Customer Economics
Observation 004
· 2 min read
The ratio that reads 3 to 1, and isn't.
An LTV:CAC ratio is only as good as the churn behind it. Replace assumed churn with observed churn and the green light can turn red.
One number
1.2 : 1
LTV : CAC once assumed churn is replaced with observed churn
One mechanism
Lifetime value is a forecast. The board slide presents it as a fact.
One decision
Ask for the churn behind the lifetime before an LTV : CAC ratio informs a budget.
Hypothetical SaaS board slide. CAC is $10,000. Annual gross profit per account is $3,000. The assumed customer life is ten years, so lifetime value is $30,000 and the ratio reads 3 to 1.
Replace the assumption with the churn the business actually observes, 25% a year, and customer life falls to about four years. Lifetime value becomes $12,000. The ratio becomes 1.2 to 1.
Same company. Same customers. The slide did not lie; it assumed. Planning season is when ratios turn into headcount and media, so the assumption becomes a commitment.
Before the ratio informs a budget, ask for three things: the churn behind the lifetime, observed or assumed; payback in months on gross profit rather than revenue; and contribution by acquisition cohort rather than one blended figure.
Evidence · Modeled · Hypothetical; lifetime = annual gross profit ÷ annual churn (simplified)