The formulas
- Average lifetime = 1 ÷ monthly churn. Losing 2% of customers a month means the average one stays 50 months.
- LTV = monthly revenue per customer × gross margin × lifetime. $100 a month at an 80% margin for 50 months is $4,000 of gross profit.
- CAC = sales and marketing spend ÷ new customers won with it. $30,000 for 25 customers is $1,200 each.
- LTV:CAC = 4,000 ÷ 1,200 ≈ 3.3.
- CAC payback = CAC ÷ monthly gross profit per customer: $1,200 ÷ $80 = 15 months.
LTV uses gross profit, not revenue, because revenue you have to spend on delivering the product isn’t available to pay back acquisition. A revenue-based LTV flatters the ratio by the inverse of your margin.
Reading the ratio
A ratio below 1 means each customer costs more to win than they will ever earn you. Above it, the payback period matters as much as the ratio: a customer worth five times their CAC who takes four years to pay it back ties up a great deal of cash. Our guide to unit economics and LTV/CAC covers what investors look for at each stage.
Where this goes wrong
Simple LTV assumes churn stays constant, but early churn is usually high and falls as customers settle in, so measure churn on mature cohorts. Spread CAC over the customers it actually produced, with a lag for long sales cycles, and include salaries, not just ad spend. If you are measuring an ad channel rather than the whole funnel, the ROAS calculator gives the first-order view.