LTV to CAC

The famous heuristic:

LTV / CAC  >  3

On the classic worked example — LTV $40,000, CAC $15,000 — the ratio is about 2.7×, shy of 3×. You would need lower CAC (about $13.3k), higher ARPA, higher margin, or lower churn to clear the bar.

Below 1×, every new customer destroys value. Between 1× and 3×, growth may still look good while the business slowly burns equity. Public SaaS companies often sit closer to 4–5×+ once they have brand, product-led expansion, and efficient channels.

The big idea

3× is a margin of safety, not a law of nature. You need leftover after CAC for the people who churn early, for the months of payback you must fund, and for everything that is not in contribution.

The analogy of a "healthy multiple" breaks when LTV is a fiction. Bill Gurley's essay The Dangerous Seduction of the Lifetime Value Formula is the required caveat. LTV assumes stable churn, stable ARPA, infinite capital to fund payback, and that "lifetime" is knowable. Treat LTV as a scenario. Prefer payback and cohort contribution curves when the company is young.

Walking through it

What breaks the simple ratio

• Mixed segments. SMB at $8k LTV and enterprise at $400k LTV with $15k blended CAC is not "2.7×." One motion is 0.53×.
• Contracted vs logo churn. Revenue churn can be lower than logo churn when you lose mice and keep whales — or worse when you lose a whale. Pair them. See SaaS metrics.
• Discount rates. A 10% annual discount on a 50-month life trims LTV by roughly mid-teens percent.
• Negative churn. 1/churn goes nonsense. Use cohort NPV.

Walk a whiteboard from ARPA → gross margin → churn → LTV → payback, then name Gurley's caveat. That is the whole skill.

Common mistakes

• Heroic lifetimes to push a 2.7× ratio over 3× on a slide.
• Revenue LTV / CAC. On 80% margin that overstates by 25%.
• Chasing 3× while payback is 30 months. You can "pass" the heuristic and still run out of cash.
• One company-wide ratio. Segment first.

Check yourself

LTV $40k, CAC $15k. Do you "have 3×"?

No. About 2.7×. Lower CAC to ~$13.3k or improve contribution or churn.

Why did Gurley distrust LTV?

It assumes stable churn, stable ARPA, knowable lifetime, and capital to fund payback — often false early.

Key takeaways

• LTV/CAC > 3 is a heuristic, not a law. The classic case is about 2.7×.
• Below 1× destroys value. Distrust long lifetimes and revenue-based LTV.
• Hit payback first when capital is tight; then raise the ratio with retention and expansion.
• Segment. A blended 3× can be one great motion plus one that is underwater.

Further learning

The Dangerous Seduction of the Lifetime Value Formula (Bill Gurley)Many consumer Internet business executives are loyalists of the Lifetime Value model, often referred to as the LTV model or formula. Lifetime value is the net present value of the profit stream of a customer. This con…Above the Crowd

Back to the map: unit economics.