If you're building a SaaS company and talking to investors, you will be asked about your LTV:CAC ratio. It's one of the most cited metrics in startup finance, and also one of the most frequently misunderstood. Here's what it actually measures and why it matters.
What LTV and CAC are
Customer Acquisition Cost (CAC) is the total cost of acquiring one new customer. This includes all sales and marketing expenses divided by the number of new customers acquired in the same period. If you spent $50,000 on sales and marketing in Q1 and acquired 100 new customers, your CAC is $500.
Customer Lifetime Value (LTV) is the total revenue you expect to generate from a customer over the entire duration of their relationship with your company. The standard formula for a subscription business is: ARPA divided by your monthly churn rate. If your average customer pays $100 per month and your monthly churn rate is 2%, your LTV is $5,000.
What the ratio tells you
The LTV:CAC ratio tells you how much value you generate for every dollar you spend acquiring customers. An LTV:CAC ratio of 3:1 means you generate $3 in lifetime value for every $1 spent on acquisition. The commonly cited benchmark for SaaS companies is 3:1 or better.
What a good ratio looks like
Below 1:1 means you're destroying value — you spend more to acquire customers than they're worth. Between 1:1 and 3:1 is marginal — you're generating value but not efficiently enough to build a sustainable business at scale. Above 3:1 is healthy. Above 5:1 might mean you're underinvesting in growth.
The CAC payback period
A related metric is the CAC payback period — how many months it takes to recover your acquisition cost from a customer's revenue. If your CAC is $500 and your customer pays $100 per month with a 70% gross margin, your monthly gross profit per customer is $70. Your CAC payback period is 500 / 70 = 7.1 months.
Horizon calculates both LTV:CAC and CAC payback period automatically based on your acquisition cost inputs, pricing, churn rate, and gross margin assumptions.