Why Investors Look at LTV:CAC Before Almost Anything Else
LTV:CAC answers the most fundamental question in any customer-acquisition business: does spending money to get customers produce more value than it costs? If LTV:CAC is below 1:1, every customer you acquire destroys value. Above 3:1, the model is healthy. Calculate your ratio with our LTV:CAC Ratio Calculator and CAC Calculator.
Calculating Customer Lifetime Value
The simplest LTV formula for subscriptions: LTV = (Average Monthly Revenue per Customer × Gross Margin %) ÷ Monthly Churn Rate. A product with $50 ARPU, 70% gross margin, and 3% monthly churn produces LTV of ($50 × 0.70) ÷ 0.03 = $1,167. The same product at 1% churn produces LTV of $3,500 — three times higher without changing price or margin. Reducing churn is almost always the highest-leverage LTV improvement available.
The Payback Period: The Cash Flow Reality Check
A healthy LTV:CAC ratio does not mean positive cash flow. If your CAC is $500 and you recover it over 24 months, you are funding customer acquisition out of reserves for two years before breaking even on each customer. Always pair LTV:CAC analysis with payback period: CAC ÷ (Monthly Gross Margin per Customer). Anything above 18 months creates significant cash flow stress in a scaling business.