How much can you afford to spend to win a customer? Many owners answer by feel. A better answer comes from comparing two numbers: what a customer is worth over time, and what it costs to win one. These are called customer lifetime value (LTV) and customer acquisition cost (CAC).
Customer acquisition cost (CAC)
CAC is what you spend on marketing to win one new customer.
CAC = marketing spend / number of new customers
If you spend $5,000 in a month and win 20 new customers, your CAC is $250. Decide what to include: ad spend, agency fees, creative, tools, and possibly sales time. Be consistent so you can compare over time.
Customer lifetime value (LTV)
LTV is the total profit a customer is expected to bring over their entire relationship with you.
A simple way to estimate it:
LTV = average sale x purchases per year x years as a customer x profit margin
Example (illustrative): a customer spends $500 per purchase, buys twice a year, stays for three years, and your margin is 40 percent. Revenue over the relationship is 500 x 2 x 3 = $3,000. Profit is $3,000 x 0.40 = $1,200. That is the LTV.
Use profit rather than revenue so you do not overspend. And use realistic numbers based on actual customer behavior, not hopes.
The LTV to CAC ratio
Compare the two: LTV divided by CAC.
With an LTV of $1,200 and a CAC of $250, the ratio is 4.8 to 1. That means each customer brings in nearly five times what it cost to win them.
A common rule of thumb is that a ratio of about 3 to 1 or higher is healthy. Below 1 to 1, you lose money on every customer. Between 1 and 3 is thin, with little room for error. Much higher than 5 might mean you can afford to invest more in growth. It is a guideline, not a law, and the right ratio depends on your cash flow and goals.
Payback period
Another important number is how long it takes to earn back what you spent to win a customer.
Payback period = CAC / monthly profit per customer
If your CAC is $250 and a customer brings in about $33 of profit per month, payback is about 7.5 months. Short payback means faster recovery of your marketing spend and more cash to reinvest. If payback is long, you need cash to fund growth.
Using LTV and CAC to set budgets
- Calculate LTV from your real customer data.
- Decide a target ratio, such as 3 to 1.
- Work out the most you can spend per customer: LTV divided by your target ratio.
- Compare to your actual CAC and decide where to adjust.
- Set your marketing budget based on how many customers you want at that cost.
With an LTV of $1,200 and a 3 to 1 target, you could spend up to $400 per customer. If your actual CAC is $250, you have room to scale. If it is $600, you need to lower CAC or raise LTV.
How to improve the numbers
Lower CAC:
- Improve conversion rates on your site and landing pages
- Cut wasted ad spend
- Follow up faster so more leads become customers
- Make sure you answer your phone. See our free Missed Call Revenue Calculator
Raise LTV:
- Encourage repeat purchases and maintenance plans
- Offer related products and services
- Improve the customer experience so they stay
- Ask for referrals
Common mistakes
- Using revenue instead of profit for LTV
- Assuming loyalty you cannot show
- Counting only ad spend in CAC and ignoring other costs
- Using averages that hide big differences between customer types
- Ignoring cash flow while waiting for lifetime value
Be conservative, and recalculate as you gather more data.
Try it with your numbers
Our free LTV and CAC Calculator works out your lifetime value, cost to win a customer, ratio, and payback period. You can pair it with the ROAS Calculator to check your ad profitability.
Frequently asked questions
Then LTV is the profit from the first sale, and your CAC must be lower than that.
Use your own data. If you are new, be conservative.
Not necessarily. A very high ratio may mean you are under-investing in growth.
What to do next
If you want help using these numbers to plan your marketing, book a free strategy call.
