To calculate your LTV to CAC ratio, divide the total gross profit a customer generates over their lifetime by the total cost of acquiring that customer. The formula is straightforward: LTV ÷ CAC. A ratio of 3 or higher generally signals a healthy, scalable business. Getting to that number, though, requires building each side of the equation carefully.
Calculate Customer Acquisition Cost First
CAC measures how much you spend, on average, to win one new customer. The formula is simple: divide your total sales and marketing expenses by the number of new customers acquired during the same period.
CAC = Total Sales and Marketing Spend ÷ New Customers Acquired
The tricky part is making sure you include everything that qualifies as a sales and marketing expense. That means advertising spend, content and campaign costs, commissions and bonuses paid to your sales team, salaries for marketers and sales managers, software tools used for outreach or lead tracking, and the overhead costs tied to those departments. If someone’s job is to bring in customers, their fully loaded cost belongs in the numerator.
Pick a consistent time period, whether that’s monthly, quarterly, or annually. A quarter is often a practical window because it smooths out short-term spikes from one-off campaigns while still giving you timely data. If you spent $150,000 on sales and marketing in Q1 and acquired 500 new customers, your CAC is $300.
Calculate Customer Lifetime Value
LTV represents the total economic value a single customer delivers over the entire relationship. Here’s where many businesses make a critical mistake: they use revenue instead of gross profit. Revenue alone overstates LTV because it ignores what it actually costs to deliver your product or service. The correct approach, recommended by firms like Andreessen Horowitz and Reforge, uses gross profit as a proxy for contribution profit.
LTV = Average Revenue Per Customer × Gross Margin × Average Customer Lifespan
Gross margin is your revenue minus the direct costs of delivering the product (cost of goods sold), expressed as a percentage. If your average customer pays $100 per month, your gross margin is 70%, and the typical customer stays for 30 months, the LTV calculation looks like this:
$100 × 0.70 × 30 = $2,100
For subscription businesses, average customer lifespan can also be calculated as 1 divided by your monthly churn rate. If 4% of customers cancel each month, average lifespan is 1 ÷ 0.04 = 25 months.
Put the Ratio Together
Once you have both numbers, the ratio is a single division.
LTV:CAC = LTV ÷ CAC
Using the examples above, if your LTV is $2,100 and your CAC is $300, your ratio is 7.0. That means every dollar spent acquiring a customer returns seven dollars in gross profit over that customer’s lifetime.
What the Ratio Tells You
The benchmark most investors and operators use is a ratio of at least 3, according to Harvard Business School Online. At that level, you can cover your marketing costs, overhead, and still generate meaningful profit. Here’s how to read different ranges:
- Below 1: You’re losing money on every customer. You spend more to acquire them than they ever return. This is unsustainable unless you’re in a deliberate, funded land-grab phase with a clear path to improving unit economics.
- 1 to 2: You’re roughly breaking even or marginally profitable on a per-customer basis. Investors typically see this as concerning because it leaves no room for the other costs of running the business (engineering, operations, general overhead).
- 3 or higher: The widely cited target. It signals that your acquisition channels are efficient and the business model can scale.
- Significantly above 5: This can actually signal underinvestment. If every customer is wildly profitable relative to acquisition cost, you may be leaving growth on the table by not spending more aggressively on marketing and sales.
Add the CAC Payback Period
The LTV:CAC ratio tells you whether your economics work over the full customer lifetime, but it doesn’t tell you how quickly you recoup your acquisition cost. That’s where the CAC payback period comes in. It measures how many months it takes for a new customer’s gross profit to cover the cost of acquiring them.
CAC Payback Period = CAC ÷ (Monthly Revenue Per Customer × Gross Margin)
If your CAC is $300 and each customer contributes $70 in monthly gross profit ($100 revenue × 70% margin), payback takes about 4.3 months. The best consumer subscription businesses aim for a payback period under six months. Fast payback means you free up cash quickly to reinvest in growth rather than waiting years to see returns on your marketing spend.
A business can have a strong LTV:CAC ratio but a dangerously long payback period. Imagine a customer who stays for five years and eventually generates great lifetime value, but only pays a small amount each month. The ratio looks good on paper, but the company needs deep pockets to fund growth while waiting for that value to materialize. Looking at both metrics together gives you a much clearer picture of business health.
A Worked Example
Say you run a B2B software company. In Q2, your sales and marketing team cost you $200,000 in total (salaries, ad spend, tools, commissions, department overhead). You closed 100 new accounts. Your CAC is $2,000.
Your average account pays $500 per month. Your gross margin after hosting, support, and infrastructure costs is 75%. Your monthly churn rate is 2.5%, giving you an average customer lifespan of 40 months.
LTV = $500 × 0.75 × 40 = $15,000
LTV:CAC = $15,000 ÷ $2,000 = 7.5
CAC payback = $2,000 ÷ ($500 × 0.75) = 5.3 months
Both numbers are strong here. The ratio well exceeds 3, and payback happens in just over five months.
Getting the Inputs Right
The math itself is simple. The hard part is feeding it accurate numbers. A few areas where calculations commonly go wrong:
When calculating CAC, be honest about what counts as acquisition spending. Some companies exclude salaries or tools to make the number look better, but that just produces a misleading ratio. If a person or tool exists primarily to acquire customers, include the cost. Also decide whether to count only net-new customers or include expansion revenue from existing accounts. Most standard CAC formulas focus strictly on new customer acquisition.
For LTV, use gross margin rather than revenue. A business with 90% margins and one with 30% margins look very different even if they charge the same price. Also be careful with churn: use the churn rate that matches your time period. If you measure monthly revenue per customer, use monthly churn. And if your business is young and you don’t have reliable long-term retention data, be conservative with your lifespan estimate rather than projecting optimistic retention curves.
Finally, segment your data when possible. Blended averages can mask the reality that one channel acquires profitable customers at a 5:1 ratio while another channel barely breaks even. Calculating LTV:CAC by acquisition channel, customer tier, or product line lets you double down on what works and cut what doesn’t.