases, we would need to account for the average percentage of customers renewing and the average number of times these customers renewed during the measured period.
Understanding Customer Acquisition Cost
The CAC is the total amount spent to attract a new customer in the measured cohort.
CAC includes sales staff compensation (salary and commissions), marketing staff compensation (salary and commissions), and marketing demand generation costs.
The spending amounts used here are limited to those incurred in acquiring the measured customer cohort.
A simple formula could be:
Total CAC = Total Sales Compensation + Total Marketing Compensation + Total Marketing Programs Cost.
The total CAC amount would then be divided by the number of customers acquired to arrive at the average CAC per customer:
CAC = Total CAC / New Customer Count
Calculating and Interpreting the Ratio
The ratio is then computed by dividing CLTV by CAC.
A ratio above 1:1 indicates that the company’s marketing effort is profitable. A ratio below 1:1 indicates that customer acquisition is a money-losing initiative for the company, a warning signal.
A CLTV:CAC ratio of 2:1 or greater indicates that the marketing effort is efficient. With a 2:1 ratio, a company generates two times the gross profit amount that it invests in new customer acquisition. Such metrics indicate that the company can grow sales profitably.
Conversely, a smaller ratio indicates that improvements are needed in the new customer acquisition process.
The CLTV sets the theoretical maximum you could spend to break even on acquisition, but in practice, businesses target a healthy multiple to ensure profitability. Most healthy businesses target a ratio between 2:1 and 3:1. Below that, acquisition may not be sustainable. Above that, you may be underinvesting in growth opportunities.
Using This Metric Strategically
The significance of these ratios extends beyond efficiency measurements.
CLTV-based market segmentations enable companies to develop enhanced retention programs for the most profitable customer groups or adjust their approach with the less profitable ones. Understanding which customer segments generate the highest lifetime value helps prioritize resources and tailor experiences.
A subscription business might discover that customers acquired through content marketing have a CLTV of $8,000 versus $3,000 for those from paid ads. This insight immediately shifts budget allocation and content strategy.
Similarly, by learning from the metrics drawn from the best-performing cohorts, businesses can then focus on attracting new customer relationships that align with those best cohorts. By understanding what makes specific customers more valuable, companies can refine their targeting, messaging, and acquisition strategies to attract similar prospects.
Better targeting leads to higher-value customers, which improves the CLTV:CAC ratio, justifying increased investment in acquisition and driving growth. A positive cycle. New customers benefit from enhanced targeted programs while the company generates more profitable customer relationships.
Conclusion
The CLTV:CAC ratio is not just a performance metric. It is a decision-making tool that helps you determine whether to accelerate customer acquisition, where to focus retention efforts, and which customer segments require the most attention. Companies that understand and act on this ratio make smarter growth investments.