You’ve probably heard business owners talk about LTV and CAC, but the real punch comes from actually tracking them. Most businesses stay busy chasing sales, but sorting out your Customer Lifetime Value (LTV) and Customer Acquisition Cost (CAC) is what turns loose growth into smart growth.
A lot rides on getting these numbers right. If you misjudge either one, things can get messy pretty fast—think wasted marketing dollars or loyal customers slipping away because you don’t realize how valuable they are.
The Basics: What Are LTV and CAC?
Let’s break it down in plain language. Customer Lifetime Value, or LTV, is the total money your business makes from a customer before they stop buying. If you run a coffee subscription and Maddie orders three boxes a year for two years—LTV is every dollar she spends in those years, minus the cost to serve her.
CAC is just what it sounds like—the average cost to land a new customer. It factors in everything, from ad campaigns to salespeople. So if you spend $5,000 on marketing in a month and add 100 new customers, your CAC for that period is $50.
Both numbers matter a lot, but they do different things.
LTV and CAC: Not Twins, But Definitely Related
While LTV looks at value from existing customers, CAC is focused squarely on the cost to bring newcomers in. CAC can rise quickly if ad rates spike. LTV, on the other hand, shows what happens after those folks are in your ecosystem.
If LTV is high and CAC is low, you’re probably in pretty good shape. If it’s the other way around, trouble is brewing. Smart founders keep an eye on the LTV to CAC ratio to see if growth makes sense.
Every time you spend money to hook new customers, you want the return—measured by LTV—covering those costs, and then some.
How To Calculate Customer Lifetime Value (LTV)—No Guesswork Needed
You don’t need fancy math, but you do need some numbers.
First, what’s the average purchase value? Add up total sales and divide by the number of purchases. If you made $20,000 from 800 orders, your average order value is $25.
Second, what’s the purchase frequency rate? Look at how many times on average a customer buys during a specific period—maybe monthly, quarterly, or yearly.
Next, estimate the average customer lifespan. If people keep coming back for three years, then three is your magic number.
Finally, the formula is:
LTV = (Average Purchase Value) x (Purchase Frequency Rate) x (Customer Lifespan)
So, if that coffee subscription pulls in $25 per box, people buy 4 times per year, and the average person stays for 3 years, LTV is $25 x 4 x 3 = $300.
That’s what each typical customer is worth over their entire relationship.
How To Calculate Customer Acquisition Cost (CAC)—Keep It Simple
Getting CAC right is mostly about being honest with your marketing spend.
First, gather up all your marketing and sales costs for a period. This means everything: online ads, salaries, printing flyers, events, even software for lead tracking.
Next, count the number of new customers added in that same period.
Divide total costs by new customers, like so:
CAC = Total Marketing and Sales Costs / Number of New Customers
Let’s say last quarter you spent $12,000 and picked up 200 new customers. That makes your CAC $60.
Some folks try to exclude certain costs hoping to make CAC look better, but short-term fluff doesn’t help. Honesty here means smarter choices later.
Why LTV/CAC Ratio Matters—And What’s Considered “Good”
Now you’ve got LTV and CAC. Most business folks make one quick move here: divide LTV by CAC. This is the LTV/CAC ratio.
A ratio above 3:1 is usually healthy. This means you’re getting three dollars in value for every dollar spent to get a new customer. Less than 1:1? That’s a red flag—you’re losing money every time you bring someone new on board.
Let’s put numbers to it. If your LTV is $300 and CAC is $60, then your LTV/CAC ratio is 5:1. That’s solid. But if it drops below 2:1, most companies need to pause and take a hard look at what’s driving costs or shrinking value.
Examples: When LTV Outruns CAC—or Not
Say you run a software-as-a-service business. Your customer sticks around for years, upgrading often. Each customer is worth $2,000 LTV. You’re pretty careful with online ads and events, so your CAC is under $400. At a 5:1 ratio, there’s room to test new marketing ideas.
Flip it, and imagine LTV is only $300 but CAC sneaks up to $400. For every customer you snag, you’re losing $100. More marketing doesn’t fix this. Either LTV goes up through retention efforts, or CAC needs to shrink—or you’ll run out of cash.
Those numbers should be on your dashboard, always.
How To Grow LTV: Small Changes Make Big Differences
Raising LTV usually costs way less than bringing in new people.
For example, focusing on customer retention can quickly boost LTV. Maybe it’s simply sending a check-in email after a customer’s first order, or offering a bonus product for their third purchase.
Personalized touches work too. Companies that send birthday discounts or notes with orders tend to get better reviews and repeat business. The more you make customers feel seen, the longer they stick around.
Some brands roll out loyalty programs with surprising results. Look at punch cards at coffee shops—once people start, many don’t want to stop until they get their freebie.
You don’t need an expensive CRM system to start. Knowing your best customers by name goes a long way.
How To Lower CAC: Spend Smarter, Not More
Plenty of companies waste money blasting ads everywhere, hoping something sticks. But tracking CAC forces you to be pickier.
Take a second look at your marketing channels. If Instagram ads cost a fortune but only bring in a handful of buyers, it’s time to shift to places where customers cost less to reach.
Streamlining your sales process can also help. If new customers are confused about signing up or checking out, you’ll lose them and pay more to capture the rest.
Referral programs are a hidden gem here. Offering existing customers a small reward for bringing in friends cuts CAC while adding customers who often stick around longer.
Sometimes, the best move is simply asking customers how they found you. If everyone says “my coworker told me,” you might not need to buy more Facebook ads after all.
How Real Companies Keep LTV and CAC In Balance
Patagonia has long relied on passionate customers who come back year after year for gear. Their LTV is high, and their CAC is modest because people share their favorite jacket stories without even being asked. That’s a best-case scenario.
On the other hand, meal kit startups had to spend aggressively on ads and discounts to sign people up. Many folks tried once and left. The CAC ballooned, but LTV stayed flat. Several of those brands either pivoted or folded, showing what happens when CAC dwarfs LTV.
Even smaller, community-driven companies pay attention to these numbers. For example, this fundraising site puts effort into keeping long-term supporters happy, so every new customer makes a bigger difference.
Businesses who treat CAC and LTV as afterthoughts sometimes wake up to find margins squeezed or loyal customers drifting away.
Wrapping Up: LTV and CAC Should Guide Everyday Actions
The most successful founders don’t just check their LTV and CAC every quarter. They use these numbers to guide real decisions—like where to spend marketing money or when to tweak an offer.
If your LTV is solid but CAC starts climbing, find out why quickly. If CAC is low but folks don’t stick around, look for ways to hold their interest.
What works today might not work forever, so it’s smart to set aside a little time every month to review these numbers. Run a quick check after a campaign, or before launching a new loyalty program.
You don’t need an MBA to get this right. Just keep your math honest, listen to your customers, and remember: Growth is great, but sustainable growth is always better.
Where To Find Tools and Further Reading
If you want to track your LTV and CAC without building six spreadsheets, there are plenty of affordable SaaS tools out there. Apps like ProfitWell, ChartMogul, or Baremetrics give you a look at key trends.
For business owners who want to dig deeper, there are solid guides from sites like HubSpot, Shopify, and Harvard Business Review.
Talking with other founders can help too. Most will admit they underestimated CAC or took their eye off LTV at some point. Sharing what’s worked—and what backfired—can save you months of trial and error.
Keeping these numbers close keeps you focused. Businesses who treat LTV and CAC like real tools, not just buzzwords, put themselves in a stronger spot—no drama required.