Cost to Acquire vs Lifetime Value
The ratio that separates scaling startups from zombies.
“A business that pays £500 to acquire a £300 customer isn't growing. It's setting money on fire with extra steps.”
The Insight
CAC:LTV is the single number that determines whether growth is a good idea. Below 1:3 and you're buying revenue at a loss. Above 1:5 and you're probably under-investing. The ratio is not a vanity metric — it's the permission slip to scale.
01
Calculate CAC Honestly
Total cost of acquiring a customer = paid media + content cost allocated + sales salaries + sales commissions + attributable ops + a fair share of tools. Divide by new customers in the period. Most founders under-count by half, because they ignore sales salaries and content costs. The honest number is usually double the first guess — and that's the number that matters.
02
Calculate LTV Without Hope
LTV = average revenue per customer × gross margin × expected lifetime in months. Do not include hypothetical upsells you haven't delivered yet. Do not include plan tiers most customers don't buy. A realistic LTV is usually two-thirds of the founder's optimistic number. Using the optimistic number is how startups over-invest in acquisition for 18 months and then run out of cash.
03
The 1:3 Rule and the 12-Month Payback
Healthy LTV:CAC ratio is 3:1 or better. Healthy payback period on CAC is 12 months or less. If either fails, stop scaling acquisition. Fix retention, pricing, or targeting first. Scaling a broken ratio doesn't make it better — it just makes the loss larger. Conversely, an unhealthy ratio fixed by better targeting can turn a dying business into a rocket.
The Takeaway
Calculate both numbers monthly. Make every growth decision against the ratio. The founders who respect CAC:LTV are the ones still alive in year five.
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