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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