Unit Economics
What Is LTV:CAC Ratio?
LTV:CAC ratio divides lifetime customer value by the cost to acquire that customer. A 3:1 ratio is the minimum healthy threshold for DTC. Below that, you are paying more to acquire customers than the business returns. Always calculate this at the channel level, not blended, or you will misallocate your budget.
LTV:CAC ratio is the relationship between what a customer contributes over their lifetime and what it cost to acquire them. The number that tells you whether the business model is fundable.
How LTV:CAC is calculated
LTV:CAC = 24-month LTV ÷ Paid CAC
Both expressed in dollars. Use paid CAC, not blended. Use CM-based LTV, not revenue-based.
Example
A DTC brand: 24-month LTV of $186 (CM-based, paid-channel cohort). Paid CAC of $52. LTV:CAC = $186 ÷ $52 = 3.58x. Healthy. The same brand if computed with blended CAC of $32 would falsely report 5.81x.
Threshold guide
- ≥ 3:1, Healthy. Each dollar of CAC recovers 3+ dollars of contribution. Fundable.
- 2:1 to 3:1, Borderline. Survivable but requires external capital to fund growth.
- Below 2:1, Unsustainable. The business model does not work at this cost structure regardless of scale.
- Above 5:1, Underspending. Usually means you could grow faster by increasing paid spend.
For full LTV:CAC mechanics including channel-level math see LTV:CAC ratio guide.
The most common mistake
Computing one LTV:CAC across the whole business. Channels have radically different LTVs and CACs. Meta prospecting may be 2.5:1; Google brand may be 12:1; the blend is 4:1 and tells you nothing about where to spend. Run LTV:CAC by channel, that's the decision metric.
Frequently Asked Questions
what's a good LTV:CAC ratio?
3:1 or better is healthy. 2:1 to 3:1 borderline. Below 2:1 unsustainable. Above 5:1 you're probably underspending.
should I use blended or paid CAC?
Paid CAC. Blended inflates the ratio by including customers you didn't pay to acquire.
how is the 3:1 rule justified?
1x to recover CAC, 1x to cover fixed costs, 1x for profit. Below 3:1 something gets squeezed.
Related Terms
Browse the full ecommerce finance glossary for every metric and money term a DTC operator needs.
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