Unit economics
The ratio of what a customer is worth to what they cost — a sanity check on the model, not a target to optimise.
Formula
LTV : CAC = LTV ÷ CAC
- LTV
- measured in contribution, not revenue
- CAC
- fully loaded, including salaries and fees
The commonly quoted 3 : 1 is a convention from subscription software, not a law. It exists because roughly a third of lifetime value is a tolerable price for growth when payback is inside a year.
Below about 1 : 1 the business loses money on every customer it buys and volume makes it worse. Between 1 and 3 it is usually a margin or retention problem rather than a marketing one. Far above 3 is not automatically good news: it often means the company is under-investing and leaving reachable demand to competitors.
The ratio is a diagnostic. It says whether the model works. It does not say what to do next, and treating it as a KPI to maximise produces companies that starve their own growth.
The two most common distortions run in opposite directions and are usually applied together: lifetime value stated in revenue rather than margin, and acquisition cost counting only media. A business with a genuine 1.8 : 1 will report 6 : 1 that way and scale confidently into a loss.
The definitions are the easy part. Whether the figure on your dashboard was computed this way is a different question, and usually the more expensive one.