How to calculate customer lifetime value and CAC
Customer lifetime value (LTV or CLV) is the gross profit a customer brings you over the whole time they buy from you. Customer acquisition cost (CAC) is what you spend on marketing and sales to win one. Comparing the two tells you whether growth pays. Enter your marketing and sales spend, the new customers it won, average order value, gross margin, orders a year and the years a customer stays. We show CAC, LTV, the LTV to CAC ratio and how many months it takes to earn back what each customer cost.
In the example, $10,000 wins 100 new customers, so CAC is $100. Each customer orders $80 three times a year at a 40% margin, which is $96 a year in gross profit. Over 2 years, that's an LTV of $192, and the LTV to CAC ratio is 1.9 to 1. Each customer pays back their acquisition cost in about 12.5 months. These 100 customers bring in $9,200 more in gross profit than they cost to win.
A ratio of 3 to 1 is the usual sign of healthy growth. The example falls short. Keeping customers 3 years instead of 2 lifts the ratio to 2.9 to 1. Winning 150 customers for the same spend cuts CAC to $67 and also gives 2.9 to 1. Keeping them 4 years and lifting orders to 4 a year gives 5.1 to 1. The chart shows profit from one customer month by month, after CAC, so you can see when they turn profitable.
Use gross profit, not revenue, for LTV, or the ratio will look far better than it is. Include all acquisition costs in spend: ads, sales salaries and commissions, agency fees and marketing tools. Base years kept on your own repeat-purchase data where you can. Results are estimates, not a forecast of what customers will do.