CAC and LTV Calculator
Work out what it costs to win a customer, what that customer is worth over their lifetime, your LTV:CAC ratio and how many months it takes to earn the cost back.
- CAC
- 120.00
- LTV (gross margin)
- 720.00
- LTV:CAC ratio
- 6.0:1
- Payback
- 6.0 months
Healthy: each customer brings in at least 3 times what it costs to win them.
How the Calculator Works
- CAC = (ad spend + other sales and marketing costs) / new customers
- LTV = average order value x purchases per year x lifespan in years x gross margin %
- LTV:CAC ratio = LTV / CAC (under 1 loses money, 1 to 3 is thin, 3 or more is healthy)
- Payback months = CAC / (average order value x purchases per year / 12 x gross margin %)
Worked example
A business spends 5,000.00 a month on ads and 1,000.00 on other sales and marketing, and wins 50 new customers. Its CAC is (5,000.00 + 1,000.00) / 50 = 120.00.
Each customer spends 100.00 per order, 4 times a year, for 3 years, at a 60% gross margin. LTV is 100.00 x 4 x 3 x 60% = 720.00.
The LTV:CAC ratio is 720.00 / 120.00 = 6.0:1, and the business earns back its CAC in 6.0 months.
How to Improve Your Ratio
- Cut wasted ad spend: pause campaigns and audiences whose customers cost more than they are worth.
- Raise your conversion rate, so the same spend wins more customers and CAC falls.
- Increase average order value with bundles, upsells or a free-shipping threshold.
- Bring customers back more often with email, SMS and loyalty offers.
- Keep customers longer by fixing the reasons they leave, so lifespan goes up.
- Protect your gross margin: check product, delivery and payment costs before you discount.
CAC and LTV Questions, Answered
What is CAC?
CAC (customer acquisition cost) is what you spend to win one new customer. Add up your ad spend and other sales and marketing costs for a period, such as staff, tools and agency fees, then divide by the number of new customers you won in that same period.
What is LTV?
LTV (customer lifetime value) is the total value one customer brings in over the whole time they buy from you. This calculator works it out as average order value x purchases per year x years as a customer x gross margin, so it shows the profit a customer brings, not just their sales.
Why is 3:1 a common LTV:CAC rule of thumb?
A 3:1 ratio means a customer brings in three times what it cost to win them. That leaves room to pay for overheads, refunds and customers who leave early, and still make a profit. It is a rule of thumb, not a law: a business with low overheads may do well below 3:1, and a much higher ratio can mean you are under-spending on growth.
What does the CAC payback period mean?
The payback period is how many months of gross profit from a customer it takes to earn back what you spent to win them. A shorter payback means your cash comes back sooner, so you can reinvest it in more marketing. A payback longer than the time customers usually stay means you lose money on them.
Should LTV use revenue or gross margin?
Gross margin is the safer choice. Revenue LTV counts every sale in full, but you also pay for products, delivery and fees, so comparing revenue LTV with CAC makes the ratio look better than it is. Gross margin LTV only counts what is left after those costs, which is the money you actually have to cover CAC.
How do I find my customer lifespan?
If you know your yearly churn rate (the share of customers who stop buying each year), a rough lifespan is 1 divided by churn. For example, 25% churn gives about 4 years. If you are new and have no history, use a cautious guess and update it as real data comes in.
Want a Lower CAC and a Higher LTV?
TML plans and runs paid ads and retention campaigns around what each customer is really worth to your business.