How LTV:CAC is calculated
LTV:CAC compares what a customer is worth over their lifetime with what it cost to win them. This calculator uses a contribution-margin LTV, which is more honest than a revenue LTV because it only counts the money left after product, shipping, payment fees and returns:
LTV = average order value × contribution margin × orders per year × lifespan in years
LTV:CAC = LTV ÷ CAC
CAC payback (months) = CAC ÷ (monthly contribution per customer), where monthly contribution = AOV × margin × orders per year ÷ 12.
Example
A store with a $45 average order, a 40% contribution margin, 2.5 orders a year and a two-year customer lifespan has an LTV of $45 × 0.40 × 2.5 × 2 = $90. With a $35 CAC, LTV:CAC is about 2.6:1, and payback takes about 9.3 months. At a 3:1 target the maximum CAC would be $30.
Reading the result
- Below 1:1: each customer costs more to acquire than they ever return. Growth makes losses bigger.
- Around 1:1 to 2:1: you're covering acquisition but leaving little for overhead, salaries and profit.
- Around 3:1: a widely used rule of thumb for a healthy balance. It's a convention, not a law; your overhead and cash position matter more.
- Far above your target: you may be under-investing in growth.
Payback time matters as much as the ratio. A good ratio that takes two years to pay back can still run a small store out of cash. If your first order doesn't cover CAC, compare this with the maximum CPA calculator, which looks at a single order.
Where the inputs come from
- Contribution margin: use the profit margin calculator or the profit calculator, and leave advertising out (it's in CAC).
- Orders per year and lifespan: from your store's repeat-purchase data. If you're new, be conservative. Repeat behavior varies a lot by product.
- CAC: total marketing and sales spend in a period divided by new customers in that period, not by all orders.
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FAQ
What is a good LTV:CAC ratio?
Around 3:1 is a widely used rule of thumb: a customer returns about three times what it cost to acquire them. Treat it as a starting point; your overhead, cash flow and growth plans decide what's right for you.
Should LTV use revenue or margin?
Margin. A revenue LTV ignores product, shipping and payment costs and makes the ratio look much better than it is. This calculator uses contribution margin.
How do I calculate CAC?
Divide total marketing and sales spend for a period by the number of new customers acquired in that period. Include ad spend, agency or creator fees and discounts used to acquire customers.
What is CAC payback?
The number of months of contribution from a customer needed to earn back their acquisition cost. Shorter payback means less cash tied up in growth.
Is LTV:CAC useful for a new store?
Yes, as a planning tool. Use cautious estimates for repeat orders and lifespan and update them once you have real repeat-purchase data.