LTV and CAC, in plain English

LTV (lifetime value, also written CLV) measures what a customer brings in over the whole relationship. CAC (customer acquisition cost) measures what it cost you to win them. Comparing the two tells you whether your marketing creates value or burns it.

  • Repeat purchase LTV = average order value × purchases per year × lifespan in years. It is the basic formula Shopify gives.
  • LTV in gross profit = LTV × gross margin: what the customer leaves you once their products or services are paid for.
  • Subscription LTV = ARPA × gross margin ÷ monthly churn. ARPA is average monthly revenue per account; churn is the share of customers who cancel each month.
  • Average lifetime = 1 ÷ churn. At 3% monthly churn, a customer stays 33 months on average.
  • LTV:CAC ratio = LTV in gross profit ÷ CAC.
  • CAC payback = CAC ÷ monthly gross profit per customer.

Our glossary covers customer lifetime value, customer acquisition cost and ROI in more detail.

How to use the calculator

  1. Pick a mode: repeat purchases for a store or service business, subscription for software, a box or a monthly contract.
  2. Work out average order value (revenue ÷ number of orders) and purchase frequency (orders ÷ customers) over the last 12 months, excluding sales tax.
  3. Estimate lifespan: the average tenure of your active customers, or 1 ÷ churn for a subscription.
  4. Enter your gross margin and CAC: sales and marketing spend for the period ÷ new customers won.
  5. Read the LTV:CAC ratio and CAC payback, then move frequency or churn around to see which one matters most.

Worked examples

A skincare store: $60 average order value, 4 orders a year, customers who stay 3 years on average, a 40% gross margin and an $80 CAC. These are the calculator's default values.

  • LTV: $60 × 4 × 3 = $720 of revenue.
  • LTV in gross profit: $720 × 40% = $288.
  • LTV:CAC ratio: $288 ÷ $80 = 3.6, above the 3:1 benchmark.
  • CAC payback: a customer leaves $60 × 4 × 40% ÷ 12 = $8 of gross profit a month, so it takes $80 ÷ $8 = 10 months to earn back the acquisition cost.

A subscription software product: $49 per account per month, an 80% gross margin, 3% monthly churn and a $400 CAC.

  • Average lifetime: 1 ÷ 3% = 33.3 months.
  • LTV: $49 × 80% ÷ 3% = $1,307.
  • LTV:CAC ratio: $1,307 ÷ $400 = 3.3.
  • CAC payback: $400 ÷ ($49 × 80%) = 10.2 months.

Push churn from 3% to 5% and LTV drops to $784, with a ratio of 2.0. Keeping customers often moves the numbers more than raising prices.

The 3:1 LTV:CAC ratio is a benchmark, not a law

The 3:1 figure comes from SaaS. David Skok, whose SaaS Metrics 2.0 guide popularized it, writes that a healthy SaaS business should have a ratio higher than 3. He adds two conditions that often get dropped: an LTV calculated without a gross margin adjustment, and a gross margin of 80% or higher.

This calculator adjusts LTV for gross margin, which gives a more conservative ratio. For a store running a 40% margin, hitting 3:1 on gross profit is a tougher bar than the original rule. So read the ratio as a zone rather than a pass or fail line:

  • Below 1:1, each customer costs more than they bring in: acquisition destroys value.
  • Between 1:1 and 3:1, acquisition pays, but leaves little room for overhead, customer service and surprises.
  • Above 3:1, you are in a comfortable spot. A very high ratio can also mean you could invest more to grow faster.

Shopify also treats 3:1 as the benchmark, while noting that your target depends on your margins and operating costs. CAC payback completes the picture: Skok suggests staying under 12 months for SaaS, and points out that he wrote that guideline in 2011, when capital was hard to raise.

LTV for a service business

The repeat purchase mode works for service companies too: use your average job or contract value as the order value. A heating contractor whose customers book a $250 tune-up once a year and stay 6 years has an LTV of $250 × 1 × 6 = $1,500 in revenue, or $750 in gross profit at a 50% gross margin.

If those customers also replace their system during that time, add that job to lifetime revenue. Referrals are real value too, but leave them out of the formula: they are hard to measure, and a conservative LTV protects your acquisition budget.

How to increase LTV

  • Frequency: email follow-ups, a loyalty program, maintenance reminders for a home services business.
  • Lifespan: regular check-ins and responsive support reduce churn.
  • Order value: add-ons, bundles and upgrades.
  • Margin: every point of gross margin raises LTV in gross profit with no extra acquisition spend.

All of these depend on knowing each customer, their purchases and their renewal dates: that is what a CRM is for. Read what a CRM is and when you need one, or see our custom platforms to track customers and their value in one place.

Common mistakes

  • Calculating LTV on revenue and comparing it with CAC: the ratio looks far better than it is.
  • Mixing periods: monthly churn with annual ARPA, or the other way around.
  • Using the lifespan of your best customers instead of the average.
  • Treating LTV as fixed: recalculate it every quarter, and after any change to prices or retention.
  • Counting only ad spend in CAC, and leaving out agency fees, tools and sales time.
  • Running one LTV for very different customers: split consumers and businesses, or acquisition channels.

To turn LTV into a budget, go through our CPA calculator, which derives your maximum acquisition cost from it, then the ROAS calculator or the Google Ads budget calculator. To win new customers who pay off, here is how we manage Google Ads.