How to calculate LTV, CAC, and the LTV:CAC ratio (with formulas)

If you only take three formulas away, take these. Everything else below is how to apply them and what the result means.

Customer acquisition cost is what you pay, fully loaded, to win one new customer. Add up everything you spent on sales and marketing in a period, then divide by the number of new customers that period produced.

Worked example: you spend €5,000 on ads, content, and tools in a month and acquire 100 new customers. Your CAC is €5,000 / 100 = €50. Be honest about the inputs: include ad spend, agency or freelancer fees, the marketing share of salaries, and software. Leaving costs out flatters the number and hides the real picture.

Lifetime value is the gross profit a typical customer generates over the whole time they buy from you. For ecommerce, the simplest reliable version multiplies four things: how much they spend per order, how often they order, how long they stay, and your margin.

Worked example: average order value €60, three purchases per year, an average lifespan of two years, and a 60% gross margin. LTV = €60 × 3 × 2 × 0.6 = €216. Using gross margin (not revenue) matters. LTV should reflect the profit a customer brings, not their top-line spend, or the ratio against CAC will be badly inflated.

Now divide. The LTV:CAC ratio tells you how many euros of lifetime gross profit you get back for every euro you spend acquiring a customer.

From the examples above: LTV €216 / CAC €50 = 4.3. So this business earns about €4.30 in lifetime gross profit for every €1 it spends to acquire a customer, written as a 4.3:1 ratio. That is healthy. The next section explains why.

The benchmark almost everyone uses is 3:1. At 3:1 you are comfortably profitable on each customer with enough margin to fund overhead and growth. The bands below are the quick read:

The ratio tells you if the unit economics work; the CAC payback period tells you how long your cash is tied up. It is the number of months to earn back the cost of acquiring a customer: CAC / (monthly gross profit per customer).

A strong ratio with a 24-month payback can still strain a small business's cash flow. This is exactly why faster, higher-margin recovery channels matter. Winning back a customer you have already acquired costs almost nothing, so it lifts LTV and shortens payback at the same time.

What is a good LTV:CAC ratio? About 3:1 is the standard benchmark for a healthy, scalable business. Below 1:1 you lose money per customer; above 5:1 you may be underinvesting in growth.

How do you calculate LTV? Multiply average order value by purchases per year, by average customer lifespan in years, by your gross margin percentage. For subscriptions, divide average revenue per account times gross margin by your churn rate.

How do you calculate CAC? Divide all sales and marketing spend in a period by the number of new customers acquired in that period. Include ad spend, salaries, agencies, and tools.

Is LTV the same as CLV? Yes. Customer lifetime value and customer lifetime value (CLV) are the same metric under two names.

How can I improve my LTV:CAC ratio? Either lower CAC or raise LTV. Raising LTV through retention and win-back is usually cheaper and faster than cutting acquisition cost, because you are selling to people who already chose you once.