LTV to CAC calculator

LTV, CAC and the LTV:CAC ratio: what they mean

LTV (customer lifetime value) is what a customer brings the business over the whole relationship. To judge profitability, calculate it in gross margin rather than revenue: a customer who pays $300 a month but costs $75 to serve leaves only $225 to pay back their acquisition and fund the rest of the company.

CAC (customer acquisition cost) is what you spent to sign a new customer: advertising, sales and marketing salaries, tools and agencies, divided by the number of new customers in the same period.

The LTV:CAC ratio puts the two side by side: how much lifetime margin each dollar of acquisition spend returns. At 3:1, a customer who cost $1,000 brings in $3,000 of margin. Below 1:1, the business loses money on every customer, and growing faster means losing faster.

The formulas, model by model

For subscriptions, the usual formula is LTV = ARPA × gross margin ÷ monthly churn. The idea is simple: with 2% monthly churn, a customer stays 1 ÷ 0.02 = 50 months on average. With a $300 ARPA and a 75% margin, LTV is $225 × 50 = $11,250. The calculator does exactly this, as the sum of monthly margins weighted by the probability that the customer is still there.

For repeat purchases, there is no subscription but orders: LTV = average order value × margin × purchases per year × lifetime in years. An $80 order at 50% margin, four times a year for three years, gives $480 of margin per customer.

Churn can be entered monthly or annually, and converting is not dividing by 12. With 5% monthly churn, 95% of customers remain each month, so 0.95 to the power of 12 = 54% remain after a year: annual churn is 46%, not 60%. The other way round, 20% a year is 1.84% a month, not 1.67%. The calculator shows the equivalent next to your input.

Two options make LTV more conservative. The lifetime cap stops the calculation at a set horizon: useful when churn is low and the formula promises customers for twenty years. Discounting reflects that margin collected three years from now is worth less than today: an annual rate is applied, converted into a compounded monthly rate.

CAC payback, the other half of the answer

The ratio tells you whether a customer is profitable; payback tells you when. It is the CAC divided by a customer’s monthly gross margin: with a $3,000 CAC and $225 of margin a month, it takes a little over 13 months to break even. Meanwhile, the business has advanced the cash.

That is why a great ratio can hide a cash problem: a customer who returns five times their cost, but over five years, means funding every new signature for years. The faster you grow, the more cash you need.

The calculator adds two readings the simple formula ignores. The first accounts for churn: some customers leave before paying back their CAC, so the cohort takes longer to break even, or never does. The second shows the share of customers already gone by the payback month.

Reading the ratio: benchmarks, not laws

The most cited benchmarks come from SaaS: an LTV:CAC ratio of at least 3:1 and a payback period under 12 months. They were proposed by David Skok in “SaaS Metrics 2.0” and have been widely repeated since. A ratio above 5:1 is often read as a sign you could invest more in acquisition: a common rule of thumb with no single source.

These thresholds are not market averages and do not apply as-is to every model. A business funded by debt or equity can accept a longer payback; a repeat-purchase business often recovers part of the CAC on the first order. The most useful figure remains your own ratio, tracked quarter after quarter and by acquisition channel.

How to measure each input

The output is only as good as the inputs. Use consistent periods, ideally a quarter, and the same customers for every figure.

1. 1

   ARPA or average order value

   For subscriptions, divide monthly recurring revenue by the number of paying customers, excluding free trials. For repeat purchases, divide revenue excluding tax by the number of orders, then count how many orders a customer places per year.

2. 2

   Gross margin

   Subtract the costs directly tied to delivering the service: hosting, support, shipping, payment fees, resold third-party licences. Leave out sales and marketing: they are already in the CAC.

3. 3

   Churn

   Divide customers lost during the month by customers at the start of the month. Do it over several months and by cohort: churn in the first months is often higher than for established customers. If you lose customers but the others buy more, this calculator does not count that expansion: your real LTV will be higher.

4. 4

   CAC

   Add up all acquisition spend for the period: media, fully loaded sales and marketing salaries, tools, agencies, commissions. Divide by new customers in the same period. If your sales cycle is long, shift the spend period back by the length of the cycle.

How to improve each input

The tool’s lever table shows which one matters most for you. Here is what you actually pull behind each one.

• Reduce churn

  The strongest lever for subscriptions, because it extends lifetime. Qualify better upfront (a poorly targeted customer leaves fast), nail the first weeks of use, spot accounts that drift before they cancel.

• Increase revenue per customer

  Review pricing, offer a higher tier, bill annually, sell add-ons. With repeat purchases, work on order value (bundles, free-shipping thresholds) and frequency (replenishment, well-timed reminders).

• Improve gross margin

  Renegotiate hosting or logistics, automate first-line support, stop serving the most expensive customers at a loss.

• Lower CAC

  Cut channels that cost more than they return, improve conversion at every funnel stage, and make sales time more productive. In cold calling, cost per meeting is a direct building block of CAC: more conversations in the same hour lowers it without touching salaries.

Mistakes that skew the ratio

• Calculating LTV on revenue

  A ratio built on revenue is inflated by however thin the margin is. At 40% margin, it looks 2.5 times better than it is. Always compare a margin to a cost.

• Dividing annual churn by 12

  Customer loss compounds month after month. Dividing by 12 understates monthly churn when you start from an annual figure, and overstates it the other way round.

• Counting only paid media in CAC

  Paid media CAC is the most flattering. Sales and marketing salaries are often the biggest part. The calculator shows both so the gap is visible.

• Extrapolating churn measured over three months

  On a young customer base, measured churn is unreliable, and a very low churn promises an absurd LTV. Cap the lifetime until you have a year or two of history.

• Blending channels

  A blended ratio can hide one very profitable channel and one losing money. Calculate it per channel too: a referral customer’s CAC has nothing in common with an ad-acquired one.

• Ignoring payback

  A 4:1 ratio with a 30-month payback can strain your cash. Always read the two figures together.

Go further

Tools and articles that detail one building block of CAC or LTV.

• Cost per Meeting Calculator One building block of CAC: what each meeting booked by your prospecting team costs.
• How many calls does your target take? Start from the customers you need to sign and get the calls, hours and reps required.
• Discount Calculator What a discount takes from your margin, and so from your LTV, and the volume needed to make up for it.
• Reduce cost per meeting Five levers and the math that turns a leaky funnel into a profitable one.
• SDR metrics and KPIs The metrics that link prospecting activity to pipeline.
• SDR commission plan templates Variable pay, an often forgotten part of CAC.
• All free tools Phone number validator, calling windows, VoIP test and more.