LTV to CAC ratio formula
Divide lifetime value by acquisition cost. Lifetime value here is the gross profit a customer brings in before they leave; with constant churn, the expected lifetime is 1 ÷ monthly churn, so LTV is monthly gross profit ÷ churn. This is the no-discount version of the margin multiple in Gupta and Lehmann’s customer-value model.[1] CAC is everything spent to win customers ÷ new customers; companies state which costs they include in their filings.[2]
- Lifetime value$3,200
- Expected lifetime40 months
- CAC payback11.3 months
- LTV:CAC3.6:1
- Highest CAC for 3:1$1,067
CAC payback period
CAC payback is CAC ÷ monthly gross profit per customer: the months until a customer has repaid what they cost. Bill.com defines its payback period in its 10-K as the time for cumulative gross profit from a cohort to exceed the sales and marketing spend that acquired it.[3] Ratio and payback answer different questions: a 3:1 ratio with a 30-month payback ties up cash for two and a half years, so report both.
| Monthly churn | Lifetime (months) | $300 CAC | $900 CAC | $2,000 CAC |
|---|---|---|---|---|
| 1% | 100 | 26.7:1 | 8.9:1 | 4:1 |
| 2% | 50 | 13.3:1 | 4.4:1 | 2:1 |
| 3% | 33 | 8.9:1 | 3:1 | 1.3:1 |
| 5% | 20 | 5.3:1 | 1.8:1 | 0.8:1 |
| 8% | 13 | 3.3:1 | 1.1:1 | 0.5:1 |
Churn moves the ratio more than anything else: going from 5% to 2.5% monthly churn doubles LTV and so doubles the ratio at the same CAC. Keeping customers is usually cheaper than acquiring new ones,[4] which is why the churn rate calculator belongs next to this page.
What LTV:CAC ratio should you aim for?
No primary source sets a universal “good” LTV:CAC ratio, and we do not print one. Above 1:1 a customer returns more gross profit than they cost; how far above you need depends on overhead, cash and how sure you are of the churn estimate. Enter your own target ratio to see the highest CAC it allows. Get CAC from the CAC calculator and a fuller lifetime value (repeat purchase or discounted) from the customer lifetime value calculator.
LTV:CAC mistakes
- Using revenue instead of gross profit. Revenue-based LTV overstates the ratio by 1 ÷ margin; at a 50% margin it doubles it.
- Assuming churn will stay low. Early cohorts often churn differently from later ones. Re-measure churn each quarter.
- Using blended CAC for one channel. A cheap organic channel can hide an expensive paid one. Compute the ratio per channel.
Frequently asked questions
How do you calculate the LTV to CAC ratio?
Lifetime value ÷ customer acquisition cost. LTV = monthly revenue × gross margin ÷ monthly churn. $80 ÷ 2.5% = $3,200; $3,200 ÷ $900 = 3.6:1.
What is a good LTV to CAC ratio?
There is no sourced universal benchmark. Above 1:1 customers repay their cost; set a target from your own overhead and cash needs and track the trend.
What is the CAC payback period?
CAC ÷ monthly gross profit per customer: the months until a customer has paid back what it cost to acquire them.
Should LTV use revenue or gross profit?
Gross profit. Revenue ignores the cost of serving the customer and overstates the ratio.
Sources
- Managing Customers as Investments: The Strategic Value of Customers in the Long Run (Gupta and Lehmann), sample chapters
- FIGS, Inc. Form 10-K for 2021 (definition of customer acquisition cost)
- Bill.com Holdings Form 10-K for fiscal 2022 (definition of payback period)
- Principles of Marketing, 1.6 Customer Relationship Management (CRM)