CAC & LTV.
aka customer acquisition cost, customer lifetime value, the LTV:CAC ratio
What a customer costs to win, versus what they are worth once you have them.
What it actually means
CAC (customer acquisition cost) is the total sales and marketing spend needed to win one new customer. LTV (lifetime value) is the total profit that customer brings over the time they stay. The ratio between them tells you whether a business is buying customers at a profit or at a loss.
CAC: all sales and marketing costs in a period (salaries, ads, tools, events) divided by the number of new customers won. Spend $200,000 and win 100 customers, and CAC is $2,000.
LTV: average revenue per customer per period, times gross margin, times how long they stay (which is one divided by churn). A customer paying $100 a month at 80% margin who stays 30 months is worth $2,400.
The ratio is the verdict. LTV:CAC of 3:1 is the common benchmark for a healthy subscription business. Below 1:1 you lose money on every customer. The other number investors ask for is CAC payback: how many months of profit it takes to earn back the acquisition cost. Under 12 is good; over 24 needs a story.
Where you'll hear it
Blended CAC rose to $2,400 last quarter and LTV is $5,100, so we’re at 2.1x with a 19-month payback. I’ll fund more spend when the ratio is back above 3.
Translation: each customer is still profitable, but less so, and the company is not going to pour money into a channel that is getting more expensive.
Also in every start-up pitch deck, in channel reviews (“paid social CAC is double organic”), in pricing debates (raising prices raises LTV) and in retention meetings (lowering churn is the cheapest way to raise LTV).
The pop-culture version
The promoter spends $20 of advertising to sell one first ticket. That is CAC. The fan then comes to three more tours, buys two T-shirts and a vinyl: $400 of profit over five years. That is LTV. Twenty to win, four hundred earned: a 20:1 ratio, which is why fans are worth so much more than ticket buyers.
Now imagine the ads cost $150 per new fan and most of them never come back. Same artist, same show, and the business is losing money on every person who walks in.
CAC and LTV are how you tell the two situations apart. Every company with repeat customers is somewhere between the two, and the ratio tells you which direction it is heading.
The trap is in the LTV estimate. It depends on how long customers stay, which a young company does not yet know, so early LTV numbers are guesses dressed as maths. Investors discount them accordingly.
Say it like you mean it
“LTV:CAC is 3.4x with a 14-month payback; paid channels are at 2.1x, referrals at 9x.”
Ratio, payback and the channel split. That is the whole unit-economics story in one line.“Our LTV is $10,000.”
Over what period, at what margin, assuming what churn? An LTV without assumptions is a wish.Memorise the two benchmarks: 3:1 ratio, under 12 months payback. Anyone who can quote those and explain how their business compares sounds like they understand unit economics, because they do.
CAC, LTV, payback and the pricing levers that move them, from the finance side of the table.
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Decoded by the Kurums editorial team. Kurums Decoded translates the language of business for people who are new to it. Definitions are kept short on purpose; the serious version above goes deep. Nothing here is financial, legal or career advice.
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