Customer Lifetime Value and the LTV:CAC Ratio: A Worked Calculation
October 21, 2026
Customer lifetime value (LTV or CLV) estimates the total profit a business can expect from an average customer over the relationship. Combined with customer acquisition cost (CAC), it tells you how much you can afford to spend to win a customer and whether the business model works. A common benchmark is an LTV-to-CAC ratio of 3:1 or better, with a payback period under 12 months.
A simple version of LTV for a repeat-purchase business: average order value × purchases per year × gross margin × expected years as a customer.
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Suppose a customer places an average order of $50, buys 3 times a year, the gross margin is 40%, and the typical customer stays for 4 years. Annual gross profit per customer = 50 × 3 × 0.40 = $60. Over 4 years: $240. If it costs $80 to acquire a customer, the LTV:CAC ratio is 240 ÷ 80 = 3.0. The CAC payback period is CAC ÷ annual gross profit = 80 ÷ 60 = 1.33 years, or about 16 months.
This version ignores discounting and assumes every customer stays exactly 4 years. In reality, some leave after the first purchase and others stay much longer.
| Input | Value |
|---|---|
| Average order value | $50 |
| Purchases per year | 3 |
| Gross margin | 40% |
| Customer lifespan | 4 years |
| Lifetime gross profit (LTV) | $240 |
| Acquisition cost (CAC) | $80 |
| LTV:CAC ratio | 3.0 |
| CAC payback | about 16 months |
Subscription Version
For subscription businesses, LTV = average revenue per account per month × gross margin ÷ monthly churn rate. If the average account pays $100 a month at an 80% gross margin and 3% of customers cancel each month, the expected lifetime is 1 ÷ 0.03 = 33 months, and LTV = 100 × 0.80 ÷ 0.03 = $2,667. With a CAC of $600, the LTV:CAC ratio is 4.4, and the payback period is 600 ÷ (100 × 0.80) = 7.5 months.
Churn has a large influence: if churn rises to 5%, expected lifetime drops to 20 months, and LTV falls to $1,600, with LTV:CAC of 2.7.
What Ratios Mean
An LTV:CAC ratio under 1 means you lose money on every customer. Between 1 and 3, the business may be marginal after overhead. Around 3 is healthy, and above 5 may suggest you are underinvesting in growth, since you could spend more to acquire customers profitably. Payback period matters for cash: a business with a 24-month payback needs substantial capital to fund growth.
Targets differ by industry. Businesses with high margins and long retention can operate at lower ratios than those with low margins and high churn.
Improving LTV
Raise average order value with bundles or upsells, increase purchase frequency through email and loyalty programs, reduce churn with better onboarding and service, and raise prices where the market allows. Each 1% improvement in retention compounds over the customer lifetime. Segment customers: your best customers may be worth many times the average, and finding more like them can reduce CAC.
Cautions
Use gross profit, not revenue, to calculate LTV. Base the lifespan on observed cohorts and not on hopes. Include all acquisition costs in CAC, including salaries, tools, and agency fees. Be careful of survivorship bias, where long-time customers inflate the average. Update the numbers regularly as the business and market change.
Frequently Asked Questions
How do I calculate customer lifetime value?
Multiply average order value, purchase frequency, gross margin, and expected customer lifespan.
What is a good LTV:CAC ratio?
About 3:1 or higher is a common benchmark.
What is CAC payback period?
The time it takes for a customer's gross profit to repay the cost of acquiring them.
Why use gross profit instead of revenue?
Because revenue ignores the cost of delivering the product.
How does churn affect LTV?
Higher churn shortens customer lifespan and reduces LTV sharply.