What is the LTV/CAC ratio? 

The LTV/CAC ratio measures the relationship between customer lifetime value (LTV) and customer acquisition cost (CAC). 

It compares how much gross profit a subscriber generates over their entire relationship with your business against what you spent to get them through the door. 

For example, if a customer brings in $300 in total lifetime value and you spent $100 to acquire them, your LTV to CAC ratio is 3 to 1.

Why does the LTV/CAC ratio matter for subscription businesses? 

In a subscription model, you spend money upfront to acquire a user and earn that investment back gradually over time. Tracking your LTV to CAC ratio gives you an immediate picture of your business model's long term profitability and efficiency. 

If your ratio is too low, you are spending too much to acquire accounts that leave before paying back the cost. If your ratio is too high, you might be underinvesting in marketing and missing out on faster growth.

Key factors that influence LTV/CAC ratio 

Several core drivers across your customer lifecycle can push this ratio up or down.

Subscription churn rate High retention keeps customers paying longer, which directly boosts your overall lifetime value without adding to your acquisition budget. Learn how to calculate churn rate. 

Acquisition costs: Spending efficiency across your paid channels, sales commissions, and marketing campaigns dictates how much each new user costs you upfront. 

Average revenue per account: Upgrades, add ons, and expansion revenue increase the total dollars a customer spends during their subscription.

Payback period: The time it takes a new customer to cover their initial acquisition cost directly impacts your cash flow and how quickly you can reinvest in growth.