Customer Acquisition Cost (CAC) & LTV Calculator

What CAC and LTV mean

Customer acquisition cost (CAC) is what you spend, on average, to win one new paying customer. Customer lifetime value (LTV) is the gross profit you expect to earn from that customer over the whole relationship. Comparing the two tells you whether growth is paying for itself.

The formulas

• CAC = total sales and marketing spend in a period ÷ new customers won in that period. Include ad spend, agency fees, sales salaries and tools, not only ads.
• LTV = average order value × purchases per year × years as a customer × gross margin %. For subscriptions: average monthly revenue per customer × gross margin % ÷ monthly churn rate.
• LTV:CAC ratio = LTV ÷ CAC.
• CAC payback = CAC ÷ (monthly revenue per customer × gross margin %), in months.

Worked example

A store spends $6,000 on marketing in a month and wins 200 new customers: CAC = $30. Customers spend $45 per order, order 3 times a year, stay 2 years, and the gross margin is 40%: LTV = 45 × 3 × 2 × 0.40 = $108. LTV:CAC = 108 ÷ 30 = 3.6.

How to read the ratio

• Below 1: each customer costs more than they bring in. Growth loses money.
• Around 3: a common target for healthy, sustainable growth.
• Well above 5: profitable, but you may be under-investing in growth.

Common mistakes

• Using revenue instead of gross profit for LTV, which can make the ratio look two or three times better than it is.
• Counting returning customers as new, which makes CAC look lower.
• Guessing customer lifetime for a young business. Use your real repeat-purchase or churn data once you have 6–12 months of it.
• Mixing channels. Paid social and organic search often have very different CACs; work them out separately.