What LTV:CAC ratio do you need?

TL;DR

• LTV = gross profit over a customer’s lifetime, not revenue. CAC = the full cost of getting that customer in the door.
• Score your three steps (attraction, conversion, delivery) as automated (0) or human (1).
• No human steps (ads → checkout → software): 3:1 is enough. One human step: 6:1. Two: 9:1. Three (outreach → sales rep → done-for-you service): 12:1.
• The extra ratio is padding. Each new rep or technician performs worse than the first one, and the margin has to absorb that while you scale.
• Very large companies push one side to an extreme: CAC near zero (brand or virality, like Facebook) or LTV near infinity (enterprise, like Salesforce).

Details

Why 3:1 is misleading. The 3:1 rule comes from software. Alex Hormozi says it only holds for the ~5% of businesses with no people in the loop: ads to a checkout page, delivered by software.¹² Physical products count as “no human” in his scheme. Manual outreach, a sales team, or service delivery each count as a human step.³

Adding human steps. Say ads go to a checkout page but a person delivers the service, or ads go to a salesperson. Now he wants 6:1. Human capacity is lumpy. When the first rep’s calendar fills you hire a second one, who is worse at first and maybe forever. At 3:1 that hire would push you under water.²⁴ Two human steps (for example ads → phone close → service delivery, which describes most service businesses) need 9:1. Three human steps need 12:1. He treats 12:1 as the minimum if you want to scale big, while admitting that 6:1 can still run a $1–2M-a-year business.⁴⁵

What’s possible. In Gym Launch’s first year, with automated ads, half-automated support and a human phone team, he reports 100:1: about $100k in ad spend producing $10M. His fortunes came in four such arbitrage windows, each above 30:1.⁵⁶ The ratio decays as you add infrastructure. Gym Launch settled around 30:1, which he considers fine as long as it scales.⁷

Two levers. You either drive CAC toward zero through massive brand or a viral product, or you drive LTV very high. Facebook acquires users for almost nothing and earns a couple of hundred dollars a year from each. Salesforce pays heavily to win enterprise contracts worth $1–5M a year.⁸ Keep reworking the money model (pricing, upsells, continuity) until one lever breaks through.⁶

Nail it, then scale it. Founders tend to scale before the ratio is in place, because their ego is tied to revenue. Hormozi would rather spend three years nailing the metrics and then scale than scale fast for three years on a broken model.⁹

Disagreements / caveats

• These are one investor’s targets for bootstrapped, often high-ticket businesses. App UA notes in this base bid against LTV per install with much thinner ratios (see Break-even CPI, revenue per install and LTV per install). Expect ratios to compress in competitive paid channels.
• Since LTV here means gross profit, low-margin products need much higher revenue-LTV to hit the same ratio (see Gross margin targets (80%+ for services) and why small gaps are huge).

See also

• CAC payback in 30 days and the 30-day cash collected rule — the time dimension of the same economics
• Churn benchmarks, cohort churn and how retention multiplies LTV — how retention multiplies LTV

Footnotes

1. The Mathematics of Business, Explained @ 05:53 — Alex Hormozi ↩

2. The Mathematics of Business, Explained @ 06:42 — Alex Hormozi ↩ ↩²

3. The Mathematics of Business, Explained @ 14:39 — Alex Hormozi ↩

4. The Mathematics of Business, Explained @ 08:12 — Alex Hormozi ↩ ↩²

5. The Mathematics of Business, Explained @ 09:47 — Alex Hormozi ↩ ↩²

6. The Mathematics of Business, Explained @ 12:23 — Alex Hormozi ↩ ↩²

7. The Mathematics of Business, Explained @ 29:57 — Alex Hormozi ↩

8. The Mathematics of Business, Explained @ 13:47 — Alex Hormozi ↩

9. The Mathematics of Business, Explained @ 09:47 — Alex Hormozi ↩