How do you calculate customer acquisition cost (CAC) and customer lifetime value (LTV), and what is a healthy LTV:CAC ra

Customer acquisition cost (CAC)

CAC is the average cost of acquiring one new customer:

$$\text{CAC}=\frac{\text{Sales and marketing costs attributable to acquisition}}{\text{New customers acquired}}$$

Include costs such as advertising, agency fees, sales and marketing salaries, commissions, software, and allocated overhead. Use the same period for costs and acquired customers, while accounting for long sales cycles.

Example: If you spend $100,000 and acquire 500 customers:

$$CAC=\$100,000/500=\$200$$

Track both:

• Blended CAC: All acquisition spending across paid, organic, referrals, and other channels.
• Channel CAC: Spending for a specific channel divided by customers attributed to it.

Customer lifetime value (LTV)

LTV should ideally measure the gross profit expected from a customer over the relationship—not just revenue.

A common formula is:

$$\text{LTV}=\text{Average revenue per customer per period} \times \text{Gross margin} \times \text{Average customer lifetime}$$

For a subscription business with relatively stable churn:

$$\text{LTV}=\frac{\text{Average monthly revenue per customer}\times \text{Gross margin}}{\text{Monthly customer churn rate}}$$

Example: With $50 monthly revenue per customer, an 80% gross margin, and 2% monthly churn:

$$LTV=\frac{\$50\times0.80}{0.02}=\$2,000$$

For businesses with variable purchasing patterns, estimate LTV using:

$$\text{Average order value} \times \text{Purchase frequency} \times \text{Customer lifetime} \times \text{Gross margin}$$

Cohort-based calculations are usually more reliable when retention, expansion revenue, or customer behavior changes over time.

Healthy LTV:CAC ratio

$$\text{LTV:CAC}=\frac{\text{LTV}}{\text{CAC}}$$

A commonly used benchmark is about 3:1:

• Below 1:1: The business loses gross profit on acquisition.
• Around 3:1: Often considered healthy and scalable.
• Far above 5:1: Strong economics, but it may indicate underinvestment in growth.
• Between 1:1 and 3:1: May work if payback is quick, retention is improving, or there are strategic benefits.

The right ratio depends on margins, cash flow, industry, growth stage, and how quickly CAC is recovered. Pair the ratio with CAC payback period—many subscription businesses aim to recover CAC within roughly 12 months, though acceptable periods vary substantially by market.