How to calculate it
Work out lifetime value, preferably on margin, and divide by acquisition cost. A subscriber worth $90 in margin who cost $30 to acquire gives a ratio of 3:1.
Reading the ratio
These thresholds are rules of thumb from subscription businesses generally, not laws. What matters is the direction over time and whether the ratio holds as you spend more.
- Below 1:1: each new subscriber loses money
- Around 1:1 to 2:1: growth barely pays for itself once other costs are counted
- Around 3:1: the commonly cited healthy level
- Well above 5:1: you could probably spend more on growth and still profit
Its limits
The ratio says nothing about time. A 4:1 ratio that takes three years to realize can still run a business out of cash. Read it together with payback period, the number of months needed to earn back the acquisition cost.
It is also only as good as its inputs. Lifetime value estimated from a few months of data on early, enthusiastic subscribers will be too high, and blended acquisition cost flatters paid campaigns.
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