How to calculate customer acquisition cost and lifetime value

What a customer costs to win, against what they are worth. If the first exceeds the second, growth accelerates the loss.

Two numbers decide whether growth is worth pursuing. Getting them wrong means spending faster on a business that loses money per customer.

Step-by-step

1. Enter total sales and marketing spend for a period, and customers acquired.
2. Enter average revenue per customer, gross margin and how long they stay.
3. Read CAC, LTV and the ratio.

Count all the acquisition cost

CAC is everything spent winning customers, divided by customers won. That means advertising, sales salaries and commission, marketing tools and agency fees — not just the ad spend.

Excluding salaries is the usual error and it understates CAC dramatically for anything with a human sales process.

LTV uses gross profit, not revenue

The second usual error. A customer paying £100 a month for two years is worth £2,400 of revenue and, at a 60% gross margin, £1,440 of gross profit. Only the second is available to pay for acquiring them.

Using revenue makes every business look viable.

The ratio

An LTV to CAC ratio around 3:1 is the common benchmark. Below that, acquisition is consuming too much of what a customer is worth. Far above it usually means underinvestment — you could profitably spend more and grow faster.

Payback period matters as much

A 3:1 ratio is little comfort if recovering CAC takes eighteen months and you cannot fund the gap. Payback period — how long until a customer has repaid what they cost — is the cash-flow question, and it is often the binding constraint for a small business.

Frequently asked questions

What should I include in CAC?

All sales and marketing costs, including salaries, commission, tools and agency fees, divided by customers acquired. Counting only ad spend understates it badly.

Should LTV use revenue or profit?

Gross profit. Only the margin is available to pay for acquisition, so using revenue makes the ratio look far healthier than it is.

What is a good LTV to CAC ratio?

Around 3:1 is the usual benchmark. Much lower means acquisition is too expensive; much higher often means you could profitably spend more.