How LTV to CAC works
LTV to CAC compares the gross profit a customer brings in over their lifetime with what you paid to acquire them. A ratio above 1 means customers return more than they cost. CAC payback shows how many months it takes for a customer's gross profit to repay that cost.
Worked example
A customer places 3 orders a year averaging $60, stays 4 years, and your gross margin is 40%. LTV is $288. You spend $6,000 to win 100 customers, so CAC is $60. The LTV to CAC ratio is 4.8 to 1. A customer earns $6 of gross profit a month, so CAC pays back in 10 months. To hold a 3 to 1 ratio you could spend up to $96 per customer, and you would break even at $288.
What ratio should you aim for?
Many businesses use 3 to 1 as a starting target, but it is a rule of thumb, not a law. The right ratio depends on your margins, how quickly you need cash back, and how reliable your lifespan estimate is. A long payback can be risky if you fund growth from cash flow, even when the ratio looks healthy. Enter your own target and watch both numbers.
Keep the inputs honest
CAC should include everything you spend to win customers, such as ads, tools and sales time, not only ad spend. Lifespan is the hardest input to know for a newer store, so test a shorter lifespan to see how sensitive the ratio is. The payback calculation uses average monthly profit and ignores customers who leave in the meantime.
Frequently asked questions
What is a good LTV to CAC ratio?
A ratio of 3 to 1 is a common starting target, but it depends on your margins and cash flow. Anything below 1 means you lose money on each customer you win.
What is CAC payback?
It is the number of months of gross profit from a customer needed to repay what you spent to acquire them. Shorter payback means you recover your marketing spend faster.
How do I calculate CAC?
Divide everything you spent on marketing and sales in a period by the number of new customers you won in that period. $6,000 spent for 100 customers gives a CAC of $60.
Should I use revenue or profit for LTV in this ratio?
Use gross profit. Revenue ignores product and fulfillment costs, so a ratio based on it looks better than it really is.