Let’s start simple. If you want to know if your business is truly healthy, two numbers matter more than most: Lifetime Value (LTV) and Customer Acquisition Cost (CAC).
LTV and CAC work together a bit like a scale. LTV tells you how much money you make from a customer. CAC tells you how much you spend to get that customer. Keep them in balance and you’re probably making money. Ignore them or get them wrong, and suddenly those sales you celebrated stop looking so sweet.
What Is LTV — And Why Do People Care?
Lifetime Value, or LTV, is just the average revenue a customer generates over their relationship with your company. If customers stick around and keep buying, LTV goes up. If they leave quickly, LTV drops.
It’s a big deal because LTV gives you the real picture on customer worth. You might chase big, expensive marketing campaigns. But if those customers bail after a single purchase, it can crush growth quietly.
So what shapes your LTV? Think about how much customers spend each time, how often they buy, and how long they stay. All of that adds up to the total value you’ll get from someone before they ghost.
How Do You Actually Calculate LTV?
The right formula depends on your business. But for subscription or membership models, here’s a common way to do it:
LTV = (Average Purchase Value) × (Purchase Frequency Rate) × (Customer Lifespan in Years)
If you run an ecommerce store, LTV often means looking at average order value multiplied by the number of orders per customer, then factoring in how long (or frequently) people shop.
It helps to segment by customer type. Your most loyal customers might have double the LTV of one-time buyers, for example.
Let’s put numbers to it. Say your subscription box brings in $30 a month, and customers stay for 18 months on average. That’s $30 x 18 = $540 LTV.
CAC: How Much Does It Really Cost To Win A Customer?
Customer Acquisition Cost, or CAC, is just what it sounds like. It’s the average total you have to spend to land a new customer. Most people underestimate it at first.
CAC isn’t just your ad spend. It’s everything: marketing costs, sales team wages, software licenses, even the fees for agencies or freelance copywriters. Add those together for a month (or quarter) and divide by the number of new customers you got in that period. That’s your CAC.
If you spent $5000 on marketing and sales last month and scored 50 new paying customers, your CAC is $100. Fairly straightforward.
Why Getting LTV and CAC Right Matters Way More Than You Think
This is where it gets interesting. If you overestimate LTV or underestimate CAC — even a little — your business plans get out of whack.
For instance, if you think every customer is worth $500 but they only stick around for $100 worth of purchases, your marketing budget is too high. That creates a profit mirage.
Investors and smart founders use LTV vs. CAC to spot healthy business models. Generally, if your LTV is at least three times your CAC, you’re on solid ground. If it’s less than that, growth can eat your cash.
Mistakes here put companies in hot water all the time. Under-count your costs or fudge your churn data, and it can look like you’re winning when the numbers say otherwise.
So, How Can You Actually Lift LTV?
There’s no magic trick, but you can push LTV up bit by bit. Predictable ways include keeping customers longer—think loyalty programs, customer support that actually helps, and regular follow-up.
Surprise and delight works too. A company I know started sending small thank you gifts after a customer’s third order. Their retention rate quietly ticked up almost overnight.
Upselling and cross-selling matter—offer reasonable add-ons or related products, but don’t get pushy. The key is making it natural. Sending useful reminders or content can also remind people to purchase again.
On The Flip Side: Shrinking CAC Without Cutting Corners
Lowering CAC takes a bit of smart work. If you notice your Facebook ads aren’t converting but your referral program brings in better customers at half the price, shift your spend.
A lot of companies waste money on channels that just don’t suit what they sell. It can help to run small, cheap experiments instead of dumping the whole budget into one place.
Simple tweaks like a more helpful landing page or a smoother checkout can raise conversion rates and drive CAC lower. Review your sales funnel step-by-step—tiny fixes compound fast.
One small business I met stopped going to costly trade shows and instead built an email nurture sequence for leads. Their CAC fell sharply in one quarter.
The LTV/CAC Ratio: Why It’s a Shortcut to Business Health
The LTV to CAC ratio is a simple way to size up your growth potential. Just divide LTV by CAC. If the number is greater than 3, you’re probably scaling profitably. If it’s lower, you may be burning money to buy each new customer.
A ratio below 1 means you’re spending more than you make per customer—not a spot any of us want. Ratios between 2 and 3 are fine for businesses still figuring things out, but aim for 3 or better long-term.
If your ratio drops, slow down acquisition, review spend, and look for ways to boost loyalty or increase prices. The ratio is a warning sign you can act on quickly.
Where People Get Mixed Up: Common Mistakes With LTV and CAC
Plenty of folks take shortcuts or misread the data. Common mistakes include leaving out sales team costs from CAC, or failing to update LTV when customer behavior changes.
If you forget to factor in refunds, discounts, or customer churn, your LTV is too high. If you only count Facebook ad spend for CAC, but not influencer fees or content creation, you’re way off.
Check your formulas often, and double-check what’s actually in the math. Assumptions from last year might not fit if your product mix or target audience shifted.
Helpful Tools for Crunching LTV and CAC—and Where to Learn More
You don’t have to use the back of a napkin for these numbers. There are solid tools out there. ProfitWell, ChartMogul, and HubSpot have useful calculators that let you play with inputs and see the impact of changes.
For hands-on folks, a Google Sheet does the trick if you set up your formulas right and keep your data current. For more reading, some founders dig case studies on SaaS review blogs or check sites like Coffee Chocolate Fundraising that dig into real business metrics and fundraising stories.
Books like “Measure What Matters” can help you see the bigger picture, tying metrics to real decisions.
Bringing It Together: Why These Numbers Deserve Attention
If you’ve ever looked at your sales numbers and felt unsure if you’re going in circles, LTV and CAC can give clarity.
These two numbers may not tell the whole story, but they put you in control of your growth. Guessing at LTV or CAC is rarely safe; measuring them with intention makes all the difference.
Take a fresh look at how you’re getting and keeping customers. Even a small shift in either metric can ripple through the bottom line. For many founders, paying attention to these details is what lets them keep building, experiment with new ideas, and worry just a little less about what’s coming next.