The short version

LTV:CAC compares what a customer is worth to what it cost to get them. 3:1 or better is the usual target.

CAC = marketing spend ÷ new customers

LTV = order value × orders per year × years × contribution margin

LTV:CAC = LTV ÷ CAC

With the numbers above: $30,000 brings in 600 new customers, so CAC is $50. Each customer spends $70 two and a half times a year for two years, and 40% of every order is left after costs. That's $140 of lifetime profit per customer, a ratio of 2.8:1.

What is a good LTV:CAC ratio?

The 3:1 rule comes from software. In SaaS Metrics 2.0, investor David Skok wrote that the best SaaS businesses run above 3, and that profits get thin once CAC takes more than 12 months to earn back. He called both "only guidelines", and they work as a rough guide for ecommerce too:

The payback clock

The ratio tells you whether a customer is worth it. It doesn't tell you when you get the money back.

That's what I call the payback clock: how long a new customer's orders take to cover what you paid to get them. You pay the CAC today. The profit arrives one order at a time.

A 4:1 ratio that takes two years to pay back can still run a brand out of cash. If the first order covers the CAC, growth pays for itself. If it takes three orders over a year, every new customer is a loan until then.

The calculator counts the orders it takes to cover CAC and turns that into months. Under 12 is comfortable for most brands. Paid back on the first order is the dream.

Use margin, not revenue

Plenty of LTV calculators multiply order value by the number of orders and stop. That's lifetime revenue, not lifetime value. You don't keep the revenue. You keep the margin.

Compare revenue to CAC and almost every business looks healthier than it is. This calculator shows both and uses margin for the ratio. It's the same idea as the cost iceberg in ROAS vs ROI.

Where to find your numbers

Marketing spend: every channel for the period, plus creative and agency fees if you count them. Count them the same way every month.

New customers: first-time buyers from your store, not from the ad platform. Returning customers in the count make CAC look cheaper than it is.

Orders per year and years: from your store's repeat purchase or cohort reports. If the brand is young, use only what you've seen in the first 12 months. Optimistic lifespans are where most LTV numbers go wrong.

Contribution margin: what's left of an order after product, shipping, payment fees and returns. The break-even ROAS calculator uses the same number.

How to improve it

1. Lower CAC. Better creative and a better landing page do most of the work. The five levers are in how to increase ROAS.

2. Raise order value. Bundles, kits and free shipping thresholds.

3. Bring people back. Email, subscriptions and refills turn one order into four.

4. Protect margin. Discounts cut LTV twice: smaller orders now, and customers who learn to wait for the next sale.

Pool rule 007Speed is a strategy.

Quick answers

What is LTV:CAC? A customer's lifetime value divided by what it cost to acquire them. A 3:1 ratio means each customer brings back three times what they cost.

How do you calculate CAC? Divide marketing spend by the number of new customers in the same period. $30,000 for 600 new customers is a $50 CAC.

How do you calculate customer lifetime value? Order value × orders per year × years as a customer × contribution margin. Leave out the margin and you get lifetime revenue instead.

What is a good LTV to CAC ratio? 3:1 or better is the common target. Below 1:1 loses money on every customer. Far above 5:1 usually means you could spend more to grow.

Is LTV:CAC the same as ROAS? No. ROAS looks at the first sale. LTV:CAC looks at every sale a customer will make, after costs. More in ROAS vs ROI and what is MER.