- Formula
- LTV / CAC; margin-adjusted LTV = (ARPA x GM%)/churn
- Unit
- ratio
- Models
- All models
| All | 3:1 rule of thumb (Skok/Bessemer origin). Best-in-class: 7–8x. Struggling: <2x. Directional only — unreliable at early stage; highly sensitive to LTV and CAC definitions. | David Skok / forEntrepreneurs |
What it is
The LTV:CAC ratio compares the lifetime value of a customer to the cost of acquiring them. A ratio above 3:1 is the widely cited rule of thumb, originating with David Skok and popularized by Bessemer Venture Partners. When margin-adjusted LTV is used, the formula becomes (ARPA × Gross Margin %) / Churn Rate, divided by CAC.
How to calculate it
Divide LTV by CAC. For a margin-adjusted version: compute LTV as (Average Revenue Per Account × Gross Margin %) / Churn Rate, then divide by fully loaded CAC (including marketing, sales compensation, and onboarding costs). The ratio can be computed for the business overall or segmented by customer cohort or acquisition channel.
Why it matters
LTV:CAC is one of the most commonly referenced unit economics ratios across all business models and stages. It answers the fundamental question of whether the business creates more value per customer than it costs to acquire them. A ratio below 1 means the company is destroying value at the unit level; above 3 suggests a defensible and scalable acquisition engine.
Benchmarks & pitfalls
Per David Skok / forEntrepreneurs, the 3:1 rule is the baseline target; best-in-class companies achieve 7–8x, while <2x signals a struggling model. This is explicitly a directional heuristic, not a rigorous empirical study — treat it as a compass, not a grade. The metric is unreliable at early stages because both LTV and CAC are estimated rather than observed. Key variant pitfalls: using revenue LTV instead of margin-adjusted LTV inflates the ratio; using blended CAC instead of new-customer CAC understates acquisition cost for mature businesses.