LTV:CAC ratio is a measure of profitability per customer.
LTV = Lifetime Value
CAC = Customer Acquisition Cost
LTV:CAC is like a slot machine:
Put a euro in at the top and LTV:CAC tells you roughly how many euros come
out at the bottom. If your money isn't multiplying, you need to tune the machine.
The rule of thumb for LTV:CAC is that you want LTV to be 3 x bigger than CAC.
If LTV:CAC is 1x, that means the gross profit over a customer's lifetime only just covers the cost of acquiring the customer - and the business won't be able to cover any operating expenses going forward.
So an investor would say: unless there is a plan to increase LTV or decrease CAC and improve the ratio over time, this business will always lose money - and always look bad - on a traditional accounting basis.
But if the LTV:CAC ratio is 3x or more, that means you're not only covering the cost of acquiring the customer, but you're contributing to other operating expenses.
A well balanced business model:
An out of balance business model: