LTV to CAC Ratio: Investor Benchmarks for Your Startup
LTV stands for customer lifetime value, meaning how much money, on average, a startup makes before a customer churns or switches to a competitor. In its turn, CAC means customer acquisition costs. So, how much money it costs your startup to sell to this customer. If you are an investor, what does the LTV to CAC ratio of 2:1 tell you about the early-stage start-up? In plain terms, for every dollar a startup spends on acquisition, it gets 2 dollars in revenue. It is not too terrible, but barely acceptable. Here is why:
Imagine a SaaS subscription service, the B2C segment. LTV is $200: customers on average stay for 8 months, with the subscription being $25. It takes $100 to acquire that customer. So, it takes 4 months to recoup this amount. This is the CAC payback period.
The investor verdict? While the CAC payback period would be acceptable (almost always, anything below 12 months is good), the LTV to CAC ratio in this example is borderline. In addition, an 8-month customer lifetime is extremely short. Generally, this early-stage startup will need to improve retention to extend the LTV in order to become investable.
In this blog post, we’ll unpack all the underlying issues about these crucial metrics. More so, these metrics are key drivers of decision-making not only for investors, but for founders in the first place. Let’s dive in!
Table of contents
When and Why Track the LTV to CAC Ratio?
Generally speaking, a startup’s life cycle consists of 5 major phases. You can see them in the image below. Moving from finding (1) solution-problem fit to (2) product-market fit and then (3) optimizing for channels, then (4) scaling, and (5) maturity. The LTV to CAC ratio becomes essential after the product-market fit has been identified, and the startup is optimizing sales channels.
Why Startups Should Not Calculate the LTV to CAC Ratio While Finding Product-Market Fit?
Today’s data-focused approach makes everyone eager to measure a variety of metrics early on. And, founders, while drafting a business plan for tech startup, might measure the LTV to CAC ratio as proof of the product-market fit. However, in our previous article, we unpacked the metrics intended for this, and measuring the LTV to CAC ratio is likely to be misleading just yet. Here is why.
- For one, this early on, it is often a founder who closes deals and brings in customers. There cannot be an expectation that a newly hired sales rep will be as successful.
- Secondly, early customers, especially in the SaaS segment, can come from pre-existing partnerships or highly engaged early adopters. These will not be representative of the common market.
- Lastly, at the early stages, your paid search targets the most lucrative keywords. Scaling paid search campaigns generally will not yield the same results, as you will have to target broader queries, which might miss the target audience or be much more saturated.
Overall, the goal of the LTV to CAC ratio is to indicate a repeatable channel. Meaning, if it relies on the sales reps, you should be able to hire X times more of those, and get the corresponding increase in new clients and revenues. If it relies on thought leadership or content creation, putting more money into it, you should get a roughly proportionate increase in revenues.
Why Startups Should Focus on the LTV to CAC Ratio While Searching for Channel-Product Fit?
This stage is actually more than simply optimizing for the channels. The end goal of this stage is to optimize a startup monetization model. So, how does the LTV to CAC ratio help you do that?
- First, startups often calculate the LTV to CAC ratio by cohorts or Personas. For instance, it is common, especially for B2B startups, to have different target customers. They are small business owners and heads of departments in corporations. In this case, the LTV to CAC ratio and the CAC payback period will help you make a strategic decision which Persona/cohort will be more efficient to focus on. And, there are optionality costs involved if the decision is not made in time. We’ll illustrate this with a case study below.
- Second, a correctly calculated LTV to CAC ratio relies on a repeatable and reliable channel. This allows you to forecast cash flow and make projections. Plus, knowing the CAC payback period, you should be able to calculate reinvestment cycles. This signals to the investors how much capital your startup needs to scale successfully. If your CAC payback period is 10 months, your reinvestment cycle will be relatively short. However, if it is 18 or 24 months, you’ll need to be financed more substantially. Overall, this indicates the startup’s readiness to scale and the amount of capital it will require.
To sum up, here the LTV to CAC ratio and the CAC payback period are in sync with optimizing the monetization model. Having a consistent and reliable acquisition channel with predictable customer behavior will provide a base for projections and forecasts. Even if you keep experimenting with other channels, there should be one worked-out and known path to scale sustainably.
Summing Up The WHYs
The LTV to CAC ratio and the CAC payback period:
- Help to make the strategic decision on which customer group is more lucrative to serve.
- Consequently, they drive the development of your digital product, sparing you optionality costs.
- Guide your decision-making on expanding the sales and marketing budget.
- Allow you to track the efficiency of your go-to-market strategy and determine the need for funding.
HubSpot Case Study: The Importance of the LTV to CAC Ratio
Originally, the company hit the initial product-market fit within 1 year. However, they still had two Personas they targeted. In the words of HubSpot’s CEO, Brian Halligan:
“… we were acquiring customers for approximately $10k and we were getting a total lifetime value of approximately $25k. We bounced around in that range for years [6 years]…we debated our target market persona. We had one camp that wanted to build our offering for Owner Ollie, a small business owner … We had another camp that wanted to build our offering for Mary Marketer, a marketing manager who worked in a company between 10 and 1000 employees. It turns out the product requirements, support requirements, pricing, and everything were different for Ollie and Mary and by not deciding, we made one uninspired compromise after another and never nailed either one.”
They had the LTV to CAC ratio of 2.5 to 1 ($25k in LTV and $10k in CAC). For a B2B startup, this is borderline. As the CEO explained that with these numbers, the startup could not move anywhere:
“When we hit the gas (hired faster), the math would get worse. When we slowed down, the math would get better. We had an interesting business, but without the ability to hit the gas pedal, we’d never be able to truly scale and build the company that we envisioned.”
Overall, their LTV to CAC ratio was 2.5 to 1, while the CAC payback period was around 12 to 14 months. Their retention rate was poor due to unfocused product development. The customers stayed for around 2.86 years. This meant that for the first 12-14 months, the company would simply be recovering its sales costs. And the last 18 to 20 months, it would be making revenues.
Optionality Costs of Not Working Out the LTV to CAC Ratio
HubSpot at that time had 5 Scrum teams. These 5 Scrum teams were developing subpar features that partially pleased the two Personas. The cost of 1 Scrum team in the US is around 1M. Multiplied it by 6 years and 5 teams: 30M went into the development that was not really optimized for either Ollie or Mary. The company missed the real learning from validating the features, could not adjust the pricing, and missed out on greater adoption rates and revenues.
The LTV to CAC Ratio Confirmation for Strategic Decision
The LTV to CAC ratio went from 2.5:1 to 4.7:1. A drastic increase and a healthy ratio signaling readiness for scale. The LTV to CAC ratio change was the guiding indicator throughout the process as you can see below.
For a B2B company with high annual contracts targeting enterprises, $10k-11k per customer in sales expenses consists of:
- Salaries of the sales and marketing department;
- Content creation and paid campaigns;
- Lead nurturing and onboarding costs.
To sum up, a 2.5 to 1 LTV to CAC ratio was unacceptable for HubSpot: they could not scale and were stuck for 6 years. So, the problem was the LTV side of the equation. They improved it by focusing on one Persona. The development became more focused. It led to retention being improved. They could also upsell better – revenue retention grew from 70% to 100%. So, finally, their LTV to CAC ratio took off. In 2 years, they optimized it to a scalable and repeatable sales process and were able to scale their business model.
Putting on an Investor-Focused Lens
It is worth remembering that LTV represents gross profit. It does not subtract operations costs, R&D, and general and administrative costs. Investors always ask the question: How soon will I be seeing the returns? And if there is very little cash leftover for the startup, coupled with the long CAC payback period, it is very likely to seriously delay the returns or erode them.
Investor Benchmarks: Evaluating a Startup
A word of caution first. The provided numbers are generalized and rely on the data on sales channels, which is subject to change. For instance, the thought leadership channel of customer acquisition varies within $7k to $15k, and PPCs can run anywhere between $3k to $30k. In addition, categories will include companies with different economics: some focus on low annual contracts (often true about the B2C segment), while others operate on high annual contracts (like HubSpot).
First, let’s look at general investor guidelines.
| App type | LTV to CAC ratio | CAC payback period |
| SaaS in the B2B segment | 3 to 14 to 1 | 12 to 15 months |
| SaaS in the B2C segment | 2.5 to 1 | Under 12 months |
| Enterprise software | 4 to 15 to 1 | 15 to 24 months |
Investor Benchmarks by Industry
Here, we collected the minimal investor benchmarks by industry before scaling. Many companies achieve a much greater LTV to CAC ratio during the scaling phase. For instance, ANZ banking software by Xero Limited reports the LTV to CAC ratio of 11.6 in the Australia and New Zealand segment. This further indicates that the LTV to CAC ratio becomes a vital metric to investors and shareholders. For Xero Limited, it is often a subject of shareholder interest and keeps guiding executive decision-making.
| Industry | LTV to CAC ratio benchmark | CAC benchmark | CAC payback period benchmark |
| e-commerce | 3:1 | $86 | 3 to 5 months |
| Healthtech (B2C) | 2:1 | $565 | 10 to 15 months |
| IoMT | 3:1 | $186 | 15 to 25 months |
| Healthteach (B2B), clinical software | 4:1 | $921 | 12 to 18 months |
| Gaming | 3:1 | $29 | 1 to 4 months |
| Industrial IoT | 4:1 | $673 | 12 to 30 months |
| Social media | 3.5(4):1 | $21 | 1 to 12 months |
| Fintech (B2C) | 3(4):1 | $112 | 6 to 18 months |
| Fintech (B2B, enterprise) | 3(5):1 | $12k | 24-36 months |
| Cybersecurity (B2B) | 4:1 | $429 | 12-24 months |
The Final Words
The LTV to CAC ratio, alongside the CAC payback period, are not mere numbers one would keep track of in a spreadsheet. These two metrics are signposts for when your startup is ready to scale. They indicate to investors the risks of scaling your startup and how capital-intensive it would be. These metrics are of constant interest to investors and shareholders. After you’ve found the product-market fit, these metrics become constant indicators of how well your business turns marketing spend into long-term value. However, before PMF, calculating these metrics can be extremely misleading. The numbers that go into these metrics should be based on repeatable processes, known customer behavior, and stable acquisition channels. When timely and correctly calculated, these metrics become a growth compass for your startup.
FAQ: LTV to CAC Ratio: Investor Benchmarks for Your Startup
The LTV to CAC ratio compares the total value a customer generates over their lifetime to the cost of acquiring that customer. It helps founders and investors understand how efficiently a startup turns marketing and sales spend into long-term revenue.
Startups should begin tracking this metric only after achieving product-market fit. Before PMF, customer behavior is unpredictable, channels are not scalable, and acquisition usually relies heavily on the founders. These distortions lead to inaccurate calculations, which in turn can cause flawed decisions about hiring, marketing budgets, or fundraising strategy.
The CAC payback period measures how many months it takes for the revenue generated by a customer to cover the acquisition cost. This metric is especially important for understanding cash flow and reinvestment cycles. Shorter payback periods allow startups to reinvest faster, while longer ones require more upfront capital, increasing financial risk.
Investors use this metric to assess operational efficiency, scalability, and capital needs. A strong ratio signals that the startup can reliably convert marketing spend into revenue and scale without excessive risk.
Once CAC and LTV become predictable, startups can estimate cash flow, reinvestment cycles, and scaling costs. This clarity helps founders plan budgets and helps investors understand how fast the company can grow with additional funding.
